Economic Crisis in Argentina Term Paper

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fiscal crisis currently facing Argentina, and what they are doing to ease the crisis.

CAUSES OF THE CRISIS

The South American country of Argentina has been on the brink of fiscal crisis throughout 2001. The default on her debt of over $130 billion would be the largest in history. Argentina's fiscal crisis did not begin over night; in fact, the roots go back to the 1980s. The country's economy has been in recession for four years, and owes over $130 billion in public-sector debt. The causes for this crisis are varied and ongoing. Double-digit unemployment has left 15 million Argentineans under the poverty line -- this is nearly half the population (Cormier).

Since December, the population has rioted over crushing poverty, and the government's "austerity" measures, which included limiting the amount of funds available for withdrawal from banks. The people protested violently, with nearly two dozen killed in riots, and two presidents taking and leaving office in a matter of weeks.

According to one expert, the country's fiscal problems "…have mounted due to the impact of international financial crisis (Tequila effect, Russian and Asian crisis) in the nineties, and a debatable system of transfers to subnational governments. The economy was also hit by the Brazilian devaluation in 1998, raising the question of the convenience of a common market when countries have different macroeconomic (in this case exchange rate) regimes. During that decade, the fiscal balance only showed a surplus in 1994, despite a strong economic performance during the first half of the nineties. Subnational governments reached an increasing 1,5% of GDP deficit in 1999 and the fiscal deficit exceeded U.S.$7 billion" (Olivia, p 10).

Basically, as the country borrowed more money, their interest rates increased, which trickled down into industry and business, who were forced to pay higher interest rates on their credit. More and more businesses were forced out of business, or had to lay off employees, adding to the recession.

However, the revaluation of the country's peso in the 80s was also a forerunner to the crisis today. The government also pegged the peso to the U.S. dollar, with one peso equaling one dollar. It made trade easier, but most of the population still saved U.S. dollars, not pesos, and their exchange rate was higher than just about any other Latin American country.

When neighboring Brazil devalued their real in 1998, investors and buyers found they could get more for their money in Brazil. This shift to the Brazilian economy helped add to Argentina's recession and unemployment woes.

Argentina's president, Fernando De la Rua, was elected on the platform of economic reform in 2000, but failed to meet his campaign promises. Since he was removed from power in December, three other presidents were placed in power and then removed. The current president, Eduardo Duhalde is now looking for emergency bail out funds, and trying to get the economy back on track (Brown).

Authorities have prevented De la Rua from leaving the country, pending an investigation of his government's handling of the widespread protests in December.

RESULTS OF THE CRISIS

Argentina's crisis is not only affecting the country and its population, it is also having a carry over affect on many other nations who do business with Argentina. Neighboring Brazil is one of the hardest hit nations, because many Brazilian companies did business with Argentina, and are facing huge losses if Argentina defaults on her international debt.

Since 2000, Spain has turned into the largest investor in Latin American nations, so they also have a lot to lose. The country's airline, Iberia, owns Aerolineas Argentinas, and there are many other Spanish owned companies and investments throughout the county (Vega).

Most people believe that the crisis in Argentina will not affect most foreign financial markets. "Analysts also said Argentina's troubles have been brewing for so long that financial markets have had time to adjust and were not surprised at the possibility of a devaluation or suspension of debt payments" (1010Wins.com).

However, any country's default and crisis can have an affect on the economy of another. The United States sells more products in Latin America than any other country. (Vega). With the economy in turmoil, very little business is being done in Argentina, and all of this has to affect anyone who is trying to do business in the country, or with the country's industries.

Despite criticism from some nations like Spain, who is heavily affected by Argentina's crisis, the International Monetary Fund (IMF) has so far refused to give any more aid to the country. However, many people blame the IMF for loaning "massive" amounts to Argentina earlier in their crisis, along with conditions requiring the country to tighten its fiscal policies. Now, Argentina is unable to repay these outstanding loans. Some of the over 130 million in debt was defaulted on in December, and "Critics say the IMF-imposed reforms have failed to work because they don't take into account the local situation. They argue that the insistence on debt repayment is what's brought Argentina to the brink of collapse" (Editors).

However, many others believe that bailing Argentina out of her current woes is not the answer. "What you hear from people in international financial community is that the problems are so deep that simply throwing money at Argentina would ultimately only extend the crisis and delay an inevitable collapse" (Time.com).

To make matters worse, "Fitch, an international rating agency, said the default by the Argentine government -- South America's second-largest economy -- on about $97 billion of outstanding debt -- was 'imminent.' Fitch gave Argentina's bonds a 'DDD' rating, which relegates them to junk status." This means that bonds issued by Argentina are worthless, and no one will want to invest in new bonds.

SOLUTIONS

The country is in political and fiscal turmoil. The people are still trying to get access to their savings in the country's banks, but are limited to withdrawals of only $1,000 per month. Many do not even have money for the basics, such as food, and the government is going to have to provide these basics, driving it deeper into debt.

Argentina is trying to solve her problems by regulating banks and savings institutions, which has angered the population. They put a limit on the amount of funds that anyone could withdraw from banks, because they were afraid of a run on the institutions. This was one cause of the widespread riots that took place during December and January. They have since changed the limits, but there are still sanctions on savings. They recently allowed the peso to "float," and many people have traded in their pesos on more stable dollars.

These measures have effectively put life "on hold" for the people of Argentina. "Conversation here centers on jobs lost -- with unemployment now estimated at 22% -- and dollar savings forcibly converted to pesos and locked up in the banks, meaning personal plans like weddings and birthdays are canceled or scaled down" (Brown).

The country has also adopted austerity measures to help cut their budget. "Economy Minister Jorge Remes Lenicov said he would present an austerity budget to Congress in the coming days and exhorted Argentines to accept more sacrifice as he seeks to end a bitter, four-year recession" (Cormier). "Meanwhile, the orthodox economy is at a standstill. The run on the banks until cash limits were imposed in early December emptied the system of a quarter of deposits" (Brown).

CONCLUSION

More immediate measures need to be taken with so many people below the poverty level. People began looting supermarkets when they could not get their funds out of the country's banks. The government needs to come together cohesively, solve the people's most pressing needs, and then create a long-term plan to get the country out of debt and back into…[continue]

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