1998–2002 Argentine Great Depression
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The 1998–2002 Argentine great depression was an
economic depression An economic depression is a period of carried long-term economic downturn that is the result of lowered economic activity in one or more major national economies. It is often understood in economics that economic crisis and the following recession ...
in
Argentina Argentina, officially the Argentine Republic, is a country in the southern half of South America. It covers an area of , making it the List of South American countries by area, second-largest country in South America after Brazil, the fourt ...
, which began in the third quarter of 1998 and lasted until the second quarter of 2002. It followed fifteen years of stagnation and a brief period of free-market reforms. The depression, which began after the Russian and Brazilian financial crises, caused widespread unemployment,
riots A riot or mob violence is a form of civil disorder commonly characterized by a group lashing out in a violent public disturbance against authority, property, or people. Riots typically involve destruction of property, public or private. The p ...
, the fall of the government, a default on the country's foreign debt, the rise of alternative currencies and the end of the
peso The peso is the monetary unit of several Hispanophone, Spanish-speaking countries in Latin America, as well as the Philippines. Originating in the Spanish Empire, the word translates to "weight". In most countries of the Americas, the symbol com ...
's
fixed exchange rate A fixed exchange rate, often called a pegged exchange rate, is a type of exchange rate regime in which a currency's value is fixed or pegged by a monetary authority against the value of another currency, a currency basket, basket of other currenc ...
to the
US dollar The United States dollar (symbol: $; currency code: USD) is the official currency of the United States and several other countries. The Coinage Act of 1792 introduced the U.S. dollar at par with the Spanish silver dollar, divided it int ...
. The economy shrank by 28 per cent from 1998 to 2002. In terms of income, over 50 per cent of Argentines lived below the official
poverty line The poverty threshold, poverty limit, poverty line, or breadline is the minimum level of income deemed adequate in a particular country. The poverty line is usually calculated by estimating the total cost of one year's worth of necessities for ...
and 25 per cent were
indigent Poverty is a state or condition in which an individual lacks the financial resources and essentials for a basic standard of living. Poverty can have diverse
(their basic needs were unmet); seven out of ten Argentine children were poor at the depth of the crisis in 2002. By the first half of 2003,
GDP growth Gross domestic product (GDP) is a monetary measure of the total market value of all the final goods and services produced and rendered in a specific time period by a country or countries. GDP is often used to measure the economic performanc ...
had returned, surprising economists and the business media, and the economy grew by an average of 9% for five years. Argentina's GDP exceeded pre-crisis levels by 2005, and Argentine debt restructuring that year resulted in resumed payments on most of its defaulted bonds; a second
debt restructuring Debt restructuring is a process that allows a private or public company or a sovereign entity facing cash flow problems and financial distress to reduce and renegotiate its delinquent debts to improve or restore liquidity so that it can continu ...
in 2010 brought the percentage of bonds out of default to 93%, though holdout lawsuits led by
vulture fund A vulture fund is a hedge fund or private-equity fund that invests in debt considered to be very weak or in default, known as distressed debt. Investors in the fund profit by buying debt at a discounted price on a secondary market and then u ...
s remained ongoing. Bondholders who participated in the restructuring have been paid punctually and have seen the value of their bonds rise. Argentina repaid its
International Monetary Fund The International Monetary Fund (IMF) is a major financial agency of the United Nations, and an international financial institution funded by 191 member countries, with headquarters in Washington, D.C. It is regarded as the global lender of las ...
loans in full in 2006, but had a long dispute with the 7% of bond-holders left. In April 2016 Argentina came out of the default when the new government decided to repay the country's debt, paying the full amount to the vulture/hedge funds.


Origins

Argentina's many years of
military dictatorship A military dictatorship, or a military regime, is a type of dictatorship in which Power (social and political), power is held by one or more military officers. Military dictatorships are led by either a single military dictator, known as a Polit ...
(alternating with weak, short-lived democratic governments) had already caused significant economic problems prior to the 2001 crisis, particularly during the self-styled
National Reorganization Process The National Reorganization Process ( PRN; often simply , "the Process") was the military dictatorship that ruled Argentina from 1976 to 1983. In Argentina it is often known simply as the ("last military junta"), ("last military dictatorship") ...
in power from 1976 to 1983. A right-wing executive, José Alfredo Martínez de Hoz, was appointed Economy Minister at the outset of the dictatorship, and a
neoliberal Neoliberalism is a political and economic ideology that advocates for free-market capitalism, which became dominant in policy-making from the late 20th century onward. The term has multiple, competing definitions, and is most often used pej ...
economic platform centered around anti-labour, monetarist policies of financial liberalization was introduced. Budget deficits jumped to 15% of GDP as the country went into debt for the state takeover of over $15 billion in private debts as well as unfinished projects, higher defense spending, and the
Falklands War The Falklands War () was a ten-week undeclared war between Argentina and the United Kingdom in 1982 over two British Overseas Territories, British dependent territories in the South Atlantic: the Falkland Islands and Falkland Islands Dependenci ...
. By the end of the military government in 1983, the foreign debt had ballooned from $8 billion to $45 billion, interest charges alone exceeded trade surpluses, industrial production had fallen by 20%, real wages had lost 36% of their purchasing power, and unemployment, calculated at 18% (though official figures claimed 5%), was at its highest point since the 1929
Great Depression The Great Depression was a severe global economic downturn from 1929 to 1939. The period was characterized by high rates of unemployment and poverty, drastic reductions in industrial production and international trade, and widespread bank and ...
. Democracy was restored in 1983 with the election of President Raúl Alfonsín. The new government intended to stabilize the economy and in 1985 introduced
austerity In economic policy, austerity is a set of Political economy, political-economic policies that aim to reduce government budget deficits through Government spending, spending cuts, tax increases, or a combination of both. There are three prim ...
measures and a new currency, the
Argentine austral The austral was the currency of Argentina between 15 June 1985, and 31 December 1991. It was divided into 100 centavos. The symbol was an uppercase A with an extra horizontal line, (₳). This symbol appeared on all coins issued in this curre ...
, the first of its kind without ''peso'' in its name. Fresh loans were required to service the $5 billion in annual interest charges, however, and when commodity prices collapsed in 1986, the state became unable to service this debt. During the Alfonsin administration, unemployment did not substantially increase, but real wages fell by almost half to the lowest level in fifty years. Prices for state-run utilities, telephone service, and gas increased substantially. Confidence in the plan, however, collapsed in late 1987, and inflation, which had already averaged 10% per month (220% per year) from 1975 to 1988, spiraled out of control. Inflation reached 200% for the month in July 1989, peaking at 5000% for the year. Amid
riots A riot or mob violence is a form of civil disorder commonly characterized by a group lashing out in a violent public disturbance against authority, property, or people. Riots typically involve destruction of property, public or private. The p ...
, Alfonsín resigned five months before the end of his term;
Carlos Menem Carlos Saúl Menem (2 July 1930 – 14 February 2021) served as the 50th president of Argentina for ten years, from 1989 to 1999. He identified as Peronism, Peronist, serving as President of the Justicialist Party for 13 years (from 1990 to 200 ...
took office in July.


1990s

After a second bout of
hyperinflation In economics, hyperinflation is a very high and typically accelerating inflation. It quickly erodes the real versus nominal value (economics), real value of the local currency, as the prices of all goods increase. This causes people to minimiz ...
, Domingo Cavallo was appointed Minister of the Economy in January 1991. On 1 April, he fixed the value of the austral at 10,000 per
US dollar The United States dollar (symbol: $; currency code: USD) is the official currency of the United States and several other countries. The Coinage Act of 1792 introduced the U.S. dollar at par with the Spanish silver dollar, divided it int ...
. Australs could be freely converted to dollars at banks. The
Central Bank of Argentina The Central Bank of the Argentine Republic (, BCRA) is the central bank of Argentina, being an autarchic entity. Article 3 of the Organic Charter lists the objectives of this Institution: “The bank aims to promote, to the extent of its powers ...
had to keep its US dollar
foreign-exchange reserves Foreign exchange reserves (also called forex reserves or FX reserves) are cash and other reserve assets such as gold and silver held by a central bank or other monetary authority that are primarily available to balance payments of the country, ...
at the same level as the cash in circulation. The initial aim of such measures was to ensure the acceptance of domestic currency because after the 1989 and 1990 hyperinflation, Argentines had started to demand payment in US dollars. This regime was later modified by a law (''Ley de Convertibilidad'') that restored the Argentine peso as the national currency. The convertibility law reduced inflation sharply, preserving the value of the currency. That raised the
quality of life Quality of life (QOL) is defined by the World Health Organization as "an individual's perception of their position in life in the context of the culture and value systems in which they live and in relation to their goals, expectations, standards ...
for many citizens, who could again afford to travel abroad, buy imported goods or ask for credit in dollars at traditional
interest In finance and economics, interest is payment from a debtor or deposit-taking financial institution to a lender or depositor of an amount above repayment of the principal sum (that is, the amount borrowed), at a particular rate. It is distinct f ...
rates. The fixed exchange rate reduced the cost of imports, which produced a flight of dollars from the country and a massive loss of industrial infrastructure and employment in industry. Argentina, however, still had external public debt that it needed to roll over. Government spending remained too high, and corruption was rampant. Argentina's public debt grew enormously during the 1990s without showing that it could service the debt. The IMF kept lending money to Argentina and extending its payment schedules. Reports indicate that tax evasion and money transfers to offshore banks played a role in capital outflows. A congressional committee started investigations in 2001 over accusations that Central Bank Governor Pedro Pou, a prominent advocate of
dollarization Currency substitution is the use of a foreign currency in parallel to or instead of a domestic currency. Currency substitution can be full or partial. Full currency substitution can occur after a major economic crisis, such as in Ecuador, El S ...
, and members of the board of directors had overlooked money laundering within Argentina's financial system.
Clearstream Clearstream or the Clearstream Group is the central securities depository arm of the Deutsche Börse Group. It provides settlement and custody as well as other related services for securities across all asset classes. Its subsidiary in Luxembour ...
was accused of being instrumental in this process. Other Latin American countries, including
Mexico Mexico, officially the United Mexican States, is a country in North America. It is the northernmost country in Latin America, and borders the United States to the north, and Guatemala and Belize to the southeast; while having maritime boundar ...
and
Brazil Brazil, officially the Federative Republic of Brazil, is the largest country in South America. It is the world's List of countries and dependencies by area, fifth-largest country by area and the List of countries and dependencies by population ...
(both important trade partners for Argentina) faced economic crises of their own, leading to mistrust of the regional economy. The influx of foreign currency provided by the
privatization Privatization (rendered privatisation in British English) can mean several different things, most commonly referring to moving something from the public sector into the private sector. It is also sometimes used as a synonym for deregulation w ...
of state companies had ended. After 1999, Argentine exports were harmed by the
devaluation In macroeconomics and modern monetary policy, a devaluation is an official lowering of the value of a country's currency within a fixed exchange-rate system, in which a monetary authority formally sets a lower exchange rate of the national curre ...
of the
Brazilian real The Brazilian real (plural, pl. '; currency symbol, sign: R$; ISO 4217, code: BRL) is the official currency of Brazil. It is subdivided into 100 centavos. The Central Bank of Brazil is the central bank and the issuing authority. The real repl ...
against the dollar. A considerable international revaluation of the dollar directly weakened the peso relative to Argentina's trading partners: Brazil (30% of total trade flows) and the
eurozone The euro area, commonly called the eurozone (EZ), is a Monetary union, currency union of 20 Member state of the European Union, member states of the European Union (EU) that have adopted the euro (Euro sign, €) as their primary currency ...
(23% of total trade flows). After having grown by over 50% from 1990 to 1998, Argentina's GDP declined by 3% in 1999 and the country entered what became a three-year-long
recession In economics, a recession is a business cycle contraction that occurs when there is a period of broad decline in economic activity. Recessions generally occur when there is a widespread drop in spending (an adverse demand shock). This may be tr ...
. President
Fernando de la Rúa Fernando de la Rúa (15 September 19379 July 2019) served as the President of Argentina from 1999 until his resignation in 2001. A member of the Radical Civic Union, he previously served as national senator for Buenos Aires across non-consecuti ...
was elected in 1999 on a reform platform that nevertheless sought to maintain the peso's parity with the dollar. He inherited a country with high unemployment (15%), lingering recession, and continued high levels of borrowing. In 1999,
economic stability Economic stability is the absence of excessive fluctuations in the macroeconomy. An economy with fairly constant output growth and low and stable inflation would be considered economically stable. An economy with frequent large recessions, a pronou ...
became
economic stagnation Economic stagnation is a prolonged period of slow economic growth (traditionally measured in terms of the GDP growth), usually accompanied by high unemployment. Under some definitions, ''slow'' means significantly slower than potential growth as ...
(even
deflation In economics, deflation is a decrease in the general price level of goods and services. Deflation occurs when the inflation rate falls below 0% and becomes negative. While inflation reduces the value of currency over time, deflation increases i ...
at times), and the economic measures taken did nothing to avert it. The government continued its predecessor's economic policies. Devaluing the peso by abandoning the exchange peg was considered political suicide and a recipe for economic disaster. By the end of the century, complementary currencies had emerged. In a 2001 interview, journalist Peter Katel identified three factors that converged "the worst possible time" that made the Argentine economy unravel: # The fixed exchange rate between Argentine peso and the US dollar decided by Cavallo. # The large amounts of borrowing by Menem. # An increase in debt from reduced tax revenues.


Currency

The 2002 crisis of the Argentine peso, however, shows that even a currency board arrangement cannot be completely safe from a possible collapse. When the peso was first linked to the U.S. Dollar at parity in February 1991 under the Convertibility Law, initial economic effects were quite positive: Argentina's chronic inflation was curtailed dramatically and foreign investment began to pour in, leading to an economic boom. Over time, however, the peso appreciated against the majority of currencies as the U.S. Dollar became increasingly stronger in the second half of the 1990s. A strong peso hurt exports from Argentina and caused a protracted economic downturn that eventually led to the abandonment of the peso-dollar parity in 2002. This change, in turn, caused severe economic and political distress in the country. The unemployment rate rose above 20 per cent and inflation reached a monthly rate of about 20 per cent in April 2002. In contrast, Hong Kong was able to successfully defend its currency board arrangement during the Asian financial crisis, a major stress test for the arrangement. Although there is no clear consensus on the causes of the Argentine crisis, there are at least three factors that are related to the collapse of the currency board system and ensuing economic crisis: # The lack of fiscal discipline # Labour market inflexibility # Contagion from the financial crises in Russia and Brazil. While the currency crisis is over, the debt problem has not been completely resolved. The government of Argentina ceased all debt payments in December 2001 in the wake of persistent recession and rising social and political unrest. In 2004, the Argentine government made a 'final' offer amounting to a 75 per cent reduction in the net present value of the debt. Foreign bondholders rejected this offer and asked for an improved offer. In early 2005, bondholders finally agreed to the restructuring, under which they took a cut of about 70 per cent on the value of their bond holdings. While the
provinces of Argentina Argentina has 23 provinces (, singular ) and one autonomous city, Buenos Aires, which serves as the federal capital, as determined by Congress. The provinces and the capital have their own constitutions and exist under a federal system. ...
had always issued
complementary currency A complementary currency is a currency or medium of exchange that is not necessarily a national currency, but that is thought of as supplementing or complementing national currencies. Complementary currencies are usually not legal tender and the ...
in the form of bonds and drafts to manage shortages of cash, the scale of such borrowing reached unprecedented levels during this period. They became called "quasi-currencies", the strongest of them being
Buenos Aires Buenos Aires, controlled by the government of the Autonomous City of Buenos Aires, is the Capital city, capital and largest city of Argentina. It is located on the southwest of the Río de la Plata. Buenos Aires is classified as an Alpha− glob ...
's Patacón. The national government issued its own quasi-currency, the LECOP. The Crédito also emerged in 1995 as a complementary currency for facilitating
barter In trade, barter (derived from ''bareter'') is a system of exchange (economics), exchange in which participants in a financial transaction, transaction directly exchange good (economics), goods or service (economics), services for other goods ...
. Some versions of Crédito were unique for being
demurrage currency Demurrage currency, also known as depreciating money or stamp scrip in its paper money form, is a type of money that is designed to gradually lose purchasing power at a flat constant rate. Unlike traditional money, demurrage is designed to only b ...
.


Rates, riots, resignations and default

When a short boom in the early 1990s of
portfolio investment Portfolio investments are investments in the form of a group (portfolio) of assets, including transactions in equity, securities, such as common stock, and debt securities, such as banknotes, bonds, and debentures. Portfolio investment cover ...
from abroad ended in 1995, Argentina became reliant on the
IMF The International Monetary Fund (IMF) is a major financial agency of the United Nations, and an international financial institution funded by 191 member countries, with headquarters in Washington, D.C. It is regarded as the global lender of la ...
to provide the country with low-interest access to credit and to guide its economic reforms. When the recession began in 1999, the national deficit widened to 2.5% of GDP, and its external debt surpassed 50% of GDP. Seeing the levels as excessive, the IMF advised the government to balance its budget by implementing austerity measures to sustain investor confidence. The De la Rúa administration implemented $1.4 billion in cuts in its first weeks in office in late 1999. In June 2000, with unemployment at 14% and projections of 3.5% GDP for the year, austerity was furthered by $938 million in spending cuts and $2 billion in tax increases. GDP growth projections proved to be overly optimistic (instead of growing, real GDP shrank 0.8%), and lagging tax receipts prompted the government to freeze spending and cut retirement benefits again. In early November,
Standard & Poor's S&P Global Ratings (previously Standard & Poor's and informally known as S&P) is an American credit rating agency (CRA) and a division of S&P Global that publishes financial research and analysis on stocks, bonds, and commodities. S&P is co ...
placed Argentina on a credit watch, and a treasury bill auction required paying 16% interest (up from 9% in July, the second-highest rate of any country in South America at the time. Rising bond yields forced the country to turn to major international lenders, such as the IMF, the
World Bank The World Bank is an international financial institution that provides loans and Grant (money), grants to the governments of Least developed countries, low- and Developing country, middle-income countries for the purposes of economic development ...
, and the
US Treasury The Department of the Treasury (USDT) is the national treasury and finance department of the federal government of the United States. It is one of 15 current U.S. government departments. The department oversees the Bureau of Engraving and ...
, which would lend to the government below market rates if it complied with conditions. Several more rounds of belt-tightening followed. José Luis Machinea resigned in March 2001. He was replaced with Ricardo López Murphy, who lasted less than three weeks in office before being replaced with Cavallo. Standard and Poor's cut the credit rating of the country's bonds to B− in July 2001. Cavallo reacted by offering bondholders a swap: longer-term, higher-interest bonds would be exchanged for bonds due in 2010. The "megaswap" (''megacanje''), as Cavallo referred to it, was accepted by most bondholders, and it delayed up to $30 billion in payments that would have been due by 2005; but it also added $38 billion in interest payments in the out years; of the $82 billion in bonds that eventually had to be
restructured Restructuring or Reframing is the corporate management term for the act of reorganizing the legal, ownership, operational, or other structures of a company for the purpose of making it more profitable, or better organized for its present needs. ...
(triggering a wave of holdout lawsuits), 60% were issued during the 2001 megaswap. Cavallo also attempted to curb the budget crisis by instituting an unpopular across-the-board pay cut in July of up to 13% to all civil servants and an equivalent cut to government pension benefits, De la Rúa's seventh austerity round—triggering nationwide strikes, and from August, it paid salaries of the highest-paid employees in IOUs instead of money. That further depressed the weakened economy, the unemployment rate rose to 16.4% in August 2001 up from a 14.7% a month earlier, and it reached 20% by December. Public discontent with the economic conditions was expressed in the nationwide
election An election is a formal group decision-making process whereby a population chooses an individual or multiple individuals to hold Public administration, public office. Elections have been the usual mechanism by which modern representative d ...
. De la Rúa's alliance lost its majority in both chambers of Congress. Over 20% of voters chose to give blank or defaced ballots rather than indicate support of any candidate. The crisis intensified when, on 5 December 2001, the IMF refused to release a US$1.3 billion tranche of its loan, citing the failure of the Argentine government to reach its budget deficit targets, and it demanded budget cuts, 10% of the federal budget. On 4 December, Argentine bond yields stood at 34% over U.S. treasury bonds, and, by 11 December, the spread jumped to 42%. By the end of November 2001, people began withdrawing large sums of dollars from their
bank account A bank account is a financial account maintained by a bank or other financial institution in which the financial transaction A financial transaction is an Contract, agreement, or communication, between a buyer and seller to exchange goods, ...
s, turning pesos into dollars, and sending them abroad, which caused a
bank run A bank run or run on the bank occurs when many Client (business), clients withdraw their money from a bank, because they believe Bank failure, the bank may fail in the near future. In other words, it is when, in a fractional-reserve banking sys ...
. On 2 December, the government enacted measures, informally known as the '' corralito'', which allowed for only minor sums of cash to be withdrawn, initially $250 a week.


December 2001 riots and political turmoil

The bank withdrawal freeze led to widespread protests, particularly in Buenos Aires. They engaged in protests known as '' cacerolazo'' (banging pots and pans). Initially peaceful, these demonstrations later involved damage to property, including banks and foreign-owned companies, particularly those from the United States and Europe. Confrontations between the police and citizens became common, and fires were set on Buenos Aires avenues. De la Rúa declared a
state of emergency A state of emergency is a situation in which a government is empowered to put through policies that it would normally not be permitted to do, for the safety and protection of its citizens. A government can declare such a state before, during, o ...
, but the situation worsened, precipitating the violent protests of 20 and 21 December 2001 in
Plaza de Mayo The Plaza de Mayo (, ; ) is a city square and the main foundational site of Buenos Aires, Argentina. It was formed in 1884 after the demolition of the Recova building, unifying the city's Plaza Mayor and Plaza de Armas, by that time known as ''Pl ...
, where clashes between demonstrators and the police ended up with several people dead and precipitated the fall of the government. De la Rúa eventually fled the
Casa Rosada The ''Casa Rosada'' (), , is the president of the Argentine Republic's official workplace, located in Buenos Aires. The palatial mansion is known officially as ''Casa de Gobierno'' ("House of Government" or "Government House"). Normally, the pre ...
in a helicopter on 21 December. Following the presidential succession procedures established in the Constitution of Argentina, the Senate chairman was next in the line of succession in the absence of the president and the vice-president. Accordingly, Ramón Puerta took office as a caretaker
head of state A head of state is the public persona of a sovereign state.#Foakes, Foakes, pp. 110–11 " he head of statebeing an embodiment of the State itself or representative of its international persona." The name given to the office of head of sta ...
, and the Legislative Assembly (a joint session of both chambers of Congress) was convened.
Adolfo Rodríguez Saá Adolfo Rodríguez-Saá (; born 25 July 1947) is an Argentina, Argentine Peronism, Peronist politician. Born in a family that was highly influential in the history of the San Luis Province, he became the province's Governor of San Luis, governo ...
, the governor of
San Luis Province San Luis () is a Provinces of Argentina, province of Argentina located near the geographical center of the country (on the 32° South parallel). Neighboring provinces are, from the north clockwise, La Rioja Province (Argentina), La Rioja, Córdo ...
, was eventually appointed as the new interim president.


Debt default

During the last week of 2001, the administration defaulted on the larger part of the public debt, US$132 billion, a seventh of all the money borrowed by the
Third World The term Third World arose during the Cold War to define countries that remained non-aligned with either NATO or the Warsaw Pact. The United States, Canada, Taiwan, Japan, South Korea, the Southern Cone, NATO, Western European countries and oth ...
. Politically, the most heated debate involved the date of the following elections. Proposals ranged from March 2002 to October 2003, the end of De la Rúa's term. Rodríguez Saá's economic team came up with a scheme designed to preserve the convertibility regime, dubbed the "Third Currency" Plan. It consisted of creating a new, non-convertible currency, the ''Argentino'', that would coexist with convertible pesos and US dollars. It would circulate as cash, or but not in checks, promissory notes, or other instruments, which could be denominated in pesos or dollars. It would be partially guaranteed with federally managed land to counterbalance inflationary tendencies. Argentines having legal status would be used to redeem all
complementary currency A complementary currency is a currency or medium of exchange that is not necessarily a national currency, but that is thought of as supplementing or complementing national currencies. Complementary currencies are usually not legal tender and the ...
already in circulation; their acceptance as a means of payment was quite uneven. It was hoped that convertibility would restore public confidence, and the non-convertible nature of this currency would allow for a measure of fiscal flexibility (unthinkable with pesos) to ameliorate the crippling recession. Critics called the plan merely a "controlled devaluation" but its advocates countered that since controlling a devaluation is perhaps its thorniest issue, that criticism was a praise in disguise. The plan had enthusiastic supporters among mainstream economists (the most well-known being perhaps Martín Redrado, a former Banco Central de la República Argentina president) citing technical arguments. However, it was not implemented because the Rodríguez Saá government lacked the required political support. Rodriguez Saá lost the support of his own
Justicialist Party The Justicialist Party (, ; abbr. PJ) is a major political party in Argentina, and the largest branch within Peronism. Following the 2023 presidential election, it has been the largest party in the opposition against President Javier Milei. Fo ...
and resigned before the end of the year. The Legislative Assembly convened again, appointing Peronist Senator
Eduardo Duhalde Eduardo Alberto Duhalde (; born 5 October 1941) is an Argentina, Argentine former peronist politician who served as the interim President of Argentina from January 2002 to May 2003. He also served as Vice President of Argentina, Vice President ...
of
Buenos Aires Province Buenos Aires, officially the Buenos Aires Province, is the largest and most populous Provinces of Argentina, Argentine province. It takes its name from the city of Buenos Aires, the capital of the country, which used to be part of the province an ...
, who had been the runner-up in the 1999 race for the presidency.


End of fixed exchange rate

In January 2002, after much deliberation, Duhalde abandoned the
fixed exchange rate A fixed exchange rate, often called a pegged exchange rate, is a type of exchange rate regime in which a currency's value is fixed or pegged by a monetary authority against the value of another currency, a currency basket, basket of other currenc ...
that had been in place for ten years. In a matter of days, the peso lost a large part of its value in the unregulated market. A provisional "official" exchange rate was set at 1.4 pesos per US dollar. In addition to the ''corralito'', the Ministry of Economy dictated the ''pesificación''; all bank accounts denominated in dollars would be converted to pesos at an official rate. Deposits would be converted at 1.40 ARS per dollar and debt was converted on 1 to 1 basis. The exchange rate spiked as depositors converted their peso deposits back into US dollars. By October 2002, depositors who withdraw lost 50% of their value in dollars. That angered most savings holders and attempts were made to declare it unconstitutional. After a few months, the exchange rate was mostly a
floating exchange rate In macroeconomics and economic policy, a floating exchange rate (also known as a fluctuating or flexible exchange rate) is a type of exchange rate regime in which a currency's value is allowed to fluctuate in response to foreign exchange market ...
. The peso further depreciated, which prompted increased inflation. Argentina depended heavily on imports but then could not replace them locally. Inflation and unemployment worsened during 2002. Then, exchange rate had reached nearly 4 pesos per dollar, and the accumulated inflation since the devaluation was about 80%, considerably less than predicted by most orthodox economists. The quality of life of the average Argentine was lowered proportionally. Many businesses closed or went bankrupt, many imported products became virtually inaccessible, and salaries were left as they were before the crisis. Since the supply of pesos did not meet the demand for cash (even after the devaluation), complementary currencies kept circulating alongside them. Fears of hyperinflation as a consequence of devaluation quickly eroded their attractiveness. Their acceptability now ultimately depended on the state's irregular willingness to take them as payment of taxes and other charges. While the regional currency was frequently accepted at the same value as the peso,
Entre Ríos Province Entre Ríos (, "Between Rivers") is a Center Region, Argentina, central provinces of Argentina, province of Argentina, located in the Mesopotamia, Argentina, Mesopotamia region. It borders the provinces of Buenos Aires Province, Buenos Aires (so ...
's ''Federal'' fared among the worst, discounted by an average 30% as even the provincial government that had issued them was reluctant to accept them. There were also frequent rumors that the first state would banish complementary currency overnight, leaving their holders with useless printed paper.


Immediate effects

Aerolíneas Argentinas was one of the most affected Argentine companies, canceling all international flights for various days in 2002. The airline came close to bankruptcy but survived. Several thousand homeless and jobless Argentines found work as '' cartoneros'', cardboard collectors. An estimate in 2003 had 30,000 to 40,000 people scavenging the streets for cardboard to sell to recycling plants. Such desperate measures were common because of the unemployment rate, nearly 25%. Argentine agricultural products were rejected in some international markets for fear that they might have been damaged by the chaos. The
US Department of Agriculture The United States Department of Agriculture (USDA) is an executive department of the United States federal government that aims to meet the needs of commercial farming and livestock food production, promotes agricultural trade and producti ...
put restrictions on Argentine food and drug exports.


Recovery

Duhalde eventually stabilised the situation somewhat and called for elections. On 25 May 2003,
Néstor Kirchner Néstor Carlos Kirchner Ostoić (; 25 February 195027 October 2010) was an Argentine lawyer and politician who served as the president of Argentina from 2003 to 2007. A member of the Justicialist Party, he previously served as Governor of Sa ...
took office as the new president. Kirchner kept Duhalde's Minister of Economy, Roberto Lavagna. Lavagna, a respected economist with centrist views, showed a considerable aptitude at managing the crisis, with the help of heterodox measures. The economic outlook was completely different from that of the 1990s. The devalued peso made Argentine exports cheap and competitive abroad and discouraged imports. In addition, the high price of
soybeans The soybean, soy bean, or soya bean (''Glycine max'') is a species of legume native to East Asia, widely grown for its edible bean. Soy is a staple crop, the world's most grown legume, and an important animal feed. Soy is a key source of f ...
in the international market produced massive amounts of foreign currency;
China China, officially the People's Republic of China (PRC), is a country in East Asia. With population of China, a population exceeding 1.4 billion, it is the list of countries by population (United Nations), second-most populous country after ...
became a major buyer of Argentina's soy products. The government encouraged
import substitution Import substitution industrialization (ISI) is a protectionist trade and economics, economic policy that advocates replacing foreign imports with domestic production. It is based on the premise that a country should attempt to reduce its foreign ...
and accessible credit for businesses, staged an aggressive plan to improve tax collection, and allocated large sums for
social welfare Welfare spending is a type of government support intended to ensure that members of a society can meet basic human needs such as food and shelter. Social security may either be synonymous with welfare, or refer specifically to social insurance p ...
but controlled expenditure in other fields. The peso slowly rose, reaching a 3-to-1 rate to the dollar. Agricultural exports grew and tourism returned. The huge
trade surplus Balance of trade is the difference between the monetary value of a nation's exports and imports of goods over a certain time period. Sometimes, trade in services is also included in the balance of trade but the official IMF definition only cons ...
ultimately caused such an inflow of dollars that the government was forced to begin intervening to keep the peso from rising further, which would have adversely affected budget balances by limiting export tax revenues and discouraged further reindustrialisation. The central bank started rebuilding its dollar reserves. By December 2005, foreign currency reserves had reached $28 billion (they were later reduced by the payment of the full debt to the IMF in ). The downside of this reserve accumulation strategy is that US dollars had to be bought with freshly issued pesos, which risked inflation. The Central Bank sterilized its purchases by buying Treasury letters. In this way the exchange rate stabilised to about 3:1. The currency exchange issue was complicated by two opposing factors: a sharp increase in imports since 2004, which raised the demand for dollars, and the return of foreign investment, which brought fresh currency from abroad, after the successful restructuring of about three-quarters of the external debt. The government set up controls and restrictions aimed at keeping short-term speculative investment from destabilising financial markets. The country faced a potential debt crisis in late July 2014, when a New York judge ordered Argentina to pay hedge funds the full interest on bonds it had swapped at a discount rate during 2002. If the judgement proceeded, Argentina argued, the country would become insolvent and have a second debt default. Argentina's recovery suffered a minor setback in 2004, when rising industrial demand caused a short-lived
energy crisis An energy crisis or energy shortage is any significant Bottleneck (production), bottleneck in the supply of energy resources to an economy. In literature, it often refers to one of the energy sources used at a certain time and place, in particu ...
. Argentina continued to grow strongly, however, and GDP jumped 8.8% in 2003, 9.0% in 2004, 9.2% in 2005, 8.5% in 2006 and 8.7% in 2007. Though wages averaged a 17% annual increase from 2002 to 2008, and rising 25% in the year to May 2008, inflation ate away at the increases: 12.5% in 2005; 10% in 2006; nearly 15% in 2007, and over 20% during 2008. The government was accused of manipulating inflation statistics, and ''
The Economist ''The Economist'' is a British newspaper published weekly in printed magazine format and daily on Electronic publishing, digital platforms. It publishes stories on topics that include economics, business, geopolitics, technology and culture. M ...
'' began to turn to private sources instead. The surveying volume prompted the government to increase export tariffs and to pressure retailers into one price freeze after another in a bid to stabilize prices but with little effect. While unemployment has been considerably reduced (it has hovered around 7% since 2011), Argentina has so far failed to reach an equitable distribution of income. Nevertheless, economic recovery after 2002 was accompanied by significant improvements in income distribution: in 2002, the richest 10% absorbed 40% of all income, compared to 1.1% for the poorest 10% (36 times); but by 2013, the former received 27.6% of income, and the latter, 2% (14 times). That level of inequality compares favorably to levels in most of Latin America and, in recent years, the United States as well. Living standards recovered significantly after growth resumed in 2003. Even using private inflation estimates, real wages rose by around 72% from their low point, in 2003, to 2013. Argentina's domestic new auto market recovered especially quickly from a low of 83,000 in 2002 (a fifth the levels of the late 1990s) to a record 964,000 in 2013.


Cooperatives

During the economic collapse, many business owners and foreign investors sent their money overseas. As a result, many small and medium enterprises closed for lack of capital. The majority of their workers, faced with a sudden loss of employment and no source of income, decided to reopen the closed facilities on their own as self-managed
cooperative A cooperative (also known as co-operative, coöperative, co-op, or coop) is "an autonomy, autonomous association of persons united voluntarily to meet their common economic, social and cultural needs and aspirations through a jointly owned a ...
s.Benjamin Dangl, 'Occupy, Resist, Produce: Worker Cooperatives in Argentina' http://upsidedownworld.org/coops_arg.htm Worker cooperatives include the factory Zanon ( FaSinPat), the four-star Hotel Bauen, the suit factory Brukman, and the printing press Chilavert. In some cases, former owners sent police to remove workers from the workplaces; that was sometimes successful but in other cases, workers defended occupied workplaces against the state, the police, and the bosses. A survey by an Buenos Aires newspaper found that around a third of the population had participated in general assemblies. The assemblies used to take place in street corners and public spaces, and they generally discussed ways of helping each other in the face of eviction, or organizing around issues such as health care, collective food buying, or food distribution programs. Some created new structures of health care and schooling. Neighborhood assemblies met once a week in a large assembly to discuss issues that affected the larger community. In 2004, '' The Take'', a documentary, was released on the assemblies.


Effects on wealth distribution

Although GDP grew consistently and quickly after 2003, it did not reach the levels of 1998, the last year before the crisis, until late 2004. Other macroeconomic indicators followed suit. A study by Equis, an independent counseling organization, found out that two measures of economic inequality, the
Gini coefficient In economics, the Gini coefficient ( ), also known as the Gini index or Gini ratio, is a measure of statistical dispersion intended to represent the income distribution, income inequality, the wealth distribution, wealth inequality, or the ...
and the
wealth gap The distribution of wealth is a comparison of the wealth of various members or groups in a society. It shows one aspect of economic inequality or heterogeneity in economics, economic heterogeneity. The distribution of wealth differs from the i ...
between the 10% poorest and the 10% richest among the population, grew continuously from 2001 to March 2005. Similar statistics are available from the World Bank.


Debt restructuring

When the default was declared in 2002, foreign investment stopped, and capital flow ceased almost completely and immediately. The government faced severe challenges in trying to refinance its debt. The government reached an agreement in 2005 by which 76% of the defaulted bonds were exchanged for other bonds at a nominal value of 25 to 35% of the original and at longer terms. A second debt restructuring in 2010 brought the percentage of bonds out of default to 93%, but some creditors have still not been paid. Foreign currency denominated debt thus fell as a percentage of GDP from 150% in 2003 to 8.3% in 2013.


Criticism of IMF

The IMF accepted no discounts in its part of the Argentine debt. Some payments were refinanced or postponed on agreement. However, IMF authorities at times expressed harsh criticism of the discounts and actively lobbied for the private creditors. In a speech before the
United Nations General Assembly The United Nations General Assembly (UNGA or GA; , AGNU or AG) is one of the six principal organs of the United Nations (UN), serving as its main deliberative, policymaking, and representative organ. Currently in its Seventy-ninth session of th ...
on 21 September 2004, Kirchner said, "An urgent, tough, and structural redesign of the International Monetary Fund is needed, to prevent crises and help in rovidingsolutions." Implicitly referencing the fact that the intent of the original
Bretton Woods system The Bretton Woods system of monetary management established the rules for commercial relations among 44 countries, including the United States, Canada, Western European countries, and Australia, after the 1944 Bretton Woods Agreement until the ...
was to encourage economic development, Kirchner warned that the IMF today must "change that direction, which took it from being a lender for development to a creditor demanding privileges." During the weekend of 1–2 October 2004, at the annual meeting of the IMF/
World Bank The World Bank is an international financial institution that provides loans and Grant (money), grants to the governments of Least developed countries, low- and Developing country, middle-income countries for the purposes of economic development ...
, leaders of the IMF, the
European Union The European Union (EU) is a supranational union, supranational political union, political and economic union of Member state of the European Union, member states that are Geography of the European Union, located primarily in Europe. The u ...
, the
Group of Seven The Group of Seven (G7) is an Intergovernmentalism, intergovernmental political and economic forum consisting of Canada, France, Germany, Italy, Japan, the United Kingdom and the United States; additionally, the European Union (EU) is a "non- ...
industrialised nations, and the Institute of International Finance (IIF), warned Kirchner that Argentina had to come to an immediate debt-restructuring agreement with creditors, increasing its primary budget surplus to slow debt increases and imposing structural reforms to prove to the world financial community that it deserved loans and investment. In 2005, after turning its primary surplus into an actual surplus, Argentina began paying the IMF on schedule, with the intention of regaining financial independence. On 15 December 2005, following a similar action by Brazil, Kirchner suddenly announced that Argentina would pay the whole debt to the IMF. The debt payments, totaling US$9.810 billion, were previously scheduled as instalments until 2008. Argentina paid it with the central bank's foreign currency reserves. The payment was made on 6 January 2006. In a June 2006 report, a group of independent experts hired by the IMF to revise the work of its Independent Evaluation Office (IEO) stated that the assessment of the Argentine case suffered from manipulation and lack of collaboration on the part of the IMF; the IEO is claimed to have unduly softened its conclusions to avoid criticizing the IMF's board of directors.


Films

* '' Social Genocide (Memoria del Saqueo), by Fernando "Pino" Solanas'' * '' A Lucky Day (Un Día de suerte)'' * '' The Take'' * '' Nine Queens (Nueve Reinas)'' * ''
Heroic Losers ''Heroic Losers'' () is a 2019 heist comedy-drama film co-written and directed by Sebastián Borensztein, based on the novel ''La noche de la Usina'' (''The Night of the Heroic Losers'') by Eduardo Sacheri, who also co-wrote the screenplay. It f ...
''


See also

* 1998 in Argentina *
1999 in Argentina Events from the year 1999 in Argentina Incumbents * President of Argentina, President: **Carlos Menem (1 January – 10 December) **Fernando de la Rúa (from 10 December) * Vice President of Argentina, Vice President: **Carlos Ruckauf (1 Ja ...
* 2000 in Argentina * 2001 in Argentina *
2002 in Argentina Incumbents * President: ** Eduardo Camaño (until January 2) **Eduardo Duhalde (starting January 2) *Vice President: ''Vacant'' Governors * Governor of Buenos Aires Province: ** Carlos Ruckauf (until 3 January) ** Felipe Solá (from 3 January ...
* Piquetero * Popular assemblies *
South American economic crisis of 2002 The South American economic crisis is the economic disturbances which have developed in 2002 in the South American countries of Argentina, Brazil and Uruguay. The Argentinian economy was suffering from sustained deficit spending and an extremely ...
* Argentine debt restructuring


References


Further reading


"Guillermo Nielsen exclusive: Inside Argentina’s financial crisis"
An insider's account, by Guillermo Nielsen, until recently the Secretary of Finance in Argentina, about his tenure there and specifically about the fraught negotiations the country had regarding its debt with the IMF, investment banks and bondholders. It goes into detail about the negotiations, the people involved. Euromoney March 2006.
Banco Central de la República Argentina
(Argentina's central bank website, with various economic statistics available on the fly)
Argentina: Life After Default
Article looking at how Argentina has recovered from the crisis
Video: "Argentina's Economic Recovery: Four Years After the Meltdown"
featuring CEPR co-director Mark Weisbrot and former IMF Research Director Michael Mussa, 30 November 2005
A Look at Argentina’s 2001 Economic Rebellion and the Social Movements that Led It
– video report by ''
Democracy Now! ''Democracy Now!'' is an hour-long TV, radio, and Internet news program based in Manhattan and hosted by journalists Amy Goodman (who also acts as the show's executive producer), Juan González, and Nermeen Shaikh. The show, which airs live ...
'' * Bortot, F. (2003). "Frozen Savings and Depressed Development in Argentina". ''Savings and Development'', Vol. XXVII, n. 2. . * * Jutta Maute: ''Hyperinflation, Currency Board, and Bust: The Case of Argentina'', (Hohenheimer Volkswirtschaftliche Schriften) (Paperback), Peter Lang Publishing. (2006),


External links


Argentina Didn't Fall on Its Own
(Global Exchange)
Argentina's debt restructuring: A victory by default?
(The Economist)
Argentina’s Economic Disaster
(The Free Market)
How Argentina Got Into This Mess
(The
Cato Institute The Cato Institute is an American libertarian think tank headquartered in Washington, D.C. It was founded in 1977 by Ed Crane, Murray Rothbard, and Charles Koch, chairman of the board and chief executive officer of Koch Industries.Koch ...
)
Confiscatory Deflation: The Case of Argentina
(Joseph T. Salerno, PhD Professor of Economics)
No Tears for Argentina
(Antony P. Mueller, PhD Professor of Economics)
Report of the External Evaluation of the Independent Evaluation Office
(International Monetary Fund)
The Crisis that Was Not Prevented: Lessons for Argentina, the IMF, and Globalisation
(Jan Joost Teunissen and Age Akkerman)
The Empty ATM
(PBS, Wide Angle)
What went wrong in Argentina?
(Steve H. Hanke, PhD Professor of Applied Economics and Kurt Schuler, PhD Economics) {{DEFAULTSORT:Argentine Economic Crisis (1999-2002) 1998 in Argentina 1999 in Argentina 2000 in Argentina 2001 in Argentina 2002 in Argentina 1998 in economic history 1999 in economic history 2000 in economic history 2001 in economic history 2002 in economic history History of government debt Economic crises in Argentina Presidency of Carlos Menem Presidency of Fernando de la Rúa Presidency of Eduardo Duhalde Recessions