The BONEX Plan was a forced conversion of
bank
A bank is a financial institution that accepts deposits from the public and creates a demand deposit while simultaneously making loans. Lending activities can be directly performed by the bank or indirectly through capital markets.
Because ...
time deposits to Treasury
bonds performed by the Argentine government in January 1990.
It was put in place following a 3079,5%
hyperinflation
In economics, hyperinflation is a very high and typically accelerating inflation. It quickly erodes the real value of the local currency, as the prices of all goods increase. This causes people to minimize their holdings in that currency as t ...
in 1989, as
heterodox
In religion, heterodoxy (from Ancient Greek: , "other, another, different" + , "popular belief") means "any opinions or doctrines at variance with an official or orthodox position". Under this definition, heterodoxy is similar to unorthodoxy, w ...
stabilization programs failed.
US$3 billion worth of the public's deposits were converted to "Bonex 89" bonds to be repaid in 1999.
It amounted to a partial default from the
Central Bank
A central bank, reserve bank, or monetary authority is an institution that manages the currency and monetary policy of a country or monetary union,
and oversees their commercial banking system. In contrast to a commercial bank, a central b ...
and Treasury to commercial banks, who in turn partially defaulted into their depositors.
It was caused by the government's political inability to undertake rigorous fiscal reforms, and a monetary
sterilization policy which generated a major 'quasi fiscal' deficit to the Central Bank, further fueling a long-standing high inflation rate.
Its high debt made the Central Bank lost most of its capacity to carry out independent monetary policy.
A freezing of deposits was also undertaken in neighbor country Brazil at the time, during the
Plano Collor.
Background
In 1985, then-president
Raúl Alfonsín
Raúl Ricardo Alfonsín (12 March 1927 – 31 March 2009) was an Argentine lawyer and statesman who served as President of Argentina from 10 December 1983 to 8 July 1989. He was the first democratically elected president after more than ...
created the
Austral Plan
The Austral plan was an Argentine economic plan devised by minister Juan Vital Sourrouille during the presidency of Raúl Alfonsín.
Previous context
Raúl Alfonsín became president of Argentina in 1983 through democratic elections, receiving h ...
, a shock plan to reduce inflation which replaced the
Peso argentino
The peso (established as the ''peso convertible'') is the currency of Argentina, identified by the symbol $ preceding the amount in the same way as many countries using peso or dollar currencies. It is subdivided into 100 ''centavos''. Its ISO 42 ...
currency with the
Austral, on a 1000:1 rate.
Initially successful, lowering inflation from a 350% in the first half of 1985 to slightly more than 20% in the second half,
it led to Alfonsín winning the
1985 midterm elections. However, as the main price anchors of the program were relaxed, inflation began to rise again, contributing to the government defeat in the
1987 midterm elections. This opposition's (
Justicialist Party) legislative strength would make any public expenditure cuts or tax increases required difficult.
A big motor of the rising inflation rate was the Central Bank's own 'quasi fiscal' deficit. During the 1980s, the institution had been absorbing money by issuing interest-bearing debt. As interest rates were liberalized in October 1987 to maintain commercial banks' profitability, the Central Bank's efforts to absorb money increased its own interest bill, making borrowing requirements the main source of money creation. The Bank then slipped into distress, left with no choice but to monetize first the interest on its debt, and then the principal, fueling hyperinflation and decapitalizing the Central Bank, as its liabilities grew faster than its liquid-asset backing.
This has been described as a fast-motion version of the 'unpleasant monetarist arithmetic' outlined by
Sargent and
Wallace.
In 1988, a new economic plan, the
''Primavera'' Plan, was approved by Alfonsín to stabilize the
Argentine economy
The economy of Argentina is the second-largest national economy in South America, behind Brazil. Argentina is a developing country with a highly literate population, an export-oriented agricultural sector, and a diversified industrial base.
...
, which had been suffering a high inflation rate for years now. It was tried from February 1989 to July 1989, but failed.
As the economy went off control, Alfonsín —who had lost
elections
An election is a formal group decision-making process by which a population chooses an individual or multiple individuals to hold Public administration, public office.
Elections have been the usual mechanism by which modern representative ...
to
Carlos Menem— had to turn power five months in advance of the constitutional transition date, amid
riots.
This political uncertainty also contributed to hyperinflation, which rose 197% in June 1989.
The country now had a
balance of payments deficit, a
budget deficit
Within the budgetary process, deficit spending is the amount by which spending exceeds revenue over a particular period of time, also called simply deficit, or budget deficit; the opposite of budget surplus. The term may be applied to the budget ...
, a big
state debt (in an international context of rising interest rates), and rapidly decreasing Central Bank reserves, as it tried to contain the currency depreciation.
The Menem administration established a new stabilization plan, called ''Bunge & Born Plan'' (also known as BB Plan), as several members of the
economic cabinet were former
Bunge & Born executives.
The new peronist government had a working legislative majority that helped it pass emergency legislation, authorizing public companies privatizations and tax reforms. A stand-by line was negotiated with the IMF.
The plan worked, lowering inflation to a single-digit monthly rate, until December 1989, when a second hiperinflationary episode emerged.
As interest rates skyrocketed, reaching a 400% annual rate for 30-day time deposits in 1989, the public saved only the minimum cash they required for living and created deposits (which could be set for a minimum 7-day period, instead of the nowadays 30-day minimum) with their remaining income, to protect themselves from inflation. Banks then on-lent deposits to the Treasury and Central Bank at high yields, cutting lending to productive sectors.
However, these high interest rates increased the
public sector borrowing requirement.
Public debt interest was financed by further borrowing, which resulted again in further interest rate increases to induce the economy to hold the growing debt stocks.
In 1989, the M1
money supply
In macroeconomics, the money supply (or money stock) refers to the total volume of currency held by the public at a particular point in time. There are several ways to define "money", but standard measures usually include currency in circul ...
had risen by a 4,101.4%.
This was a consequence of the lagging exchange rate depreciation and high interest rate on deposits, which generated enormous interest flows that were capitalized into the deposit stocks.
At this time,
ATMs were not common in Argentina, and wages were usually paid in cash. Price and wage ''de facto''
indexation
Indexation is a technique to adjust income payments by means of a price index, in order to maintain the purchasing power of the public after inflation, while deindexation is the unwinding of indexation.
Overview
From a macroeconomics standpoin ...
was common practice, enhancing the effects of any inflationary shock.
Fearing further devaluations, withdrawal demand increased, worsening commercial banks'
illiquidity.
By October 1989, a new premium with the parallel foreign exchange market emerged, Central Bank tightening policy failed to eliminate the premium, and taxes were raised to increase non-interest surplus. The M4 broad money stock grew from US$2.9 billion in June 1989 to 7.5 billion in November 1989, parallel premium kept raising, forcing a new devaluation of the Austral, from 655 to 1000
₳ per dollar.
A new
run on the Argentine currency took place in December 1989. This ended the ''Bunge & Born Plan'', forcing Minister of Economy
Néstor Rapanelli to resign.
A new floating exchange rate system was put in place, and price controls were lifted. This caused a vicious cycle of depreciation, surging prices, and soaring interest rates. The IMF stand-by programme was interrupted during the December 1989 hyperinflation.
By the end of 1989, the official floating exchange rate had reached 1,800₳ per dollar, with the parallel rate reaching 4,000₳ per dollar.
Development and deployment
To halt a new hiperinflation, the
Ministry of Economy —now headed by
Antonio Erman González— forced the conversion of time deposits into ''BONEX 89'' treasury bonds (Spanish: ''BOnos Exteriores'', External Bonds), to be repaid in 1999.
It was approved by
presidential decree
A decree is a legal proclamation, usually issued by a head of state (such as the president of a republic or a monarch), according to certain procedures (usually established in a constitution). It has the force of law. The particular term used for ...
, and announced on a press conference on December 28. The Treasury would issue BONEX bonds to the Central Bank (around US$3 billion),
who would then pay off banks' inaccessible deposits with BONEX, and the commercial banks would then pay the depositors.
Only 1 million
₳ (about US$500) per account would be given back in cash to the public, following several days of bank holiday, with the remaining funds being converted to bonds. Additional amounts could be exempted from the conversion, only if the depositor could prove that the funds were to be used for tax or payroll payments.
M2 money supply tumbled down from 18% of GDP in 1986 to 3.1% after the conversion.
Time deposits were temporary disallowed, and the Treasury converted most of its own outstanding domestic debt into BONEX.
The refinancing of public debt made possible lowering the 'quasi fiscal' deficit.
This sudden drop in liquidity lowered inflation, and even produced a few days of
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% (a negative inflation rate). Inflation reduces the value of currency over time, but sudden deflatio ...
.
The BONEX 89 bonds started trading
under par, a discount price 50% under its face value.
The public initiated lawsuits to the Argentine State and the Central Bank, questioning the
constitutionality
Constitutionality is said to be the condition of acting in accordance with an applicable constitution; "Webster On Line" the status of a law, a procedure, or an act's accordance with the laws or set forth in the applicable constitution. When l ...
of the forced conversion, but in December 1990 the
Supreme Court —on the ''Peralta, Luis Arcenio y otro c/Estado Nacional'' case''—'' validated the presidential decrees, stating the measures were a proper response to a severe social risk situation.
In March 1990, the government announced new fiscal measures: It stopped the export refunds benefit, halted all public
invitations to tender and government purchases, as well as reducing the administrative structure of the government.
Inflation revived to the ends of January 1990, amid rumors of
dollarization
Currency substitution is the use of a foreign currency in parallel to or instead of a domestic currency. The process is also known as dollarization or euroization when the foreign currency is the dollar or the euro, respectively.
Currency subs ...
. Government raised public-service prices, and increased taxes during February 1990. Exchange rate went from 1,865₳ per dollar at the end of January to 5,965₳ at the end of February.
A new fiscal programme was announced on 4 March 1990, including: a raise on taxes, a tightening in public expenditure, and a reduction in public employment, and the suspension of payments owed to government contractors.
Following this announcement, pressure on the exchange rate eased and inflation dropped, but remained on two digits levels.
The IMF stand-by programme was then restarted.
Aftermath
In February 1991, a new run against the Argentine currency took place, triggering a big devaluation and fueling the comeback of inflation.
Minister Erman González resigned and was replaced by
Domingo Cavallo
Domingo Felipe Cavallo (born July 21, 1946) is an Argentine economist and politician. Between 1991 and 1996 he was Economic Ministry of Argentina during Carlos Menem presidency. He is known for implementing the '' Convertibility plan'', which ...
. In March 1991, the
Convertibility plan started, pegging the Austral (and then the Argentine Peso) to the US Dollar. Public debt was refinanced with the
Brady Plan
Brady bonds are dollar-denominated bonds, issued mostly by Latin American countries in the late 1980s. The bonds were named after U.S. Treasury Secretary Nicholas Brady, who proposed a novel debt-reduction agreement for developing countries.
...
.
As the Argentine economy grew, the BONEX bonds price gradually recovered.
See also
*
Austral plan
The Austral plan was an Argentine economic plan devised by minister Juan Vital Sourrouille during the presidency of Raúl Alfonsín.
Previous context
Raúl Alfonsín became president of Argentina in 1983 through democratic elections, receiving h ...
*
Rodrigazo
Rodrigazo is the name given to a group of economic policies announced in Argentina on June 4, 1975, and their immediate aftermath. The name is from the fact that the policies were announced and implemented by Celestino Rodrigo, the Minister of Eco ...
References
{{Economy of Argentina
1990s economic history
1990 in Argentina
Economic history of Argentina
Inflation in Argentina
Presidency of Carlos Menem