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Economy of Argentina
Peso (currency)
Convertibility plan
Corralito
Cacerolazo
2001 riots
Apagón
Economic emergency law
Debt restructuring

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The Argentine Currency Board pegged the Argentine peso to the U.S. dollar between 1991 and 2002 in an attempt to eliminate hyperinflation and stimulate economic growth. While it initially met with considerable success, the board's actions ultimately failed. In contrast to what most people think, this peg actually did not exist, except only in the first years of the plan. From then on, the government never needed to use the foreign exchange reserves of the country in the maintenance of the peg, except when the recession and the massive bank withdrawals started in 2000.[1]

Background

For most of the period between 1975 and 1990, Argentina experienced hyperinflation (averaging 325% a year), poor or negative GDP growth, a severe lack of confidence in the national government and the Central Bank, and low levels of capital investment. After eight currency crises since the early 1970s, inflation peaked in 1989, reaching 5,000% that year. GDP was 10% lower than in 1980 and per capita GDP had fallen by over 20%. Fixed investment fell by over half and, by 1989, could not cover yearly depreciation - particularly in the industrial sector. Social indicators deteriorated seriously: real wages collapsed to about half of their 1974 peak and income poverty rates increased from 27% in 1980 to 47% in 1989.[2]

To a large extent, the main reason behind this long period of hyperinflation was unsustainable growth of the money supply to finance the large fiscal deficits maintained by successive governments. Driven by rising tax evasion and losses among state enterprises, the total public fiscal deficit reached 10% of GDP in 1983. Austerity measures pursued by President Raúl Alfonsín trimmed this 4% in 1985, though the 1989 crisis pushed the shortfall to 7.6% (which could only be financed by suspending debt interest payments).[2] Since Argentina could not participate meaningfully in world capital markets given the great investment risk it posed, the only course available was the financing of these fiscal deficits by monetizing them. This meant that the government levied an inflation tax to pay for the fiscal deficits, which in turn contributed to stalling growth.

Another reason for the instability of the Argentine currency was the fragility of domestic financial institutions. The Argentine banking crisis of 1990 underlined this point, as the Central Bank moved to confiscate the deposits of commercial banks with the BONEX plan, to overcome a liquidity crunch by exchanging certain types of time deposits for BONEX bonds. Tightening domestic credit became increasingly limited to the public sector: only US$17 billion of loans outstanding (45% of the total) were accounted for by private sector borrowers, and this declined to US$7 billion during the 1989 crisis. Accordingly, the nation's money supply (M2) fell by nearly identical figures, while affluent Argentine nationals held over US$50 billion overseas.[2]

There were also external factors that further triggered the currency crisis, such as interest rate fluctuations. In the early 1980s, for example, the United States imposed tight monetary discipline upon its own institutions, which made it more expensive to borrow money because banks were required to keep higher reserve requirements. Erratic or punitive responses to global financial vagaries by the Central Bank of Argentina itself often left the Argentine economy bearing the brunt. One particularly damaging austerity policy was the Central Bank Circular 1050. Enacted in 1980, it tied monthly installment payments to the value of the U.S dollar in Argentina, which rose over ten-fold between early 1981 and July 1982, when new Central Bank President Domingo Cavallo rescinded the surcharge (by then, commercial banks had been writing off 5% of their loan portfolio a month). The debacle shattered credit market confidence locally for the rest of the 1980s, directly contributing to the negative economic climate in Argentina during those years.[2]

Carlos Menem took office six months in advance. His early attempts to stabilize inflation failed, resulting in further Argentine peso to the U.S. dollar between 1991 and 2002 in an attempt to eliminate hyperinflation and stimulate economic growth. While it initially met with considerable success, the board's actions ultimately failed. In contrast to what most people think, this peg actually did not exist, except only in the first years of the plan. From then on, the government never needed to use the foreign exchange reserves of the country in the maintenance of the peg, except when the recession and the massive bank withdrawals started in 2000.[1]

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