Argentina at the Abyss
In 2006, Argentina still has a risk of defaulting in their financial commitments (insert pdf reference). Nevertheless, it also ranked highest on household consumption among South American nations. Nowadays, Argentina is undergoing economic progress. IMF negotiations are ongoing for the availability of credit, President Kirchner’s close ties with President Bush, keeping peace, democracy and stability and economic and political talks among the administration are among the current schemes for development (Noriega, 2004). Unemployment rates continue to decrease and economic growth continue to increase (insert pdf reference).
But before February 3, 2002, the Argentine peso had been pegged to the United States (US) dollar. For about 11 years, the exchange rate for the two currencies was kept 1:1 (Hanke and Schuler, 2002; insert pdf reference) when President Eduardo Duhalde created the “Convertibility Law” wherein an Argentine peso is equal to a US dollar. This was done to be able to control hyperinflation and to attract investors for economic development (Petras and Veltmeyer, 2002). The country was even praised for the liberalization of the currency despite its status as a third world country. Although it was implemented to able to attain economic growth and well-being, it became a double-edged scheme for Argentina.
By year 2002, the currency was removed from its anchorage from the US dollar. Instead, it ran on a floating exchange rate regime. This decision both had advantages and disadvantages. For the advantages, the resulting value of the peso proved the overvaluation of the Argentine peso (Litterick, 2002). In addition, the commodities being exported are now becoming competitive because of the prices of the goods being adjusted to the real value of the Argentine peso, the goods were priced lower. Furthermore, there would not be a need for the disposal of the international reserves just to stabilize the exchange rate of the currencies. The reserve can be used for other expenditures of the government.
On the other hand, on the disadvantages side, because of the 1:1 exchange before, the people considered the two currencies as convertible. Thus, the removal of the peg from the US dollar made some deposits and contracts erratic (Hughes, 2002). Some account and deposits where in the other currency but the sudden change in the value made things worse. Depositors aren’t even allowed to withdraw at the normal rate, setting a 300 pesos limit on withdrawals at a weekly basis (Wallin, 2002). Also, the investors opted to invest on another place because of the instability of the economy. And, financial institutions such as the International Monetary Fund (IMF) and the US Treasury were not willing to lend more money to Argentina until the fiscal deficits become stable. In addition, the value of the debt rose because of the lower value of the peso (insert pdf reference).
The Argentine peso’s value declined even before the implementation of the floating exchange rate regime. In fact, the Argentine government sold portions of its international reserves just to keep up with the exchange rate of the two currencies (“Argentina Plans to Use Reserves to Defend Peso’s Value vs. Dollar”, 2002). The president then, Eduardo Duhalde, promised the stability of the exchange rate due to the foreign reserves available for defending the peso. Nevertheless, citizens were not satisfied with this assurance causing several psychological disturbances (Wallin, 2002). The citizens were unsure of the financial status of the country and worried about their personal accounts. Several protests and demonstrations then were done by the citizens. Furthermore, because of the lack of currency reserves, the loan of Argentina defaulted (Insert pdf reference).
Also, the Convertibility law caused faults in the money supply and the exchange rate in itself. Because an Argentine peso can be easily exchanged for a US dollar, the reserves of Argentina did not hold a restriction on the amount of international reserves and caused a disturbance in the money supply in the country (Hanke and Schuler, 2002). Yet, there are still other factors that led to the floating exchange rate such as the fiscal crisis and decline in the investments still contributed to the decision of removing the dependence on the US dollar.
Growth did occur in Argentina due to the anchorage of their currency on the US dollar, however, not able to eliminate the fiscal deficits (Hughes, 2002). The government pursued asset sales and foreign capital to cover expenses. Most of the inflows, on the other hand, were used to purchase short-term government bonds. This then led to vigorous provinces that issued bonds at the expense of the federal government. Usually, the bonds that were being issued were in dollars that further increased the debt of the government. Not long after, the US dollar appreciated, thus, the Argentine peso became an overvalued currency. The anchor currency is appreciating but the Argentine peso retains its value causing a difficulty for the peso to keep up with the value of the dollar. The ever increasing debt of the country plus the decrease in global commodity prices leading to low revenues added to the economic burden of Argentina.
Recession, rising fiscal and external deficits and an overvalued currency was too hard to handle for Argentina in the late 1990s (Hughes, 2002; insert pdf reference). This led to massive unemployment rates and rising commodity prices. A lot of employees have been released by their employers removing the source of income of these workers. This led to families not being able to purchase goods for the basic needs of the members furthering to health and psychological problems (Lindsay, 2003). Most of the people resorted to trash scavenging as it is an easy answer to lack of resourced. It obviously had a drastic effect on the quality of life and the cost of living. Adding up the mishaps, it was announced that Argentina’s debt reached 130 billion US dollars (Hopkins, 2001).
“Argentina Plans to Use Reserves to Defend Peso’s Value vs. Dollar” (2002). Retrieved October 21, 2007, from http://www.people.umass.edu/nkapadia/FINOPMGT413/Argentina.pdf.
Hanke, S. and K. Schuler. (2002). What went wrong in Argentina? Central Banking Journal, 12, 43-48. Retrieved October 21, 2007 from Central Banking Publications, Ltd.
Hopkins, A. (2001). Default, Dollarization, or Knockout: Argentina Approaches the Abyss. Retrieved October 21, 2007, from http://www.worldpress.org/Americas/180.cfm.
Hughes, K. H. (2002). A Social Contract Abrogated: Argentina’s Economic Crisis. Retrieved October 21, 2007, from http://www.wilsoncenter.org/topics/pubs/boletin_01_social_contract.pdf.
Lindsay, R. (2003). Argentina Writhes in Depths of Deep Economic Abyss. Retrieved October 21, 2007, from http://www.post-gazette.com/World/20030309argentinaworld6p6.asp
Litterick, D. (2002). Argentina to Scrap Link With Dollar. Retrieved October 21, 2007, from http://www.telegraph.co.uk/money/main.jhtml?xml=/money/2002/01/16/cnarg16.xml.
Noriega, R. F. (2004). Argentina’s Current Economic and Political Situation. Retrieved October 22, 2007, from http://www.state.gov/p/wha/rls/rm/30360.htm.
Petras, J. and H. Veltmeyer. (2002). Argentina Between Disintegration and Revolution. Retrieved October 21, 2007, http://www.thirdworldtraveler.com/South_America/Argentina_Disint_Revol.html.
Wallin, M. (2002). Angry Depositors in Argentina Take It Out on Their Bankers. Retrieved October 21, 2007, from http://www.people.umass.edu/nkapadia/FINOPMGT413/Argentina.pdf.