The Argentine Financial Crisis



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Code : ECC0001

Year :
2004

Industry : General Business

Region : Argentina

Teaching Note:Not Available

Structured Assignment : Not Available

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Background In the 19th century, Argentina's economy was based on the agricultural sector. It was one of the largest producers of agricultural goods, cattle and oil.4 It was also one of the largest exporters of soybeans, wheat and meat. Its main imports were machinery, metals and other manufactured goods. After the World War I, Argentina's nationalistic policy helped the country to improve its productivity. This policy led to increase in labour skills and labour mobility...

The Convertibility Law In April 1991, another attempt was made to curb the inflation. A new currency, called the new peso, equal to 10,000 australs was created.Along with the change in the currency, a comprehensive reform package was introduced which was designed by the Economy Minister, Domingo Cavallo and was supported by President Carlos Menem. This package reduced the government's budget deficit andmade theArgentine economy internationally competitive. Following the implementation of this package, Argentina's inflation gradually decreased for more than a decade...

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Beginning of the Crisis Between December 1994 and April 1995, Argentina experienced a recession for a short period because of the devaluation of the Mexican peso. The banks of Argentina had been largely dependent on large corporate deposits. The devaluation resulted in capital outflows and withdrawals from these banks. The simultaneous cuts in the interbank lending rate, gave rise to a banking crisis. There was a net deposit withdrawal of $8 billion from the Argentine banks. The Argentine government took many measures to restructure and consolidate the country's banking system. It established a Trust Fund of $2 billion, which was financed by the government of Argentina bonds. They also took an additional loan of $500 million from the World Bank....

Devaluation and After On January 1, 2002, the Argentine Congress appointed EduardoDuhalde as the newPresident. Hewas a strong critic of the economic policies of the 1990s.On January 6, 2002, he announced the abandonment of the currency board.He also announced a 29%devaluation of the peso formajor foreign trade transactions and allowed a parallel floating rate for all other transactions. The new government planned to hold the peso-dollar peg at 1.4 pesos per dollar.25 The government announced conversion of the dollar bank deposits to pesos at the exchange rate of 1.4 pesos per dollar and loans at the rate of one peso per dollar.26 The government also continued tomaintain limitations on the monthly withdrawals...






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