In January 2005, the Argentine government offered the first debt restructuring to affected bondholders; nearly 76% of the defaulted bonds (US$62.5 billion) were thus exchanged and brought out of default. The contraction of the economy, which started in that year, however resulted in rising non-performing loans. At first, the peso is devalued from 1 peso per Dollar to 1.4 peso per Dollar. Rodriguez Saá will have to resign a couple of days later, thereby increasing political instability even more; as much as four different presidents will try to rule Argentina in December 2001, none of them however manages to remain in office. Use "AND" and/or "OR" to get better search results. A survey by an Buenos Aires newspaper found that around a third of the population had participated in general assemblies. Russia's $40bn default in 1998 precipitated a global financial crisis. President Fernando de la Rua's government will hope that creditors will accept the less valuable bonds, but the unilateral nature of the government's move effectively means that Argentina has all but defaulted on most of its $132bn debt. [9][10], Argentina's GDP exceeded pre-crisis levels by 2005, and Argentine debt restructuring that year were resumed payments on most of its defaulted bonds; a second debt restructuring in 2010 brought the percentage of bonds out of default to 93%, though holdout lawsuits led by vulture funds remained ongoing. [citation needed], Several thousand homeless and jobless Argentines found work as cartoneros, cardboard collectors. With the implementation of the reforms, Argentina won great commendation, especially from the IMF. 2001 riots The economic outlook was completely different from that of the 1990s. Gives Budget-Cut Order to Argentina", "El 'corralito' asfixia la economía argentina", "La Corte Suprema dictó nuevas medidas en favor del corralito", "El fin del 'corralito' en Argentina será efectivo a partir del 2 de diciembre", "Argentina Limits Withdrawals as Banks Near Collapse", "Nuevo cacerolazo contra la Corte Suprema", "Bancos y comercios destrozados después del cacerolazo", "Doce policías heridos, más de 30 detenidos y negocios atacados", "Argentina in 'state of siege' after riots", "Renunció De la Rúa: el peronista Puerta está a cargo del Poder Ejecutivo", "Argentina's new president vows not to devalue", "Accommodating an army of garbage pickers", "Statement by Ms. Felisa Miceli Minister of Economy and Production Argentina", "Hectic efforts on by Argentina to avoid second default", Ministerio de Economía y Producción – República Argentina, "Official statistics: Don't lie to me, Argentina", "Ligera mejora en la distribución del ingreso", "El poder adquisitivo creció 72% desde 2003", "Americas Program | Citizen Action in the Americas | Worker-Run Factories: From Survival to Economic Solidarity", "Poverty headcount ratio at urban poverty line (% of urban population) | Data | Table", "El Central recuperó las reservas del pago al Fondo Monetario", "Committee questions independence of IMF's evaluation arm", "Guillermo Nielsen exclusive: Inside Argentina’s financial crisis", Video: "Argentina's Economic Recovery: Four Years After the Meltdown", A Look at Argentina’s 2001 Economic Rebellion and the Social Movements that Led It. Fears of hyperinflation as a consequence of devaluation quickly eroded their attractiveness. Such desperate measures were common because of the unemployment rate, nearly 25%. The country suffered from bad policy making due to an ongoing political gridlock and was hit by adverse terms of trade. Although the pegging the peso to the dollar cut inflation, the move made exports to neighbouring Latin American countries less competitive and limited Argentina's to cut interest rates in a recession. January 1st , 2002 – The Argentine Congress chooses Eduardo Duhalde as the new president. In 2004, the Argentine government made a 'final' offer amounting to a 75 percent reduction in the net present value of the debt. November 30th , 2001 – As a result of rising worries among Argentines about a peso devaluation and a deposit freeze, overnight interest rates rise sharply. They engaged in protests that became known as cacerolazo[52][56][57][58] (banging pots and pans). This eventually led to the outbreak of a severe currency, sovereign debt and banking crisis. If the judgement proceeded, Argentina argued, the country would become insolvent and have a second debt default.[72]. The convertibility law reduced inflation sharply, preserving the value of the currency. January 6 th , 2001 –The implementation of the Law of Public Emergency and Reform of the Exchange Rate Regime marks the end of the Convertibility Plan. [8], Politically, the most heated debate involved the date of the following elections. The Central Bank sterilized its purchases by buying Treasury letters. [17], Argentina's many years of military dictatorship (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 in power from 1976 to 1983. The outbreak of the oil crisis in the 1970s was the start of a long period of economic downturn, which culminated in the severe Latin American debt crisis of the 1980s. Only in 1995 output growth was negative, due to the so-called Tequila crisis in Mexico. The peso slowly rose, reaching a 3-to-1 rate to the dollar. Other countries that restructured defaulted debt, such as Mexico, cut spending and subsequently reduced their dependence on foreign capital. The January 2002 economic reforms, including the abandoning of the Convertibility Plan, the pesofication of bank deposits and loans at two different exchange rates and prize freezes for utility companies, caused a wave of defaults and liquidity problems at Argentine companies. This made the country increasingly dependent on foreign capital. A second debt restructuring in 2010 brought the percentage of bonds out of default to 93%, but some creditors have still not been paid. 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. The quick return of high economic growth in 1996 however suggested that the Argentine economy was strong enough to counter external shocks. Copyright © 2020 Rabobank/RaboResearch, Utrecht. The government faced severe challenges in trying to refinance its debt. The devalued peso made Argentine exports cheap and competitive abroad and discouraged imports. Argentina's recovery suffered a minor setback in 2004, when rising industrial demand caused a short-lived energy crisis. 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.[79]. Rodríguez Saá's economic team came up with a scheme designed to preserve the convertibility regime, dubbed the "Third Currency" Plan. On 2 December, the government enacted measures, informally known as the corralito,[51][52] that effectively froze all bank accounts for twelve months,[53][54] allowing for only minor sums of cash to be withdrawn, initially $250 a week.[55]. Argentina maintained its peg, but this left it unable to respond to the growing economic problems, as it could not apply monetary or exchange rate policy. This further strengthened the confidence in the implemented policies, including the Convertibility Plan. The influx of foreign currency provided by the privatization of state companies had ended. The government encouraged import substitution and accessible credit for businesses, staged an aggressive plan to improve tax collection, and allocated large sums for social welfare but controlled expenditure in other fields.[71]. This was not an enticing offer to creditors. In the worst case scenario, the move could trigger a massive outflow of deposits that would accelerate Argentina's financial crisis and lead to a knock-on effect for other developing countries. The debt payments, totaling US$9.810 billion, were previously scheduled as instalments until 2008. Peso (currency) This regime was later modified by a law (Ley de Convertibilidad) that restored the Argentine peso as the national currency.[25]. 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. 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: While the currency crisis is over, the debt problem has not been completely resolved. In the beginning of the 20th century, Argentina was one of the wealthiest countries in the world. Argentina depended heavily on imports but then could not replace them locally. He inherited a country with high unemployment (15%), lingering recession, and continued high levels of borrowing. Their acceptability now ultimately depended on the state's irregular willingness to take them as payment of taxes and other charges. The exchange offered longer term par, quasi-par, and discount bonds - the latter with a much lower nominal value (25–35% of the original). This change, in turn, caused severe economic and political distress in the country. "Frozen Savings and Depressed Development in Argentina". However, in Argentina fiscal policy was pro-cyclical during the boom period. All this led to a sharp reduction in exports. The effects of De La Rúa’s policy were however the opposite, as the imposed rise in tax rates only reduced domestic demand, encouraged corruption and did not lead to the necessary reduction of the fiscal deficit. [71] Though wages averaged a 17% annual increase from 2002 to 2008, and rising 25% in the year to May 2008,[73] inflation ate away at the increases: 12.5% in 2005; 10% in 2006; nearly 15% in 2007, and over 20% during 2008. A bank run begins. However, in the late 1990s, Argentina’s hard currency peg to the US Dollar, pro-cyclical fiscal policies and extensive foreign borrowing left the country unable to deal with a number of economic shocks. [69], 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 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 peso further depreciated, which prompted increased inflation. [18], Democracy was restored in 1983 with the election of President Raúl Alfonsín. Argentina's debt restructuring: A victory by default? When inflation reached an extreme annual rate of 3,080% in 1989, political support to deal once and for all with high inflation grew. 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. After Argentina’s seventh default in 2001, ... and nothing substantial until 2026, pushing the bulk of its debt service beyond the end of its first term. According to De La Rúa, reducing the deficit would restore confidence in government finances, reduce interest rates and thereby bring back economic growth. As government spending could not be matched by taxation and financial markets borrowing, the authorities became dependent on inflation to finance the rising deficits.