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2001-2002 Argentinean Currency Crisis

2001-2002 Argentinean Currency Crisis. Angel Munoz Kolby Patrick. Summary. History Threats The Crisis IMF Intervention Critiques Q&A. History. 1983 – Raul Alfonsin becomes president Inherits Huge Debt from Predecessor Prints Money to pay off debt – Inflation ↑

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2001-2002 Argentinean Currency Crisis

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  1. 2001-2002 Argentinean Currency Crisis Angel Munoz Kolby Patrick

  2. Summary • History • Threats • The Crisis • IMF Intervention • Critiques • Q&A

  3. History • 1983 – Raul Alfonsin becomes president • Inherits Huge Debt from Predecessor • Prints Money to pay off debt – Inflation ↑ • 1991 – Carlos Menem Assumes Power • Chief Economist, Domingo Cavallo, recommends a fixed exchange rate to stifle hyperinflation • Recommends Privatization of many industries

  4. History • 1995 – Establishment of MERCOSUR • A common market between Argentina, Brazil, Paraguay and Uruguay • Aimed To Eliminate Tariffs between the nations

  5. Results • Fixed Exchange Rate • Halts Hyperinflation • Encourages Imports • Privatization • Decreases Government Deficits • Decreases Public Debt • MERCOSUR • Increases Exports

  6. Threats • U.S. Dollar Appreciation • Exports becoming more expensive • Exports Decline • Brazil Devalues the real • Brazilian Exports more attractive and less expensive • Argentinean Exports decline further • Current Account Falls into deeper Deficit

  7. The Result

  8. Threats • Capital Account dwindling • Foreign Direct Investment Decreases • High debt to defend Fixed Exchange Rate • Argentina Fails To Pay Interest on its Debt • Capital Account falls. • Argentina Uses Foreign Reserves to pay debts

  9. The Result

  10. Political Reaction • Fernando de la Rua replaces Carlos Menem • Forces businesses to raise prices to increase tax revenue • Businesses fail because of added costs • Tax Revenues Decline

  11. Crisis Begins • Early 2001 - Public Debt = 50% of GDP • GDP Drops 3% • Late 2001 – Public Debt = 60% of GDP

  12. Real GDP Change

  13. Unemployment

  14. 2001 Year End Figures • Gross Domestic Product – Down 6.03% • Government Deficit – 4.5% • Total Economic Activity – Down 18% • Construction – Down 36% • Imports – Down 50% • Tax Revenue – Down 17%

  15. Public Reaction • Devaluation Fears • Run on the Banks • $3.6 Billion Withdrawn • 6% of Deposit Base Withdrawn in 2 Days • Deposits fell from $85B to $15B by July 2002 • Government imposed a freeze on withdrawals • Riots ensued • 20 Dead

  16. IMF Intervention • Removal of US$ Peg, Devaluation of the Peso • Reduction of Government Spending • Public Sector Wages dropped 13% • Raised Interest Rates

  17. Interest Rates

  18. Money Supply

  19. IMF Critiques • Unrealistic Forecasts • 2001 Real GDP growth was forecasted to be +3.5% • Actual Real GDP declined by over 6% • Were not able to assess severity of the situation • Oversight of Fixed Exchange Rate • Should not have been permanent

  20. IMF Critiques • Debt Management • Borrowed at higher interest rates than economic growth rates • Continued Borrowing when it did not have funds to pay interest on existing debt • Lending Policy • Must have standards for loans • Must not encourage moral hazard

  21. Questions

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