Debt Crisis Argentina and Chile

1. Debt CrisisArgentina and Chile By Olivia Ponitz

2. Debt Crisis of the 1980’s • By 1981 US anti-inflation policy put world economy into a recession • There was a rise in interest burden that debtor countries had to pay • The dollar appreciated sharply • Primary commodity prices collapsed

3. 1980’s continued • Crisis began in 1982 • Banks in industrial countries cut off new credits and demanded payment on loans • Which caused developing countries to not be able to meet debt obligations • By 1986 more than 40 countries were having severe financial problems

4. Ending a Crisis • Crisis ended in 1989 • American banks started lending to developing countries again

5. Argentina • Turned to institutional reform and increased government revenues • Slashed import tariffs • Cut government expenditures • Major state companies were privatized • Tax reforms

6. Convertibility Law of 1991 • Currency fully convertible to US dollar at a fixed rate • Currency be backed by gold or foreign currency • This worked for nearly a decade

7. Result • Affected inflation- under 5% by 1995 • Real appreciation of the peso • Unemployment • Growing current account deficit

8. After the Fact • 1997 country’s deficit grew uncontrollably • 2001 country’s foreign credit dried up • Defaulted on it’s debt in December 2001 • Abandoned peso-dollar peg in January 2002 • Government defaulted the external debt

9. Chile • Instituted a regulatory environment for domestic financial institutions • Removed explicit bailout guarantee • A crawling peg was implemented • 1990 Chilean central bank was made independent of the fiscal authorities

10. Chile • New policy required inflows to be accompanied by a 1 year, non-interest bearing deposit • The implied inflow tax set up to limit real currency appreciation and reduce risk if foreigners withdrew short term funds

11. Result • Between 1991 and 1997 GDP grew averaging 8% a year • Inflation dropped from 26% in 1990 to 6% in 1997