Argentina Crisis

Argentina: Anatomy of a financial crisis

1.    What were political and economic conditions like in Argentina in December 2001/January2002?

The ruling government was able to achieve economic andpolitical stability through fundamental changes to economic and fiscal policy; fixed currency system, privatization and tightening monetary control. As a result the positive measures gave Argentinaseveral years of economic growth, higher social spending and significantly lower inflation (Case text) However, there were external factors contributing to an increasing deficit of the current account.The fixed currency system pegging the peso to dollar provided stability in the economy which had been the economic cornerstone for the Argentinean economy for several years. With this fixed systemArgentina was vulnerable to the American macroeconomic factors, which was detected under the recession in 82 which lead to a significant decrease in Argentinean exports.

The political climate inArgentina was unstable and resulted in that the people had no trust in their politicians. Menem as president developed the Convertible Plan (CP), which was made as a monetary system to induce domesticinflation and excessive fiscal spending. (Case text) Unfortunately, this kind of fixed currency system did not just fixed the hyperinflation, but it also lead to current account deficits and the realexchange rate to appreciate against the dollar. Many of Menem’s tries to recover the economic situation was unsuccessful and one of these reasons was due to a political system permeate of corruptionwhich undermined any gains of introducing purely market forces. Also the Argentinean political system had agent-principal issues with the provinces taking advantage of the federal government as theyprinted more bonds and draft when they had a cash shortage.



2.    What causes (both internal and external) were behind the predicament Argentina was in with the de-pegging of the peso and the...