How to avoid financial crises in developing countries by studying and analysing the economic and political mistakes made in the case of argentina?

U52099
Economics Dissertation (double)

How to avoid financial crises in developing countries by studying and analysing the economic and political mistakes made in the case of Argentina?

Module Leader: Haluk Seezer
Supervisor: Andy Kilmister
Constantin Schellenberg 03179982
9.600 Words

Table of contents

1. Introduction

2. Literature review

• First generation models• Second generation models
• Third generation models

3. Analysis taking Argentina as an example

• Bad fiscal policy and performance
• Choice of inappropriate anchor
• Adjustment mechanism under a hard peg
• Global and international developments
• Long term exports problems
• Abandonment of the peg by force

4. Recommendations to prevent crisis

• MoreFlexible Exchange Rates
• Debt structure monitoring
• Further development of financial services and markets

5. Reference List

List of Tables

1. Exchange rate (US-$ average) and Inflation (variation rate to the year before)
2. Interest rate (yearly average) and Risk premium on bond market (year end)
3. Gross foreign debt (in % of exports) and foreign debt servicing (in % ofexports)

List of figures

1. Sources of peso overvaluation – Annual Averages by Period 1993-1998 and 1999-2001
2. Argentina Trade structure
3. Firm`s Balance Sheet Dollarization

Abstract

The dissertation is a case study based work. The theories of financial crisis and debt defaults are applied on the Argentina`s financial crisis in 2001-2002. The dissertation is limited to theoccurrence of the crisis and won`t consider empirical analysis and forecasting of debt default. It`s objective its to identify the risks which has leaded to the crisis in Argentina and to draw possible recommendations to minimize those risks to prevent similar phenomena in other developing countries. It will focus on the economic forces leading up to the crisis. Most of my statistics were obtained fromresearch papers prepared for international institutions such as the IMF, World Bank, NBER. Also the data bank of the “Dresdner Bank Lateinamaerika” was very useful. The methodology is 100% desktop based on secondary data.

1. Introduction

Argentina has experienced a severe economic crisis in 2001 - 2002. The government declared insolvency; output fell by about 20% over 3 years, the bankingsystem collapsed, and the Argentine peso lost value dramatically (IMF 2003).

These events might seem surprising in the light of Argentina`s strong performance five years earlier. The Argentina crisis differs significantly in several aspects of previous ones. Including those of Argentina own crisis in the past and unlike to classic balance of payments crisis, this crisis was not caused by largedeficits financed by money printing. On the contrary, the currency board arrangement did not allow direct money financing of fiscal deficits. Deflation was observable in the years from 1999-2001. Although the financial sector contributed to excessive reliance on foreign financing it seemed to be sound.

Table 1. Exchange rate (US-$ average); Inflation (variation rate to the year before)|Year |1989 |1990 |1991 |1992 |1993 |1994 |1995 |
|Interest rate |9,4 |10.5 |11,2 |10,9 |29,8 |36,8 |18,2 |
|(yearly average)| | | | | | ||
|Risk premium on |429,0 |581,0 |533,0 |773,0 |4404,0 |6229.0 |6463,0 |
|bond market | | | | | | | |
|(year end) | | | | | |...