1998–2002 Argentine great depression
Economy of Argentina Argentine peso Convertibility plan Corralito Corralón Cacerolazo 2001 riots Apagón Economic emergency law Debt restructuring
[5] The depression, which began after the Russian and Brazilian financial crises,[1] caused widespread unemployment, riots, the fall of the government, a default on the country's foreign debt, the rise of alternative currencies and the end of the peso's fixed exchange rate to the US dollar.
[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.
A right-wing executive, José Alfredo Martínez de Hoz, was appointed Economy Minister at the outset of the dictatorship, and a neoliberal economic platform centered around anti-labour, monetarist policies of financial liberalization was introduced.
The initial aim of such measures was to ensure the acceptance of domestic currency because after the 1989 and 1990 hyperinflation, Argentines had started to demand payment in US dollars.
That raised the quality of life for many citizens, who could again afford to travel abroad, buy imported goods or ask for credit in dollars at traditional interest rates.
A congressional committee started investigations in 2001 over accusations that Central Bank Governor Pedro Pou, a prominent advocate of dollarization, and members of the board of directors had overlooked money laundering within Argentina's financial system.
Other Latin American countries, including Mexico and Brazil (both important trade partners for Argentina) faced economic crises of their own, leading to mistrust of the regional economy.
President Fernando de la Rúa was elected in 1999 on a reform platform that nevertheless sought to maintain the peso's parity with the dollar.
While the provinces of Argentina had always issued complementary currency in the form of bonds and drafts to manage shortages of cash, the scale of such borrowing reached unprecedented levels during this period.
A strong peso hurt exports from Argentina and caused a protracted economic downturn that eventually led to the abandonment of the peso-dollar parity in 2002.
The government of Argentina ceased all debt payments in December 2001 in the wake of persistent recession and rising social and political unrest.
[30] When a short boom in the early 1990s of portfolio investment from abroad ended in 1995, Argentina became reliant on the IMF to provide the country with low-interest access to credit and to guide its economic reforms.
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.
In early November, Standard & Poor's placed Argentina on a credit watch, and a treasury bill auction required paying 16% interest (up from 9% in July, the second-highest rate of any country in South America at the time.
[33] Rising bond yields forced the country to turn to major international lenders, such as the IMF, the World Bank, and the US Treasury, which would lend to the government below market rates if it complied with conditions.
[39] Cavallo also attempted to curb the budget crisis by instituting an unpopular across-the-board pay cut in July of up to 13% to all civil servants and an equivalent cut to government pension benefits, De la Rúa's seventh austerity round[40]—triggering nationwide strikes,[41] and from August, it paid salaries of the highest-paid employees in IOUs instead of money.
[67] 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.
[citation needed] Rodríguez Saá's economic team came up with a scheme designed to preserve the convertibility regime, dubbed the "Third Currency" Plan.
It was hoped that convertibility would restore public confidence, and the non-convertible nature of this currency would allow for a measure of fiscal flexibility (unthinkable with pesos) to ameliorate the crippling recession.
The plan had enthusiastic supporters among mainstream economists (the most well-known being perhaps Martín Redrado, a former Banco Central de la República Argentina president) citing technical arguments.
The Legislative Assembly convened again, appointing Peronist Senator Eduardo Duhalde of Buenos Aires Province, who had been the runner-up in the 1999 race for the presidency.
In addition to the corralito, the Ministry of Economy dictated the pesificación; all bank accounts denominated in dollars would be converted to pesos at an official rate.
In addition, the high price of soybeans in the international market produced massive amounts of foreign currency; China became a major buyer of Argentina's soy products.
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.
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.
The majority of their workers, faced with a sudden loss of employment and no source of income, decided to reopen the closed facilities on their own as self-managed cooperatives.
A study by Equis, an independent counseling organization, found out that two measures of economic inequality, the Gini coefficient and the wealth gap between the 10% poorest and the 10% richest among the population, grew continuously from 2001 to March 2005.
In a speech before the United Nations General Assembly on 21 September 2004, Kirchner said, "An urgent, tough, and structural redesign of the International Monetary Fund is needed, to prevent crises and help in [providing] solutions."
During the weekend of 1–2 October 2004, at the annual meeting of the IMF/World Bank, leaders of the IMF, the European Union, the Group of Seven industrialised nations, and the Institute of International Finance (IIF), warned Kirchner that Argentina had to come to an immediate debt-restructuring agreement with creditors, increasing its primary budget surplus to slow debt increases and imposing structural reforms to prove to the world financial community that it deserved loans and investment.
