The Nature of Argentina Crisis

 The Argentine crisis was both a CURRENCY

and a BANK crisis-
Inter-related but caused by a combination of
different factors.
 The third crisis, the DEBT crisis-
 Embodied in the larger sovereign default in
history – is closely related to the two.
Monthly Gross Domestic Product
Seasonally adjusted(Jan 98=100)
REAL GDP
 THE CURRENCY CRISIS
 It reached its peak with the January 2002
devaluation.
 It is usually analyzed in the context of the Argentine
Currency Board System, established in 1991 as an
anti-inflationary devise.
 Question to be analyzed:
What were the weakness and the main causes for the
demise of the convertibility regime?
 Three Approaches:
1. The loss of competitiveness of the Argentine
economy.
2. Macro economic policy inconsistencies
3. The “Sudden Stop” argument
REAL BILATERAL EXCHANGE RATE
Major Trade Partners
TRADE ACCOUNT
FISCAL DEFICITS
Argentina 1975-2001
CAPITAL FLOWS & ECONOMIC ACTIVITY
(Accumulated 4 quarters)
SUDDEN STOPS IN ARGENTINA & CHILE
(Private capital flows, % of GDP)
ECONOMIC ACTIVITY:GDP &
INVESTMENT
 THE BANKING CRISIS
 It was largely caused by the government “abuse”
of the banking sector, giving its inability to
adjust the budget deficit.
 The main cause for the banking crisis was the fear
that banks would be rendered insolvent by
government policy and that deposits would be
confiscated.
 An important reason behind this fear was the fact
that private sector assets were being displaced by
public sector assets in bank’s balance sheets.
PRIVATE SECTOR DEPOSITS
(in bn Argentine Pesos)
Private Sector assets have been displaced by
public sector assets in bank’s balance sheets
 …continue
 The increasing banking exposure to the public
sector was accompanied by
1. A rapid decrease in deposits and
2. A sharp increase in country risk
 Nov 2001: Withdrawal restriction on bank
deposits (“Corralito”)
 December 2001: Riots the De la Rua &
Cavallo government
 First two weeks of January 2002:
 Public debt default
 currency board is abandoned and the currency
devalued
 Bank assets and liabilities are pesified
asymmetrically i.e. at different rates.
The abandonment of currency board was
traumatic:
 Complete loss of confidence in the banks, the
currency and the government
 Continuous bank runs
 A run on the peso that pressured strongly the
exchange rate
 No money market or debt instruments for
open market operations
 LESSONS FROM THE CRISIS
1. The Potential Fragility of Financial Institutions
 Experience indicate that solid and solvent
financial structures could deteriorate quickly
 This is particularly true in the face of inadequate
interventions, distorted incentives and
misguided policies.
 Weak financial sectors are not necessarily crisis
prone, rather they have been generated by
inconsistent policies and by an unstable
macroeconomic environment.
Only Feasible Intermediate solution

 Slow the pace of the bank run and at the

same time, try to avoid excessive
liquidity expansion.