Argentina's Currency Crisis: Effects

Effects on Argentina

Essentially, the beginning of this crisis was strongly influenced by the law of convertibility. In the years prior to 1998, the Argentinian economy due to the law of convertibility began to enter into a recession which sparked the beginning of a four-year depression. The economy continued to experience a decline until 2001, when the measures put into place to rectify the depression began to take effect. In an effort to save funds, control excess losses, and increase stabilty, the government increased interest rates. However, this plan backfired and enlarged the problem, creating adverse effects on the Argentinian people and their economy.

• In all, the Argentine economy had diminished 28%.
• Massive riots and protests occured in the streets of Argentina
  • People frantically ran to their banks in hopes of drawing out large quantities of their bank accounts.
  • This resulted in the deaths of over 20 people.
• 1999 - GDP dropped 4%
• Unemployment in 2001 reached 23%.
• Also in 2001, speculative attack effects are seen.
  • People begin withdrawing large amounts of money from banks, exchanging their pesos for dollars and therefore decreasing the quantities of cash held by banks.
  • Government took reactionary measures that were too strict. In another effort to dampen the blow on the Argentinian people, limits were placed on the amount which people could withdraw from bank accounts. The withdrawals were limited to $250 per month. This led to intense riots and protests in which people were killed.
• 2002- Argentina is forced to ultimately leave the fixed exchange rate on January 3, therfore reversing the Convertibilty law.
• After the Law of Convertibility was reversed, the peso depcreciated astronomically relative to the dollar.
  • The rate was $1 to 1 peso initially but then became $0.30 to 1 peso
  • This was problematic because, families with a debt of $10000, which under the law was 10000 pesos, suddenly had an increase in debt to 30000 pesos.
  • This depreciation had huge implication on the businesses and the general public, as life-savings were lost and firms declared bankruptcy.
  • This ultimately caused a huge decrease in the Argentine GDP.

Effects on Region

• In addition to the direct effects on the Argentine economy and market, the depression also had serious implications for other countries and their economies in Latin America. Therefore as the depression continued to linger into 2000, the "Southern Common Market," also known as Mercosur, began to question whether they needed to offer support in Argentine domestic and economic issues.

• Mercosur members:
  • Argentina
  • Brazil
  • Paraguay
  • Uruguay

• Associate members:
  • Bolivia
  • Chile

One of the reasons for this scare, was that Argentina was one of the founding and most prominent members of Mercosur along with Brazil. A problem in one of their economies, most likely would cause a ripple effect throughout the greater part of Latin America.

The Mercosur countries felt the Argentine Currency Crisis...

• One issue was sharp increases in the exchange rates for Latin American currencies against the US dollar. Chile in particular was concerned about the increased exchange rate, because they experienced low demand in this sector. The formula of an increasing exchange rate and low demand, utlimately the country is confronted with stagnation and inflation.
• Another symptom demonstrating the spread of the Argentine Currency Crisis, were the turbulent dives and dips experienced in the stock market for the area.
• Has caused other currencies in Latin America to devalue in comparison to the American dollar. Examples are the Chilean and Brazilian economies, with the Chilean peso accumualting a devaluation of 7% to the US dollar, and the Brazilian real to a rate of 30%.
• Interest rates also rose in both Chile and Brazil during the crisis.
  • Brazil recorded an interest rate of 18.25% in July of 2001.
• In addition to soaring interst and exchange rates and the devaluation of the economy, many Latin American countries had to alter their GDP projections for 2001. Examples of this are Brazil who changed their projections from 4.5% growth to 2.5%, and Chile who changed their projection GDP growth from 5.5% to 3%.
  • Due to this adverse effects, the Central Bank of Chile has considered dipping into its international reserves to alleviate these issues.

http://www.town.com/south_america/images/sa_map.jpg

---

Home Page | About Currency Crises Thailand's Currency Crisis | Thailand's Currency Crisis: Effects | Thailand's Currency Crisis: Solutions Argentina's Currency Crisis | Argentina's Currency Crisis: Effects | Argentina's Currency Crisis: Solutions Currency Crises: Works Cited

---