Argentina's Currency Crisis: Effects

Effects on Argentina

• Massive riots and protests occured in the streets of Argentina, as people ran to their banks in hopes of drawing out large quantities of their bank accounts.
• This resulted in the deaths of over 20 people.
• This lead Argentina to ultimately leave their fixed exchange rate on January 3, 2002. This resulted in the rapid and sudden depreciation of the peso. 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.
• In all, the Argentine economy had diminished 28%.
• Unemployment in 2001 reached 23%.

Effects on Region

• These issues ultiamtely affected Mercosur or the "Southern Common Market."
• Its members are Argentina, Brazil, Paraguay, and Uruguay.
• These countires have been affected by sharp increases in exchange rates on the dollar and other forms of turbulence related to the stock market in 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%.

The years that followed: repercussions of the law

devaluation of the Brazil real, effect on Argentina because they were trading partners. The peso appreciated against the real. Harmed Argentine exports as Brazil had 30% of the total trade flows for Argenina. Investors are afraid because of the speculative attack - they are scared (become flighty) of the instability of the economy regardless of the fixed rate. Because of this, they take part/cause the speculative attack. As stated earlier, a speculative attack is self-fulfilling and usually causes a recession. Investors had mistrust because of other countries such as Mexico and Brazil which were also trade partners of Argentina had had economic crisis. because of the convertibility plan, policy makers were unable to take necessary macro economic action Essentially, the beginning of this crisis that some argue were caused, or strongly influenced, by the law of convertibility, was in 1998. The economy continued to experience a decline until 2001, when the measures put into place began to take effect. 1998 - In the year prior to 1998, the Argentinian economy due to the law of convertibility began to enter into a recession which converted itself into a depression in the year of 1998. Beginning of the four-year depression. economy shrank 28%. external shocks reached its pinnacle, there were signs appearing about the potential downfall of the economy, investors began to get scared in an effort to save funds, control excess losses, and increase stabilty, they increased interest rates. However, this plan backfired and enlarged the problem. 1999 - GDP dropped 4% 2001 - Speculative attack effects are seen. People begin withdrawing large amounts of money from banks, exchanging their pesos for dollars and therefore further depreciating the amount of money that banks had. 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. This led to intense riots and protests in which people were killed. December 2001 - unemployment rate soared to 23%.

1. Global Effects? Do you guys have anything in this category? I know we're working on the Thailand > Argentina link, do you want to get into what Argentina effected, if anything specific?

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