Argentina's Currency Crisis: Effects

Effects on Argentina

Essentially, the beginning of this crisis that some argue was caused, or strongly influenced, by the law of convertibility, was in 1998. 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 reverse it began to take effect. However, during the time of the depression, there were a number of effects of the Argentine economy and the Argentinian people. In an effort to save funds, control excess losses, and increase stabilty, they increased interest rates. However, this plan backfired and enlarged the problem.

• 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 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.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, 2002, a reversal of the convertibilty law.
  • This resulted in the rapid and sudden depreciation of the peso.
• After the Law of Convertibility was reversed, the peso experienced an astronomical drop 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

• 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%.

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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