mib 7 _ ie _ group 6 _ argentina crysis analysis

7/31/2019 MIB 7 _ IE _ Group 6 _ Argentina Crysis Analysis

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MIB 7 Group 6 ARGENTINA CRYSIS ANALYSIS

Argentia crysis analysis

LECTURER: Hoang Xuan Binh, PhD

CLASS: MIB7

GROUP Members 6 :

Vu Ngoc Long

Vu Thi Ngoc Quynh

Hoang Thi Quynh Trang

Nguyen Thi Hai Yen

Dinh Huyen Anh

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CONTENT

I. ARGENTINAS CRYSIS OVERVIEW 3

II. ARGENTINAS CRYSIS REASONS

1. Exchange rate regime 5

2. Irresponsive fiscal policy 6

3. External shocks 7

4. Debt spiral and excessive external borrowing 9

5. Other factors 9

III. ARGENTINAS CRYSIS SOLUTION

1. Fiscal Responsibility Law 10

2. The deposit freeze and pesification 11

3. Leaving the Fixed Exchange Rate 14

4. Argentinas Sovereign Debt Restructuring 16

IV.GENERAL LESSONS FROM THE ARGENTINE CRISIS 17

V. CONCLUSION 18

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I. ARGENTINAS CRYSIS OVERVIEW

During 5 years, since 1998 to 2002, Argentinas economy had experienced through ahuge crisis.

Initially, the foreign exchange between Peso and USD was 1 rate 1. Its current accountwas deficit caused by transaction with foreign currency was .

In responds, Government had to devaluate the peso currency which brought about manychallenges for Argentinas economy for along time. When the currency was devaluatedwhich meant the value of currency was worsen leading to export products reduced.

In 1999, the whole areas economy was too recessed. The neighbor country, Brazil alsodepreciated its currency. Tn the same year , The Fiscal Responsibility Law of ArgentinaGov took effect and URC was on argument in order to curb corruption in this country. In

addition, Government applied for IMFs assistance.

Early in 2000, peso currency slowdown to 7%, reached the bottom this period.However, the advantage competitive of the country in international market still slightlyincreased.

In order to receive, the IMFs assistance package of 7.2 bn USD, Argentina needed tobalance budget in fourth quarter of 2001. In spite of assistance from IMF, Gov stillwasnt able to solve out all difficult problems. Gov carried on conducting a second debtswap to support Central bank increased its reserves but the payment on foreigndebt wasno longer guaranteed. Gov had to plan a new long-term economic project which forcedGov s cutting 1 bn USD from budget. And then, thanks to a 40 billion multilateralassistance package of IMF, the Argentina s economy recovers, in the fields: revaluatingPeso currency. Growing in agricultural exports, returning tourism, increasing averagewage for 17% annually leading to reducing unemploymentrate to 8.5% in 2002.

After the huge crisis, Argentina had suffered from many negative effects. From severalthousand newly homeless and jobless, which made many habitants became waste pickeror cardboard collectors, to the unemployment rate gradually increased annually. Inaddition, the agricultural products were rejected in some international markets. A numberof private enterprises were affected by the crisis likeAerolineas Argentina.

The bellowing tables briefly show us economic and Financial Indicators from 1995 to2002 and Economic growth and inflation in Argentina during 52 years ( from 1950 to2002).

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II. ARGENTINAS CRYSIS REASONS

1. Exchange rate regime

The convertibility system maintained a pegged exchange rate of one peso per dollar.The peso supposedly became overvalued because, converted into dollars, prices inArgentina rose faster than prices inthe United States and in Argentinas neighbors,notably Brazil. After Brazil devalued in 1999, the convertibility system preventedArgentina from devaluing to remain competitive; to end its recession, Argentinasupposedly had to take the slower, more painful, and politically harder path of cuttingwages. Ultimately that proved impossible, so Argentina had to devalue the peso.

The major characteristics of an orthodox currency board are (1) a fixed exchange ratewith an anchor currency; (2) no restrictions on exchanging (converting) currency boardcurrency into the anchor currency at that exchange rate, nor discriminatory exchangerates; and (3) net foreign reserves equal to 100 percent or slightly more of the currency

boards liabilities of a monetary nature. Together, these characteristics imply that anorthodox currency board has no room for independent monetary policy. Theconvertibility system at times lacked one, two, or all three characteristics of an orthodoxcurrency board, hence Argentinas central bank retained considerable discretionarypowers.

Because the reserve ratio of central bank was often far from 100 percent, under theconvertibility system the exchange rate of the peso was intermediate (pegged) rather thanfixed. An orthodox currency board maintains a fixed exchange rate, under which itsetsthe rate, but lets market demand determine the amount of the monetary base it supplies atthat rate. At the other extreme, a few central banks, including the U.S. Federal ReserveSystem, have clean floating exchange rates, under which they set the amount of the

monetary base, but let market demand determine exchange rates. In intermediate(pegged) exchange arrangements, such as the convertibility system, central banks try toset both the exchange rate and the amount of the monetary basea practice calledsterilized intervention. There are times when a target for the monetary base can conflictwith a target for the exchange rate. The result can be a currency crisis1.

Particularly after Brazils devaluation of January 1999, it was often claimed that theArgentine peso was overvalued. The Economist magazines tongue-in-cheek Big Macindex, which compares the prices of McDonalds hamburgers around the world,suggested that the peso was 2 percent undervalued relative to the dollar in early 2001.

1Hanke (1991); Hanke and others (1993), pp. 72-7; Hanke and Schuler (1991, 1999); Schuler (1999).

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For much of the life of the convertibility system, Argentina had deficits in itstrade account and current account. A countrys trade account is imports minus exports ofgoods; its current account is net trade in goods (the trade account), plus net trade inservices, plus net current transfers such as interest payments made or received. Someobservers took the deficits as indications that the Argentine exporters were uncompetitive

because the peso was overvalued. However, exports grew every year of the convertibilitysystem except 1991, when the system was not in effect the full year, and 1999, whenBrazils devaluation had a significant but temporary effect. Growth in exports was notlimited to commodities; exports of manufactured goods also increased.

2. Irresponsive fiscal policy

Argentina had defaulted on its foreign debt during the Latin American debt crisis of

1982; ten years later it was still in default and hence unable to borrow in international

financial markets. In April 1992, it agreed to a plan for restructuring its debt; it began

totherefore less solid than the figures from 1993 onward.

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Argentinas ratio of government debt to GDP increased in the mid 1990s, but

much of the increase came from converting contingent liabilities into explicit liabilities.A reform of the social security system began in August 1994. Some payroll taxes that the

federal government had formerly used for a pay-as-you-go system now went into private

accounts. The federal government had to finance the resulting shortfall in current social

security payments by other means. The government also bore some of the costs of

rescuing provincially owned banks in the recession of 1995. Unlike many other countries

in similar situations, Argentina closed or privatized the banks to prevent them from

causing further problems. Some observers have argued that the federal government

should not have converted its contingent liabilities from the social security system into

explicit liabilities, but doing so would have made the budgetary situation less transparent.

3. External shocks

From 1998 onward Argentina faced an external situation unfavorable in three

respects: foreign investment to emerging market countries fell in the context of some

major currency crises; Brazil devalued its currency in January 1999; and the dollar was

unusually strong.The East Asian currency crisis of 1997-98 and the Russian currency

crisis of August 1998 made investors in developed countries much more cautious about

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investing in developing countries, even those far from East Asia and Russia. Estimated

net private flows of capital to developing countries fell from a peak of $187.8 billion in

1996 to just $8.3 billion in 2001, as investors in developed countries sold many of the

stocks and bonds they had bought in developing countries2. In Argentina, the capital and

financial account, which measures net foreign investment, turned from a net inflow of

$18.3 billion in 1998 to a net outflow of $4.4 billion in 2001.

Brazil, Argentinas largest trading partner, withstood a currency crisis from August to

October 1998, on the heels of the Russian crisis. In a fresh currency crisis in January

1999, Brazil allowed its currency to float rather than maintaining the crawling peg to

the dollar that had previously existed. The Brazilian real quickly depreciated from 1.21

per dollar to 2.18 per dollar before recovering somewhat. (As of early June 2003, the

exchange rate of the real is about 2.90 per dollar.) Brazilian manufacturers gained a

temporary advantage over Argentine competitors, because wages in Brazil did not

immediately rise to offset the depreciation in full. Growth in Brazils real GDP slowed

from 3.3 percent in 1997 to 0.1 percent in 1998 and 0.8 percent in 1999. After years ofgains, Argentine-Brazilian trade was flat in 1998 and shrank in 1999.Because the

Argentine peso was pegged to the U.S. dollar, it appreciated with the dollar against most

other currencies, notably the real and euro. The Federal Reserves broad measure of the

exchange rate strength of the dollar, based on an index level of 100 for March 1973, rose

from a low of 84.23 in July 1995 to a peak of 113.09 in February 2002its highest level

since January 1986. Some analysts of U.S. monetary policy thought that from 1999 to

2001, part of the strength of the dollar resulted from the Federal Reserve keeping

monetary policy too tight. Trends in commodity prices and other indicators support this

view.

External events triggered the initial recession, but were not responsible for deepening

the recession into a depression. As has been mentioned, the peso prime rate rose sharply

from August to October 1998 and again in January 1999 on fears Argentina might

devalue. High interest rates hurt the economy, but they were temporary: by April 1999,

interest rates were back around the levels prevailing before the Brazilian crisis. Foreign

investment in Argentina did not actually turn negative until the first quarter of 2001. This

reversal seems to have resulted more from investors specific fears about Argentina than

from the general reduction of investments to emerging markets: Brazil and Mexico, the

two biggest Latin American economies, continued to attract substantial foreign

investment in 2000 and 2001. After dipping in 1999 as a result of events in Brazil,

Argentinas exports to all countries combined grew in 2000 and reached a record level in

2001, despite the strength of the dollar and therefore of the peso.

The behavior of interest rates in Argentina reinforces the case that domestic factors

were paramount in causing the crisis. In 2001, lending rates charged by banks rose

2International Monetary Fund (2002), p. 212.

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steeply in Argentina at the same time they were falling in the United States. They were

also falling in El Salvador, Panama, and, more erratically, in Ecuador. The difference

between the other countries and Argentina was that they all used the dollar as their

official currency, while Argentina maintained a separate currency, which was losing the

confidence of Argentines and foreigners alike.

4. Debt spiral and excessive external borrowing

Argentinas spectacular economic crash and default were the culmination of a debt-leddevelopment process that began in the late 1970s. the December 2001 default andeconomic crisis were the logical outcome of a massive debt accumulation process whichresulted from two main factors. First, the negative effects of policy prescriptions by theinternational financial institutions (IFIs), particularly the IMF and the World Bank (WB),enthusiastically implemented by Argentine officials. In other words, US-trainedArgentine officials and IFI staff acted like a team in which there was a high degree of

agreement on the economic policies to be implemented. Second, a series of exogenousshocks which ranged from US interest rate hikes to financial crises in Asia, Russia, and,finally, Brazil. These shocks led to spiraling costs of public sector borrowing and tomassive capital flight as the system unraveled. The combination of inconsistentmacroeconomic policies and exogenous shocks led to an economic collapse of historicalproportions in December. Therefore, theArgentine economic crisis of 2001 was in partthe result of massive capital flight, induced by fears that Argentina would default on itsexternal debt (the situation was made worse by the fact that Argentina had an artificiallylow fixed exchange rate and was dependent on large levels ofreserve currency).

5. Other factors

Moreover, with the Mexican crisis of late 1994. Argentina was hit hard by this so-calledtequila crisis, but with the help of the central bank, its relatively strong banking sectorsurvived the withdrawal of deposits and after one year of sharp decline, the economygrew again in 1996. But another shock followed in 1997, when a violent financial crisiserupted in Asia, followed in 1998 by the Russian crisis and in 1999 by crisis in Brazil,which floated its currency. Argentina has already suffered from turmoil caused by Asianand Russian crises and devaluation of the Brazilian currency added to its problems. Manyinvestors were still licking wounds from the Asian and Russian crises and in themeantime, hi-tech share bubble began to burst. Risk aversion of investors remained highand emerging markets access to international capital markets continued to be difficult.

Also, Argentinas instability and high level of corruption led to a withdrawal of capitalfrom the country

III. ARGENTINAS CRYSIS SOLUTION

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1. Fiscal Responsibility Law

FRLs. At the national level, faced with a deteriorating budget balance and growing debtpayments, the Argentine Congress approved a Fiscal Solvency Law in September 1999.Besides establishing numeric limits for the central governments fiscal deficit, it limited

the growth of expenditures, stipulated the adoption of pluri-annual budgeting, created aCountercyclical Fiscal Fund, and implemented transparency measures regarding publicfinancesthe features favored by the recent literature on fiscal rules. The Law requiredreaching fiscal balance no later than 2003 and set nominal ceilings for the national-levelnon-financial public sector deficit between 1999 and 2002.

But they were broken in every year. Although the national law did not includeconditions for subnational governments, it invited the provinces to pass similar laws oftheir own, and several did. The provisions of the laws differ across provinces, as did thedegree to which they were adhered to, even before the economic crisis in 2001. All theprovincial FRLs have limits on the deficit or overall debt, and most have both (Braun

and Tomassi 2003). More importantly, however, the city of Buenos Aires and three ofthe four large provinces did not pass any FRL. They contain well over half of thenations economy, and their nonparticipation undercut any hope for the system of FRLsto assure that no government would spoil the common good of fiscal prudence. Thetradition of not respecting rules goes beyond the FRLs. For instance, 16 of 24 provinceshave constitutional limits on the ratio between debt service and total revenue20 to 25percentbut in 2000, only 10 of the 16 provinces complied with those limits; results for2001 were much worse (Braun and Tomassi 2003).

In 2001 the FRLs stopped working because of the extreme mismatch between thenational governments fiscal and monetary policies in the context of a fixed exchangerate. Although the federal governments FRL lacked enforcement power, the morefundamental problem was the governments many legally inflexible spending obligations,most notably debt service and provincial transfers. Federal-provincial agreements in2000 had set nominal peso (= US dollar) floors on transfers to the provinces that wouldlast several years during a transition to a long-term arrangement of moving-averagecalculations that were more favorable to the federal government. Unfortunately, therecessions of 2001 and thereafter reduced revenues to the point that the federalgovernment could not make the promised transfers and defaulted on those and otherobligations, paying them with debt that circulated as money (Gonzalez, Rosenblatt andWebb 2003). Even with stronger enforcement procedures on paper, the FRL could nothave solved the problem. The provincial FRLs also had shortcomings that would havebeen problematic even if the collapse at the top had not come first. They lackedenforcement power and a critical mass of states had not passed themBuenos Airesprovince, Buenos Aires city, and Santa Fethe same entities that had formed the coregroup for fiscal adjustment in the early 1990s. The Compromiso Federal of 2000 did nothave contingencies to assure fiscal sustainability in down-side scenarios of growth. Itarranged to share benefits of growth but not to share the cost of recession. All thegovernments were benefiting from the public asset of a stable currency and using it toaccess credit markets, but they failed to appreciate the fragility of the asset and the need

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to coordinate effortsex ante controlsto avoid overusing it. The attachment of co-participaciones at Banco de la Nacion looked so much like a federal guarantee of theprovincial debt that most lenders did not fear ex post consequences, and there were no exante constraints from their side.

Source:Steven B. Webb, Fiscal Responsibility Laws for Subnational Discipline: The LatinAmerican Experience, World Bank, 2004http://elibrary.worldbank.org/docserver/download/3309.pdf?expires=1349346814&id=id&accname=guest&checksum=22FCE33D7E4317F5D88DE96379C5C7EA

2. The deposit freeze and pesification

An important part of the story of the imposition and then amelioration of shock to the

economy turns on the deposit freeze and the succession of adverse and thencompensatory measures affecting the banking sector. The deposit freeze began in mid-December, 2001, when the de la Rua administration sought to halt the large withdrawalsof deposits and resulting losses of international reserves as depositors took their capitalabroad. That freeze, the corralito (little fence), prevented the conversion of demanddeposits into currency (except for modest monthly sums), but allowed full use of demanddeposits for any payments within the banking system. In part because of concern that thisarrangement was causing a migration of funds from the public sector banks andArgentine national-ownership banks to the stronger foreign-owned banks, in January2002 the new administration tightened the freeze, preventing the use of demand depositseven for payments within the banking system except for transactions within the specificbank where the deposit was held. At the same time, a corralon (big fence) was imposedfreezing dollar time deposits that had been pesified and reprogrammed to mature in 2003-2005. It is no surprise that such a pervasive initial freeze would have sparked a seizing upin payments and economic activity, although during the course of 2002 the demanddeposits in the corralito were gradually released.

Aside from the immediate measure of continuing and tightening the deposit freeze toavoid a mass exodus of funds and further drain on reserves, in January the Duhaldegovernment converted all deposits and debts into pesos (pesification).

There had been considerable discussion even in 2001 of converting debts to pesos as ameans of dealing with the risk of mismatched balance sheets of firms and householdsindebted in dollars but earning pesos (Hausmann, 2002). Unfortunately, when thegovernment did adopt pesification in early 2003, the devaluation had already occurred,so that a conversion of loans to pesos at the market rate would not have avoided theshock from the asset-liability currency mismatch.

Moreover, for political reasons the government did not use the devalued exchange

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rate to pesify debts, but decreed that a wide range of dollar-denominated debts would 44be converted to pesos at the old parity of one peso per dollar.(1) Yet it allowed the holdersof dollar deposits in the banks to obtain a much more favorable exchange rate of 1.4pesos for each dollar. The result was a large loss imposed on the balance sheets of thebanks, who could only claim 1 peso for each dollar in debt owed by borrowers but now

owed 1.4 pesos for each dollar held by depositors. The dollar time deposits frozen in thecorralon were converted to pesos at a rate of 1.4 pesos per dollar, in the form ofCEDROS (certificates of reprogrammed deposits) indexed against inflation and bearinginterest.(2) This asymmetric pesification was one of the most conspicuous examples of abroader phenomenon: the highly political nature of the allocation of the losses from the3D crisis among the various sectors. In this case the allocation involved depositors,debtors, the banks, and the government. In effect the government granted a windfall gainto debtors owing dollar obligations and imposed a loss on the banks, which subsequentlynecessitated that the government make good on some part of the bank loss if it desired toavoid a collapse of the banking system.

The losses imposed on the banks by the asymmetric pesification amounted to about$10-15 billion, compared to their equity (net worth) of about $17 billion at the end of2001.(3)

The government soon recognized that it could not risk a consequential collapse of thebanking system, and it eventually agreed to grant $9 billion or more to the banks incompensation, in the form of government bonds (Boden).(4)

From the standpoint of the banks, however, a true accounting of the value of thecompensation bonds was problematical, considering that market prices on the Bodengovernment bonds were about 50 cents on the dollar (and prices on other governmentbonds were as low as 25 cents on the dollar).(5)

The International Monetary Fund had reportedly sought that Argentina convert all ofthe frozen bank deposits into government bonds in order to avoid an inflationary impactof the release of these funds. Instead, the government pursued a patchwork of policiesthat had the effect of gradually releasing the bulk of the funds.

One important provision was that depositors could sell their frozen deposits tocorporations at a discount for use by the corporations to repay debts owed to the samebank in which the deposits were held. Similarly, additional amounts were released by thecourt-awarded amparos to individual plaintiffs who had legally challenged the freeze.

Other windows permitting release from the freeze were the allowance of use of depositsof up to 100,000 pesos to pay mortgage debt and up to 35,000 pesos to pay debt onautomobiles and other consumer durables. In addition, the government carried out tworounds of deposit swaps for government bonds on a voluntary basis, although these metwith only limited response. Further, the banks themselves were allowed to offeradvanced release of depositor funds at a discount of about one-third, though again theuptake by holders was limited. The combined effect of all of these mechanisms was tocut back the amount of frozen deposits in the corralon to only one-fifth of total depositsby March, 2003, allowing the Minister of Economy to pledge complete liberalization of

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the freeze by the time of the new governments entry into office by May 25 (La Nacion,18 March 2003). (6)

(1)About two-thirds of loans to the private sector enjoyed the conversion at parity, including mortgages up to

$100,000, auto and consumer durable loans up to $30,000, consumer loans up to $10,000, and smallbusiness loans up to $100,000. Other dollar-denominated debts were converted at 1.4 pesos per dollar, andby February 2002 the government converted its own dollardenominated domestic-law debt to pesos at 1.4per dollar.(2)As of mid-March 2003, the CEDRO with accumulated inflation correction (by the CER) and interest

amounted to about 2 pesos for each original dollar, in contrast to the exchange rate at about 3.1 to thedollar.

(3)Others have reached similar estimates; Lagos (2002) places the cost at $11.2 billion. My own rough

calculation of the asymmetry loss is as follows. The banks had $45 billion in dollar deposits. If these areconverted at an average exchange rate of 2.0 (about the CEDRO value by early 2003), their liabilities

jumped by 45 billion pesos; if they are converted at 2.5 pesos, the increase in liabilities was 67 billionpesos. The banks held about $11 billion in unsheltered dollar loans to the private sector, converted at 1.4pesos per dollar, and about $21 billion in dollar loans to the public sector, converted at 1.4 pesos to thedollar; so the value of these assets rose by about 13 billion pesos. Net liabilities thus rose by an amountranging from 32 to 45 billion pesos, or about $10-15 billion at the late-March 2003 exchange rate of 3.1pesos per dollar.

In actual practice, there were dollar deposit liability liquidations at a more steeply depreciated exchangerate, boosting the loss. An offsetting consideration, however, is that there were also the amounts of dollardeposits unwound by transactions on the discounted secondary market (noted below), which would haveenabled a bank to reduce both its dollar claims and dollar liabilities without a loss except for theforgiveness granted on the loans in question.(4)Compensation is to be paid either in peso bonds maturing in 2003-07, indexed to inflation and bearing 2

percent interest; or in dollar bonds (Bonos Optativos del Estado Nacional, Boden) maturing 2005-2012 andbearing interest at Libor. The amount of the compensation is the difference between the banks net worthat end-2001 valuing its dollar assets and liabilities at 1.4 pesos per dollar, on the one hand, and the same networth valued at the actual (asymmetric) exchange rates applied in the pesification process. The pesodifference can be taken in the government indexed peso bonds, or the dollar difference can be taken inBoden (Lagos, 2002).(5)As discussed below, the banks are being allowed to phase in gradually over five years the marking to

market of the value of the government bonds they hold on their books.(6)Javier Finkman estimates the disposition of dollar accounts as follows. Initial stock: $46 billion. Pesified

in January-February 2002: $16.4 billion. Reschedule and pesified into Cedros (CertificadosReprogramados de Plazo Fijo) at end-February 2002: $30 billion. Released through Amparos completed

and pending as of late February 2003: $4.6 billion. Exchanged in Swap I: $4.7 billion. Swap II andloosening of the corralon: $0.86 billion. Bank conversion offering: $0.6 billion. Loans repaid onautomobiles, mortgages, and other windows: $10.4 billion. Remaining rescheduled deposits as of March2003: $8.8 billion. By communication, 14 April 2003.

Source:Restoring Economic Growth in Argentina, JBIC Institute, 2004http://www.jbic.go.jp/en/research/report/research-paper/pdf/rp27_e.pdf

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3. Leaving the Fixed Exchange Rate

Argentina left the fixed exchange rate and stopped trying to keep the currency peggedagainst the dollar. The government also tried to prevent capital outflows by freezing bank

accounts for 12 months. Leaving the currency peg, led to a huge devaluation in theArgentinian currency.From 1 Argentina Peso = 1 US Dollar. By 2002, the currency fell to 4 Peso to 1 Dollar.Inflation was running at 80%This led to imported inflation and a large reduction in living standards.

Using Data at http://www.indec.gov.ar/wiki commons

Benefits of Devaluation in Argentina Peso

When Argentina left the fixed exchange rate, it was very grim situation. Capitalfled from Argentina and consumer spending fell amidst uncertainty. However,

the devaluation made Argentina exports much more competitive and importsuncompetitive. This led to a big increase in export demand (helped by rise inprice of soya).

Also, the devaluation forced people to buy less imports and more domesticallyproduced goods which was good for Argentinian industry.

Since the devaluation and debt default, Argentina has posted impressive rates ofeconomic growth. This suggests that despite defaulting on debt and leaving thesecurity of a fixed exchange rate the economy can recover.

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Costs of Devaluation

There was a big fall in living standards from devaluation.

Argentina has had inflation since devaluation (official figures 9% in 2011.

Congressional estimate of 22%)

Most savings were lost

Argentina has a bad reputation for borrowing (though it hasnt been permanently

locked out of bond markets)

However, the main thing is that the economy could recover and unemployment fell from

the critical peaks of the early 2000s

Source:Tejvan Pettinger,Argentina Crisis and Recovery, 2012http://www.economicshelp.org/blog/5422/economics/argentina-crisis-and-recovery/

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4. Argentinas Sovereign Debt Restructuring

Argentina started the process of debt restructuring in 2002, negotiations with the IMFand the investors in the three years to find a solution that it feels real value for profoundsocial and economic decline. Faced with a huge debt burden, Argentina has adopted a

hard line against all parties, the original emphasis on a massive write-down for theprivate creditors and deferred action Paris Club and IMF debt. After years ofnegotiations,which has been criticized by both sides, Argentina finally determined that ithad reached an impasse with the creditors and decided to act on its own. It suspended theagreement with the IMF and give it suggest unilateral some time with the SEC to dealwith private creditors. Argentine legislature codified this commitment, through the called"Padlock Law" (Ley Cerrojo), the regulations prohibit the government to reopen theexchange or make any kind of offer better conditions in the future.

January 14, 2005, Argentina opened exchange of bonds for six weeks, hoping toachieve a final settlement of the debt face value of $ 81.8 billion plus $ 21.4 billion of

overdue interest (PDI). The default is unprecedented for its size ($ 103.2 billion),resolution (over three years), low recovery rate (30% on a net present value basis,including PDI), and the remaining large residual holdout (24% of all loans). Owners ofbonds and IMF criticized Argentina to participate in a process lasting (creditors willdebate) accepted guidelines of the debt negotiations. However, the value of $ 81.8 billionin debt, $ 62.2 were exchanged for $ 35.2 billion in new bonds. Argentine government,however, can not completely solve the problem because the $ 19.6 billion of bonds (24%of the stock) is not tender and still dispute together with accrued interest, $ 6.2 billionParis Club debt, and $ 9.8 billion debt to the IMF.

Argentina has settled this debt remaining in one of two ways. In 2006, it decided to paythe full $ 9.8 billion debt to the IMF, to reduce the pressure to the government of anypolicy of the IMF. However, Argentina refused to restructure or repay Paris Clubcountries or holdouts. Holdout creditors have pursued litigation to force repayment, withthe result of the judgment and orders attached together effectively prevent Argentinafromborrowing on international capital markets until the bond payment default, restructuring.

For years, neither of these responses affected Argentinas determination to deviate fromits policy of financial independence. Strong economic growth until the 2008 globalfinancial crisis and reliance on various stop-gap measures (details below) to meetfinancing gaps have allowed Argentina to rebuff attempts at forced resolution

Argentina made a first attempt to restructure the remaining debt default in September2008. As President, Cristina Fernndez de Kirchner announced that Argentina wouldseek to repay the Paris Club debtits about $ 47 billion of international reserves and signeda deal with three bank-Barclays Capital, Deutsche Bank, and Citibank to consider theconsider the offer to negotiate with private holdout creditors. Simultaneous onset ofglobalfinancial crisis, however, the potential termination of the agreement and any hope to meetshort-term financial needs international loans.

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IV. GENERAL LESSONS FROM THE ARGENTINE CRISIS

Not all financial crises dued to moral hazard in the management of the bank. Argentina isa good example. The system has been defined and monitored, can withstand a severe and

prolonged recession, beginning in 1998, no major incidents and to a deposit level up untilFebruary 2001 . This system is capitalized and can withstand significant losses in thevalue of its assets. However, it can not exist a set of interventions that destroy the brandvalue of the bank (as corralito) and deprived of their capital (such as pesificationasymmetric). So, good financial regulation and supervision while necessary are notsufficient to protect banks from the crisis.

Liability dollarization can seriously amplify the costs of the crisis. The crisis is oftenassociated with large fluctuations in the real exchange rate increases the cost of debt inU.S. dollars in the country at a time when the borrower at least be able to service itsobligations of them. The country plans to maintain exchange rate flexibility should

develop policies designed to increase the market for domestic currency denominatedassets both at home and on the international market.

The importance of the integrity of the payment system can not be overstressed. Whenthis system fails, it causes a tremendous economic activity that, in addition to the socialcosts of its large, complex financial solvency and limits the government's ability toaddress crisis. Therefore, the Argentine crisis shows that the country should be evenwilling to pay the cost of securing a payment system functions well in times of crisis. Italso implies that the government should consider the impact of their crisis managementinitiatives on the stability of the payment system.

This is the first major crisis took place in the context of a system of international banksin the country. Therefore, it provides an important opportunity to assess the effect ofownership structure of banks during the crisis. It is often argued that foreign-investedbanks have better access to capital and liquidity in times of crisis through theirrelationships to their parent company and therefore will be seen by the public is a saferorganization. In this context, the Argentine crisis that this may be true in the case ofpersonal problems, limitations in the banking system. However, during the crisis of thesystem, the parent company is less likely to support their subsidiaries. This is especiallytrue when capital losses may be due to the government's decision.

Argentina crisis also provides new evidence on the long-term lessons on the problemscaused by public sector commercial banks. The temptation to influence politics in theallocation of credit institutions undermined their ability to retain the respect of depositorsin bad times aggravating, the overall situation. In Argentina, the banks are the ones withthe worse asset quality and the poorest indicators of performance. The bank suffered a lotas a flight to quality became rampant. The Commission believes that it is important forcountries to reduce the role of the public commercial banks in the domestic system.Extend the maturity of the public debt is very important to avoid the problem of re-investment. However, the Argentine crisis shows that when buying long-term bonds bybanks, they can create mismatches on bank term deposits with a term shorter than bonds

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government. Upon the occurrence of a systemic crisis, the decline of deposits held at thesame time that the bond price is very low and that the central bank is struggling to protectthe reserve by international credit control in the country. Debt maturity increasedmanagement complexity banking crisis.

Currency crisis can cause through exchange controls as a temporary measure to containthe decline of the exchange rate and the decline of bank liquidity. In this context, thecentral bank is required to include an evaluation of how exchange controls should applyto transactions between the head office of the domestic banks and their foreignsubsidiaries and its subsidiaries owned by the majority. This decision is furthercomplicated by the fact that international trade can take place in a context of its headoffice is required liquidity support from central banks. The Commission believes thatexchange controls should not interfere with the responsibilities between headquarters andbranches above, and its subsidiaries, in accordance with the principle of consolidatedsupervision. Also, in this context, efforts should be made to coordinate the actions ofvarious central banks on how to deal with the problems facing liquidity of banks specific

goods in different countries.Besides the really obvious impact of Argentina on its neighbors, Uruguay significant

spread from the presence of the bank is owned by Argentina. When the bank has negativeeffects of the Argentine crisis, they can not guarantee the support of the central banks ofthe two countries, as an organization feel responsible for the organization. This leads to agray area in the international division of labor between the central bank, a problem to besolved.

V. CONCLUSION

Argentina's economy has declined in the 1980s, ending the decade in a hyperinflation.After making drastic reforms to open the economy, private companies governmentowned,and monetary stability, Argentina enjoyed strong economic growth began in 1991 underPresident Carlos Menem. Economic recession in 1995 as a result of the financial crisis ofMexico, but then continue to grow. However, in October 1998, immediately after thecurrency crisis in Russia and Argentina's neighbors Brazil, Argentina entered a recessionkhac. Bad economic policy turned what should have been a recession a year into arecession four years. The economy had signs of growth at the end of 1999 when thenewly elected president, Fernando de la Rua, the tax increase to reduce the budget deficitof the federal government's Argentina. When internal political division in March 2001, dela Rua government has issued two more tax increases and changes in monetary policy toweaken confidence in the one-to-one exchange rate contracts Argentine peso to thedollar, which has existed since in economic 1991. The economy continued shrinkinggovernment revenue and is still under planning.

In July 2001, the international bond rating agencies had downgraded its credit rating ofthe government. Faced with rising costs refinance its debt, the government increasinglydesperate measures. In December 2001, it imposed a freeze on bank deposits, makingwhat is believed to still be called a bad recession into a real recession. About the

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economy protests forced President de la Rua from office later this month. In the interimperiod of three presidents in less than two weeks, the government broke its foreign debtin a way almost designed to respond to the debt. At the beginning of the NationalAssembly in January 2002 of Argentina chosen as president Eduardo Duhalde, wassecond in the 1999 presidential election. Within days, he set the new policy that nasty

ownership painstakingly built since the 1800 long right that prosperity whichstrengthened as Argentina has achieved economic duoc.Nen decline rapidly more, finallyreaching the bottom around August 2002 after falling 28% from its peak of 1998. Theelection of a new president, Nestor Kirchner, took office on May 25, 2003.

Argentines have suffered so much in the last few years that a widespread feeling existsthat the prosperity of the early and mid 1990s were a bubble depending on fortunatecircumstances that could not persist, such as an overvalued exchange rate, unsustainableinflows of foreign capital, loans from the IMF, or obviously unsound governmentfinances.

That is not the case. Starting in 1989, Argentina has made fundamental economicreforms greatly increased its attractiveness for employees, businesses, savings, andinvestment. Capital flows, some of it from abroad, many from Argentina bring funds theysent abroad or tucked under their mattress. Economic growth because the fundamentalshave improved a lot. However, continued growth depends on the incentives to work,business, savings, and investment. The tax rate is not too heavy, a credible currency, andrespect for private property rights is very important. In the recession of 1995, The federalgovernment of Argentina after some hesitation reaffirmed his commitment to class ofcourse it has since 1989. In the recession started in 1998 and developed into a crisis in2001, the government moved increasingly away from the course.

Argentina's crisis is not a failure of the free market, as some observers have suggested.Instead, the crisis stems from the failure of the federal government in economic policy.The blunders impede economic growth, reducing government revenue and threaten thegovernment's ability to service its debt. Understanding the crisis is essential for Argentinacan achieve sustained long-term growth. The recovery of Argentina is currentlyundergoing is welcome, but it does not look like the beginning of sustainable growth,because the government's policies have made the institutions of a market economy isweaker than at any any time since at least 1989. By lending to Duhaldegovernment, theinternational community granted the legitimacy of the policy to reduce economicfreedom and the poor. It's greater economic freedom allows the economy of Argentinaappeared in the 1990s decline of the 1980s. Long-term growth will require reverse policydirection in the past few years and allow greater economic freedom, anchor respectproperty rights.

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