Wall Street, the International Monetary Fund, and the Bankrupting of Argentina (2005)
The Argentine economic crisis (1999--2002) was a major downturn in
Argentina's economy. It began in
1999 with a decrease of real
Gross Domestic Product (
GDP). The crisis caused the fall of the government, default on the country's foreign debt, widespread unemployment, riots, the rise of alternative currencies and the end of the peso's fixed exchange rate to the
US dollar.
By
2002 GDP growth had returned, surprising economists and the business media.
As of 2012, the default had not been completely resolved, although the government had repaid its
IMF loans in full.
Since the early
1990s, Argentina had relied on the IMF to provide the country with reliable access to credit and to guide its economic reforms. When the recession began, the national deficit widened to 2.5% of GDP in 1999 and its external debt surpassed 50% of GDP.[13]
Seeing these levels as excessive, the IMF advised the government to balance its budget by implementing austerity measures to sustain investor confidence. The
De la Rúa administration implemented
US$1.4 billion in cuts in its first weeks in office in late 1999. In June
2000, with unemployment at 14% and projections of
3.5% GDP growth for the year, austerity was furthered by US$938 million in spending cuts and
US$2 billion in tax increases.[14]
Following vice president
Carlos Álvarez' resignation in
October 2000 over bribery suspicions in the
Upper House,[15] the crisis accelerated.[citation needed]
GDP growth projections proved to be overly optimistic (instead of growing, real GDP shrank 0.8%), and lagging tax receipts prompted the government to freeze spending and cut retirement benefits again in
November 2000.[16][not in citation given] In early November,
Standard & Poor's placed Argentina on a credit watch, and a treasury bill auction required paying 16% interest (up from 9% in July); this was the second highest rate of any country in
South America at the time.[17]
Rising bond yields forced the country to turn to major international lenders, such as the IMF,
World Bank and the
U.S. Treasury, which would lend to the government at below-market rates, and to comply with the accompanying conditions. Several more rounds of belt-tightening followed.
José Luis Machinea resigned as
Minister of Economy in
February 2001. He was replaced with
Ricardo López Murphy, who lasted 8 days in the office before being replaced with
Cavallo. In July
2001,
Standard and Poor's cut the credit rating of the country to B--.[18]
In July 2001 the government instituted an unpopular across-the-board pay cut of up to 13% to all civil servants and an equivalent cut to government pension benefits—De la Rúa's seventh austerity round[19]—triggering nationwide strikes,[20] and, starting in August, it paid salaries of the highest-paid employees in
I.O.U.s instead of money.[21] This further depressed the weakened economy. The unemployment rate rose to 16.4% in
August 2001[22] up from a 14.7% a month earlier,[23] and it reached 20% by December.[24] In
October 2001, public discontent with the economic conditions was expressed in the nationwide election.
President Fernando de la Rúa's alliance lost seats in both chambers of the
Argentine National Congress, leaving it in the minority. Over 20% of voters chose to enter so-called "anger votes", returning blank or defaced ballots rather than indicate support of any candidate.[25]
The crisis intensified when, on
5 December 2001, the IMF refused to release a US$1.3 billion tranche of its loan, citing the failure of the
Argentine government to reach previously agreed-upon budget deficit targets,[26] and demanded further budget cuts, amounting to 10% of the federal budget.[27] On
4 December,
Argentine bond yields stood at 34% over
U.S. treasury bonds, and, by
11 December, the spread jumped to 42%.[28][29]
By the end of
November 2001, people began withdrawing large sums of dollars from their bank accounts, turning pesos into dollars and sending them abroad, causing a bank run. On
2 December 2001 the government enacted measures, informally known as the corralito,[30][31] that effectively froze all bank accounts for twelve months,[32][33] allowing for only minor sums of cash to be withdrawn, initially $250 a week.[34]
The freeze enraged many
Argentines who took to the streets of important cities, especially
Buenos Aires. They engaged in protests that became known as cacerolazo (banging pots and pans). These protests occurred especially in 2001 and 2002. At first the cacerolazos were simply noisy demonstrations, but soon they included property destruction, often directed at banks, foreign-owned privatized companies, and especially big
American and
European companies.
http://en.wikipedia.org/wiki/Argentine_economic_crisis_%281999%E2%80%932002%29
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