International Monetary Fund

Wall Street, the International Monetary Fund, and the Bankrupting of Argentina (2005)

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• published: 04 Aug 2013
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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 Image by Emiism (Own work) [CC-BY-SA-3.0 (http://creativecommons.org/licenses/by-sa/3.0)], via Wikimedia Commons