Argentinian Financial Crisis - Essay Example

Argentina's Financial Comeback Introduction The focus of this paper is lay bare the integral steps that were enacted to create the economic disaster that occurred in 2000-2001 which ultimately brought Argentina to default on almost half of its International Monetary Fund (IMF) debt of $180 billion dollars in international debt (Burbach, 2004). After the meltdown, not only did Argentina have to come to terms with its heedlessness in accepting an influx of loans from various international sources, it had to create a plan for not allowing this situation the possibility of occurring again. In essence, figuratively speaking, Argentina had to become an adult, discipline itself and make its own needs a priority. Three years after the fiasco, Argentina's economy is growing steadily. The growth is still under 10%, but there is growth and a growing sense of safety and responsibility from the government, creating a very positive outlook for Argentina to emerge in years to come as a dominant presence in Latin America. I. What is Globalization Globalization is a series of links that a country has with foreign countries. Globalization in essence links a country's economy to other economies so that there is a web of interdependence throughout all linked economies thereby creating a global economy. In a recent report in Latin Business Chronicle (LBC), Argentina was ranked as the 'least-globalise' country in Latin America (Bamrud, 2005). LBC utilized 6 factors to measure each country's level of globalization. These factors included: - Exports of goods and services as a percent of the gross domestic product (GDP) - Imports of goods and services as a percent of GDP - Foreign direct investment as a percent of GDP - Tourism receipts as a percent of GDP - Remittances as a percent of GDP - Internet penetration (Bamrud, 2005) This is an important Index that LBC created in that it allows investors, and other interested parties an opportunity to view Argentina in an extremely objective light. Remittances, money sent back home by family members working abroad, is an area that is steadily growing for Argentina. A report prepared by the American Immigration Law Foundation (AILF) states, 'remittances area sign of family values, a part of human nature. They are a form of helping one's family. Remittances increase both the income of the recipient and the foreign exchange reserves of the recipient's country. "If remittances are invested, they contribute to output growth, and if they are consumed, then also they generate positive multiplier effects," notes economist, Dilip Ratha in Global Development Finance 2003, a World Bank publication ("Role of Remittances", 2003). By using this 6-step process to cull globalization indexes, one can get a larger view of the financial status of Argentina. LBC report states that Argentina has the lowest import rates in Latin America, it has a low export rate, foreign investment is low (1.2% of GDP) and it has one of the lowest remittance rates in the region as well. Even tourism levels are down (Bamrud, 2005). While Argentina is not facing imminent meltdown, it is still toddling its way back from its financial disaster 3 years ago. However, its economy is rallying. According to the U.S. Department of State's website, Argentina had an annual real growth rate of +9% in 2004, and their GDP stands at $150.0 billion. To give a bit more background, globalization is supposed to help keep countries in line and disciplined because if they have solid economic practices, the assumption is that government will be favoured by foreign investment. If the government does not practice sound economic policies, the reverse is supposed to be true - monies will either not be invested, or will be pulled from that country (Blustein, 2003). This did not happen in Argentina in the years leading up to the crisis, in fact, due to inflated expectations and selective reporting of the country's true financial state, globalization helped to create the massive Argentine downfall. II. What Happened in Argentina in the Late 90's through 2002 Quite simply, Argentina had massive international debts that could not be paid as their interest rates became too high for them to pay. There were several key factors that spiralled in on Argentina and created a precipitous fall that was predicted, but the warnings went unheeded. In late 2001, Argentines started protesting in the streets because the government under President Fernando de la Rua because on December 1st, 2001 he imposed a banking freeze which limited withdrawals from savings accounts to approximately $500 a month ("Argentinean Finance Minister Quits", 2002). Later that month, de la Rua resigned and in the next couple of weeks, Argentina had a total of 5 new presidents (Burbach, 2004; Eiras and Johnson, 2003). In January, the former Vice President, Eduardo Duhalde, was named by the National Congress as the "transitional" leader to finish out de la Rua's final 2 years. And, it was during Duhalde's term that Argentina defaulted on the large payment of $800 million to the World Bank. Unemployment rates skyrocketed, small businesses were forced to close, low income families' income totally dried up and the government had to spend money on social programs to keep its people from being destitute. III. What Lead Up to Argentina's Financial Disaster There was a fourfold factor that lead up to Argentina's financial demise. The first problem was former Economy Minister Domingo Cavallo's legal linking of the peso to the American dollar which went into effect in 1991 (Katel, 2001). This scenario worked for a few years, but as the dollar became overvalued, so did the peso which 'makes a country's exports too expensive and its imports artificially cheap' (Weisbrot, 2002). Weisbrot, give a good analogy that a strong currency is not equivalent to a strong body; 'it is very easy to have too much of a good thing' (2002). To continue making an overvalued currency workable, the country must have a large quantity of the exchange money on hand in their reserves in case investors become concerned and stream en masse to the banks to exchange for the linked currency. In this case, Argentina would have to have a large quantity of American dollars to be able to convert their pesos. Argentina did not have the money which is why de la Rua made that ever so unpopular decision to limit withdrawals in order to protect the Argentine economy. In effect, that one move destroyed people's confidence, increased anxiety levels and fear levels and caused an even greater protest which were taken to Argentine courts. Once in court, the bank account holders were vindicated as the judges 'have consistently upheld the right of savers who have challenged the decision [to limit withdrawals] in court' ("Argentinean Finance Minister Quits", 2002). The second factor in Argentina's financial woes was the continued acceptance of new loan monies from various international sources. Large quantities of money were borrowed beginning in President Carlos Menem's term. President de la Rua inherited $114 billion in debt (Eiras & Johnson, 2003) and was not able to bail out of it, in fact during his two years as President, de la Rua made the situation more dire by taking on ever more loans. In fact, the IMF loaned Argentina $40 billion in 2001 to support the peso (Weisbrot, 2002). According to Eiras and Johnson's research report, the IMF approved $30 billion in loans to Argentina since 1983 and 'it has failed to foster economic growth or stability. To the contrary, the loan packages have had the perverse effects of encouraging faulty policymaking and enriching the political elite and foreign investors while bankrupting ordinary Argentines saddled with paying off the notes' (2003). Thirdly, there was an unfounded optimism that was published in analyst reports around the world about Argentina's bonds. Bond managers sent large corps of analysts to Argentina to lobby for the best rates and exclusive rights to sell various financial instruments in various localities (Blustein, 2003) and these analysts did not focus on the larger picture - Argentina's national debt was becoming a larger percent of the GDP. Argentina's debt load went from 29% of the GDP in 1993, to 41% in 1998 (Blustein, 2003) - a 12% jump in a scant 5 years. The sale of Argentine bonds all over the world, especially in Europe, gave the Argentine government as sense of security and complacency as noted by Paul Blustein in a Washington Post article (2003). However, these bonds were becoming increasingly unstable, there was nothing to back them anymore. So, when the meltdown finally occurred, the effects were felt around the world. Since disclosure regulations are less strict in the Europe than in the United States, many European investors had to declare bankruptcy after the financial disaster. Lastly, as the economy shrunk from servicing increasingly higher and higher interest payments on debt, tax revenues also shrunk creating the final piece in the tangled plot that became the Argentine financial disaster (Katel, 2001). These four factors combined to create a massive web from which Argentina is still trying to free itself from. IV. Argentina's Current Financial Position The current Argentine President, Nestor Kirchner, was inaugurated in May 2003 and he's been fighting with the IMF 'fiercely over the terms of new loans and the repayment of the country's international debt' (Burbach, 2004). Currently President Kirchner has the IMF in a very unusual situation for them - one of compromiser. Normally, the IMF, and other international lending organizations, set the tone by stating the loan terms and the repayment terms. In February, it was reported that Argentina's president has told the IMF that they cannot pay back their $15 billion in loans in 4 years, they need 6 years as the country is still in recovery (McCarthy, 2005). According to IMF's charter, they cannot lend money 'to a nation that is in arrears with its private creditors, and is acting in bad faith (defined as when a debt-restructuring offer garners only a miniscule acceptance rate from creditors). Argentina has recently claimed an acceptable rate would be 50% while the IMF believes around 80% acceptance would warrant the "good faith" label' (McCarthy, 2005). In addition to this, Kirchner has told the IMF that he expects another round of negotiations after the debt is restructured which means that the IMF has been put into a situation where they have to go to the table with a nation that is potentially in arrears with its private lenders (which as stated is against their regulations). The IMF will have to either agree to the 2 year extension Argentina is asking for, which will now set a precedent for other nations in debt, or it will have to declare Argentina's extension as not acceptable which would bar Argentina from any future loans with the IMF. Argentina is the IMF's third largest borrower, the latter option is most probably not an option as Argentina would most likely default on its current loan. President Kirchner has drawn a very eloquent noose for the IMF, one that will allow his country breathing room and hopefully maintain Argentina's ability to borrow from IMF in the future (McCarthy, 2005). V. How Argentina Plans on continuing its Globalization Efforts The previous section goes into very specific detail as to how President Kirchner is positioning the country in regards to globalization strategies. By his astounding trump card, Kirchner has created a bit of levelling in the international playing field for all other indebted nations to follow, if they can be as savvy. It is very clear that Kirchner is trying to secure every advantage for Argentina even while trying to assist the country in recovering from an almost fatal disaster that is less than 5 years in its past. In a recent article, Kirchner said, "We are not going to repeat the history of the pastWe don't want new agreements that will frustrate us and the world. For many years, we were on our knees before financial organizations and the speculative fundsWe've had enough!" (Burbach, 2004). President Kirchner's words ring clear and true with his recent successful struggle with the IMF. This path that is being forged, if continued upon, will bring positive reforms back into play within Argentina's government, and with such a strong leader, Argentina is most definitely on track for sunnier financial days. References Argentinean Finance Minister Quits, 2002, CBS News, [online], Retrieved November 8, 2005, Available at: http://www.cbsnews.com/stories/2002/04/23/world/printable507015.shtml Bamrud, J. 2005, 'Special Report: Panama Best, Argentina Worst: Latin American Globalization Index', Latin Business Chronicle, [online] Available at: http://www.latinbusinesschronicle.com/reports/reports/lagi100305.htm Blustein, P. 2003, 'Argentina Didn't Fall on its Own: Wall Street Pushed Debt Till the Last', Washington Post, 3 August, pg. A01. Burbach, R. 2004, 'Argentina Squares Off With International Financiers', ZNetArgentina, [online] Available at: http://www.zmag.org/content/print_article.cfmitemID=6906§ionID=42 Eiras, A.I. & Johnson, S. 2003, 'Research Latin America: More Loans Without Reform Will Only Prolong Argentina's Economic Woes', The Heritage Foundation, [online], Retrieved November 3, 2004, Available at: http://www.heritage.org/Research/LatinAmerica/EM888.cfm Katel, P. 2001, 'Argentina's Crisis Explained', Time: World Americas, [online], Retrieved November 3, 2005, Available at: http://www.time.com/time/world/printout/0,8816,189393,00.html McCarthy, D.M. 2005, 'Can Debtors Be Choosers: The Implications of Argentina's Struggle with IMF Debt for Highly Indebted Poor Countries', Global Policy Forum , [online], Retrieved November 5, 2005, Available at: http://www.globalpolicy.org/socecon/bwi-wto/imf/2005/02argentina.htm The Role of Remittances in the World's Economy, 2003, The American Immigration Law Foundation, [online], Retrieved November 7, 2005, Available at: http://www.ailf.org/ipc/policy_reports_2003_pr002_remittances.asp U.S. Department of State, 2005, 'Background: Argentina', Bureau of Western Hemispheres Affairs, [online], Retrieved November 5, 2005, Available at: http://www.state.gov/r/pa/ei/bgn/26516.htm Weisbrot, M. 2002, 'Argentina's Crisis, IMF's Fingerprints', AlterNet, [online], Retrieved November 3, 2005, Available at: http://www.alternet.org/module/printversion/12152 Read More