A Debt Crisis in Argentina in the1980s - Term Paper Example

International Economic History of 1980s: Argentina Name Institution Course Date International Economic History of 1980s: Argentina Introduction Financial crisis affects the economy of a respective country and other countries globally. IMF, World Bank and other international financial institutions play a major role in reviving such economies. Argentina records a period of financial crisis from the 1980 decade to the 1990s which posed a threat of possible economic meltdown to the economy of its states and globally. The financial crisis affected the exchange rates, employment and different economic sectors within and outside Asia (Davis, 2010). The debt crisis experienced in Argentina was as a result of the financial crisis in the Latin American countries that affected more than one country. This is mostly known as the lost decade since earning power in the countries was far much less than their foreign debts. Argentina as a nation has been exposed to country risk where investors have doubted the viability of the country to manage investments. The essay provides an analysis of debt crisis that faced Argentina which is a country in Latin America, a history of previous crises and reasons for the crises. Analysis Debt crisis and Country risk Debt crisis in a country involves huge tax revenues and public debt. Most of this debt is usually from international financial lenders. Inability to settle these debts accumulates more of the debt leading to imbalanced budgets. Financial crisis is the state of the economy where financial institutions and assets of a state lose value. This affects their exchange rates, interest rates and the value of the currency is the most affected. According to Reinert (2012), country risk is attributed to changes in the business environment that negatively affects the operating profits of a country and the value of its assets. This results to risk on the part of investors who invest or intend to invest in the victim country. This risk refers to risks affecting all kinds of companies within the country. Changes in currency controls and regulations, stability and devaluation are the financial features that can cause country crisis by affecting the operations of companies. Government takeover is the most severe country risk that companies are exposed to. Causes of the Crisis Argentina Excessive borrowing The debt in Argentina traces back in the 1960 and 1970 decades when the country together with others in Latin America purposed to boost the industrialization sector by upgrading their infrastructure and as a result acquired huge sums of money from creditors internationally. Since Argentina was economically elevated, their creditors found them viable and extended more loans. Developing countries were also among the external creditors providing loans to Argentina through the World Bank. The first debt crisis took its full swing in the 1980s. The incursion of funds acquired from countries rich in oil in private banks was believed to be safe investment. Public debt increased between 1975 and 1982 to a rate of 20.4% owed by commercial banks. According to Naya et al (1989), Latin America increased its external debt four times than before due to the intensified borrowing in its commercial banks. The total debt rose to over 315 billion dollars by 1983 from 75 billion dollars in 1975. This is also equivalent to 50% of the states’ GDP (Gross Domestic Product). Since the borrowed money had interests and service charges, repaying the principle amount and interests became more expensive as it rose faster from the 12 billion dollars of 1975 to 66 billion dollars. The banking sector contributes to the crisis largely. Most companies highly depend on borrowing from banks rather than issue of stocks or bonds. The government system encourages banks/businesses and business/government associations through favorable interest rates for such associations. Bureaucrats have greater influence in making the laws and enforcing them through the parliament. This has greatly affected the Argentina economy. International borrowing posed the risks of maturity distribution of accounts. Banks and businesses acquired short term loans for long term projects. Such loans have contributed to the crisis (Bello, 1998). Financial policies It is believed that wrong policies were implemented by officials in Argentina suggested by the International Monetary Fund and the World Bank which are part of IFIs (International Monetary Institutions). The officials were trained in the United States and together with staff of IFIs formed an implementation team and formulated the economic policies which they later on executed.The international intervention by international institutions was as a result of failure by Carlos Menem misters for economics failing to restore Argentina’s economy. Suggested and implemented policies included conventional measures of monetary and fiscal nature. Fiscal spending was intended to be reduced drastically together with privatization of enterprises and introduction of a free floating exchange rate in the country. Among the suggested issue that were implemented include resuming the 1988 debt service payments for public debt which had been defaulted for long. All these policies partly contributed to the crisis by causing another hyperinflation towards end of 1990 (Setser&Gelpern, 2006). The most severe country risk is takeovers. Governments can take over the management of private companies if they are at risk of collapsing. The private investors therefore end up losing their businesses. Government influences led to the closure of Coca-Cola HBC Company and the Burger king business. The Coca-Cola Hellenic Company closed down its operations in the in some of its operating regions in order to reorganize its operations due to the increasing costs that it incurred.However, companies can reduce the exposure to government takeovers by acquiring insurance covers over their business. This ensures compensation and revival for the sinking companies and avoids takeovers. Borrowing form the domestic banks ensures that country-boundaries growth is maintained and the government revenue is boosted. The companies can also display social interests by employing nationals since laws on labor in Argentina are more favorable. Economic sectors Because of the instability of the government, corruption in its operations and the country risks that it is exposed to, investing in the country is more risky than expected benefits. However, with insurance cover and other exposure control measures, investing is projected to be beneficial. The need to encourage foreign investment required that they maintain a close range of their currency and that of other countries or currencies that the dollar had control over. With a free financial sector of non-government intervention, capital markets were less conservative and banks could borrow abroad and lend domestically. This is the reason why Brazilian crisis was a major hit on the Argentina economy. Governments imposed high interest rates in order to thwart speculators and attract more foreign investors. This led to slow economic growth and people were more attracted to securities bearing interests than equities. More investors flee to invest in the local markets with equity falling with almost $ 700 billion. Stock prices fell and the effect extended to other stock markets in the world. The falling currency values with increasing interest rates affected the business sector in local Argentina and their supplies of trade credit loans for funding was also growing. This in turn increased the rate of unemployment (Jochnick& Preston, 2009). Leadership Argentina was under dictatorship of the military which took over command since back in 1976 and the debt increased to 8 billion dollars. The military left by 1983 from the nations authorities after seven years control. Public debt had increased by this time to 45 billion dollars. The debt is also believed to have been accelerated during the Carlos Menem regime since 1989 where debt accumulation increased. His election was based on the high inflation rates that caused instability in the economy and extensive social discontent. Policies implemented by the president were of no good to solve the situation despite a previously promised system of policies and therefore was opposed. During this period, between 1989 and 1990, office of the minister for economics had already had two ministers who were both unable to restore the economic disturbances (Edwards, 2010). Government spending is one of the causes of the Argentine crisis. The government displayed extravagance in spending, recording budget deficits since after the 1960 to 1973 era. 1974 to 1980 period recorded tolerable deficits of less than 3% Gross Domestic Product. The tolerable era was followed by an era of unsound budget deficits from 1981 to date and a projection of the next two years indicates a more than 3% deficit of the GDP. The economic downturn as a result of excess spending extended causing the capital market to freeze (Setser&Gelpern, 2006). Government tax prevarication and corruption is another problem that the Argentina economy faced. Setting taxes below expected levels in the recent decades has stimulated the current crisis. The costs of avoiding tax in 1970s were estimated at more than twenty billion annually. The country also has a history of misreporting the official statistics of the country’s economy. External shocks Shocks from other countries which experienced financial crisis also contributed to the financial crisis such as Asian countries, Brazil, Russia. According to Ocampo&Ros (2011), although Argentina survived the financial crisis experienced by Mexico and partly Asia, the financial crisis in Brazil was a major hit for the economy that its fixed exchange rate system could not sustain due to pressures caused by overvaluation of currency. The recession that developed worsened resulting inflation. The United States played a role in Argentina’s debt crisis from its increasing interest rates. As a result of the shocks, public sector borrowing became expensive as a result of escalating costs. More people and institutions also avoided and withdrew capital as the system untied.in December the same year, historical shares collapsed economically due to external shocks and the unreliable macroeconomic strategies. Financial crisis in Greece and the whole of Asia rubbed off on Argentina and contributed to its debt crisis. Greece crisis was linked to corruption since the government paid banks such as the Goldman Sachs bank millions to conceal the country’s borrowing levels since 2001. This was discovered after nine years, in 2010. The Yen and dollar cross currency swap of Greece currency was the most noted where faulty exchange rates were used by Goldman Sachs bank. Other countries Asia as a continent has also experienced financial crisis in the 1980s. The financial crisis started in Thailand in the year 1997, which later on spread to other states and internationally. Since 1985 to 1996, the country had positive growth with reasonable levels of inflation. Thai baht was affected by speculative issues in 1997 in the financial crisis. The government finally allowed floating of its currency for the market determined its value. The economy recovered in 2001. South Korean banks had idle-loans and its companies had threatening ventures. South Koreans formed conglomerates which failed to realize returns enough to offset loans. Absorbing more capital led to excess debts and therefore failures and conquests. Lowering credit rating resulted to more loss of value and downturn on stocks. Its debt against GDP doubled as a result of the crisis. Indonesian companies were borrowing from the U.S. The rupiah had increased value against the Dollar at that time. The authorities expanded its trading band after the Thailand crisis to 12%. In August, the crisis also hit Indonesia. Free floating approach was put in place and the rupiah dropped further (Ito and Andrew, 2006). Philippines responded to the crisis by increasing interest rates through the central bank. This further dropped Peso value. Malaysia on the other hand was also performing well before the crisis. The Thailand crisis affected its economic performance in 1997 but later recovered in the year 2005.Singapore was subjected to recession as a result of the crisis and the government took over general management of the economy. There were no direct interventions to correct the failures but in less than a year, Singapore re-stabilized. China’s foreign investment included factories other than securities. This saved it from adverse effect of the crisis unlike Southeast Asia and South Korea. However, its GDP was affected as it fell in 1998-1999. Japan’s Consumers and nationals lost confidence in spending. Dot-com bubble, housing bubble and subprime mortgage were the most evident effects. Devaluation of currency and bankruptcy were other effects but not more than the long term changed relationship with the U.S. Asia macroeconomics elements were affected by the crisis. There were adverse fall in value of currency and effects on the stock market. South Korea experienced a 33.1% fall in GDP. Exchange rates against U.s dollar increased making Asian currencies cheap. Thai baht changed by 40.2%, rupiah 83.2% Peso of Philippine 37.4%, ringgit 39.0% and South Korean won changed by 34.1%. The Gross Net Product for Asian countries also dropped by 40% in Thailand and 83.4% in Indonesia. Philippines reduced by 37.3%, Malaysia 38.9% and South Korea 34.2% (Sachs, 2000). The recent Greek crisis draws its roots from previous years. Panaritis (2011) states that, Greece work up to the reality facing its economy in 2010 after experiencing rejection, bargain and dejection. The wars and conflicts that the country got involved in from 1912 all the way to the 1974 conflict between Cyprus and Turkey contributed to its current crisis. As governments were concentrating on the political aspects, the economy was neglected and kept on deteriorating. After the 1945 period of economic tragedy, and inadequate attention on the economic sector, the then poor government decided to sort alternative ways to recover its people’s lives. Welfare policies basing on salaries were implemented and workers’ salary adjustments effected. Some of Greece citizens however migrated to the U.S which affected the country’s Gross Domestic Product. In 1970s, the country’s annual growth rate shoot to 6% recording a success and recorded an 8% yearly growth with low inflation rates (Panaritis, 2011). Production also increased to almost 10% yearly. The 2009 Crisis is the recent one in Greece which led to risk of confidence on the part of investors. However, it is considered as a challenge to initiate new policies and economic turns. The severity extended to 2010 in the financial market, affecting bonds and suppressing the private capital market. Developing countries suffered the crisis since investors relaxed their lending to them. Price of oil also reduced to very low levels in 1998 affecting oil exporters like the OPEC countries. The Russian financial crisis resulted from the low oil prices and the collapse of the U.S capital management. Brazil and Argentina suffered a financial crisis in 1990 as a result. History of Argentina crisis The debt crisis of Argentina traces is linked with the 2001economic recession and stagnation. According to Cibils and Vuolo (2010), the economic bang just reached its peak from the initial process that began in the 1970s. After all those decades, IMF still concludes that Argentina’s inability to minimize its debts was the main cause of the debt crisis. Argentina government provides risk assessment and management as a legal obligation for organizations conducting outdoor activities. According to Barrow (2000), risk assessment and crisis management is of growing importance to all kinds of businesses. Changes in business environment affect the profits and asset ownership of a country leading to country risk. For this reason, investors shy away from investing in the country. Reforms Although Argentina was affected by the crisis, the hyperinflation faced in the late 1980 to early 1990 led to structural reforms in certain areas of the political and economic sectors of the country in 1990s which has set the country to constant growth. IMF has served as the solution to the crisis that has revived the economy in Argentina and the whole of Latin American countries to the recovery period. Through the IMF packages and strategies, the Argentina as a country has been able to overcome the financial crisis and re stabilized the financial sectors together with its economy (Pettis, 2001). Conclusion Financial crisis can be avoided if viable measures are put in place. IMF serves as the bull dozer for the nations suffering financial crisis by developing strategies to revive them. Many countries learn from the financial crisis experienced by Argentina and as a result, they have developed strategies like building reserves for foreign exchange to avoid depletion of the reserves in such a situation. Introduction of Swaps among continents is also a strategy in case of any such crisis. A country’s financial crisis exposes businesses to financial, political and economic risks that if not controlled can lead to liquidation. Banks and financial institutions in Argentina contributed to the crisis and also became victims of the same. The risk of these companies being taken over by the government or alteration of its operations as a result of government interference is the most severe risk. However, the exposures can be controlled. Investors need to study the risks in a given country to determine viability to invest. List of References Barrow, C 2000, 8 Risk assessment and crisis management. Accessed on October 10, 2013 from Davies, H 2010, The financial crisis: Who is to blame? Cambridge, UK: Polity Press Ocampo, J. A., &Ros, J 2011, The Oxford handbook of Latin American economics, Oxford University Press, Oxford. Pettis, M 2001, The Volatility Machine: Emerging Economies and the Threat of Financial Collapse. Oxford University Press, Oxford. Sachs, J., Schwab, K., & Woo, W 2000, The Asian financial crisis: Lessons for a resilient Asia., Mass. MIT Press, Cambridge. World Bank, Asian Development Bank Press and News Releases, 1998,.International Monetary Fund.The IMF’s Response to the Asian Crisis. Wall Street Journal, Accessed on October 10, 2013 from . Panaritis, 2011, The historical roots of Greece’s Debt crisis.The globalist. Accessed on October 10, 2013 from Cibils, A and Vuolo R. O 2010, At Debt’s Door: What Can We Learn from Argentina’s Recent Debt Crisis and Restructuring? Wordpress. Retrieved from: http://greekleftreview.wordpress.com/2010/07/14/at-debt%E2%80%99s-door/ Bulmer-Thomas, V 2003, The Economic History of Latin America since Independence, Second edition, Cambridge University Press, Cambridge, UK. Edwards, S 2010, Left Behind. Latin America and the False Promise of Populism, Chicago University Press, Chicago. Setser, B and Gelpern, A 2006, Pathways through Financial Crisis: Argentina. Lynne Rienner publishers. Accessed on October 10, 2013 from Naya, S., Urrutia, M. M., & Mark, S 1989, Lessons in development: A comparative study of Asia and Latin America. International Center for Economic Growth, San Fransisco, Calif. Reinert, K. A., &Reinert, K. A 2012, An introduction to international economics: New perspectives on the world economy, Cambridge University Press, New York. Jochnick, C and. Preston, F. A 2009, Chapter 11: Foreign Debt and Financial Crises, Routledge. New York, Accessed on October 10, 2013 from Read More