Wall Street, the IMF, and the Bankrupting of Argentina
At the outset of the 20th century, Argentina was one of the wealthiest nations in the world and appeared to be on the right path to lasting prosperity. However, as it usually happens with things that are “too good, too fast,” the nation seemed to be so overwhelmed with its momentary success, that in the end wasted its chances to achieve a beautiful future. It all started in 1991, when, after the nation experienced many years of hyperinﬂation and poor monetary performance, a new Economy Minister – Cavallo was appointed. He embraced a radical framework to impose a fiscal discipline on the country; his system fixed the exchange rate: 1 Argentine peso = 1 U.S. dollar. Many people disagreed that such a step is wise. Nonetheless, in spite of many cynics, this convertibility framework succeeded to tame Argentina’s hyperinﬂation and to set up the financial establishment for future economic prosperity.
In the meantime, the Argentine government focused on other problem areas as well. They removed trade barriers, deregulated industry, privatized government companies and did everything they could do to make the market stronger. Despite a few issues with corruption in the privatization program, in general, the new “order” appeared to work magnificently. Cavallo quickly became a national legend. In 1997, the IMF gave its approval to Argentina by setting up a “precautionary” program to give the country crisis monies if necessary. In any case, Argentina was just starting its road of success, and nobody thought that it could ever require these emergency funds.
Allured by its booming market, investors continued to buy Argentina’s bonds. However, their interest and investments indebted the country more than it was recommended. Very soon the country’s debt – to GDP ratio climbed beyond frugal levels. The IMF warned the state that a market crash might be on the way, but this warning was quickly brushed aside. Overnight, just as the IMF suspected, things got out of hand.
The rise and the fall of Argentina’s bubble is a product of irresponsible governing and inexcusable greed, and let to the unexplainable anguish that reached the whole world. People starved, kids died, families lost everything as the economy broke down. The way that a darling of the worldwide capital markets could reach such a despicable end fuels the anti-globalization movement. The Argentine financial collapse had adverse outcomes for the population of Argentina and moreover – for the world.
Who is this book for
This book is a delightful presentation of the rise and the fall of Argentina’s market. First, it shows the way the country succeeded in overcoming decades of financial troubles and started moving towards economic growth. Moreover, it explains the way the nation sunk into financial chaos, bigger than ever before. Author Blustein is not “objectively” telling the story. On the contrary, he argues that brokerage companies and international banks are the main culprits in destroying Argentina’s economy. Furthermore, he does not cast a light on what happened to all the money that flowed into the country during its booming years. On the other hand, he presents us his expert opinion about the dark side of globalization and underlines some current problems in the international financial system. We recommend this book to anyone that is interested in economics and global finance.
Author’s expertise and short biography
Paul Blustein has written about economic and business topics for more than 20 years. He is a writer at The Washington Post and has authored The Chastening: Inside the crisis that rocked the global financial system and humbled the IMF.
Key Lessons from
1. The Argentine Recession
2. The Beginning of the End
3. The Fall
The Argentine Recession
In 1999, Brazil devalued its currency, and therefore hastened the crisis. Since Brazil was an important export market for Argentina, the devaluation increased Argentina’s export costs. Consequently, as one could anticipate, Argentina’s exports decreased. In the meantime, global commodity prices were declining as well, cutting Argentina’s profit from wheat and other horticultural products. Finally, investors started to stress over Argentina’s capacity to service its debts. Argentina got itself caught in an endless loop. The recession prompted greater budget deﬁcits, which, accordingly, prompted more market sketchiness. These events drove the markets to request higher interest rates on Argentine securities, thus prompting a much more profound recession.
The Beginning of the End
In December 2000, the International Monetary Fund gave consent to give a loan to Argentina. The loan’s worth was $14 billion and was supposed to provide the administration with some breathing space to deal with its difﬁcult issues. Experts scrutinized Argentina’s fiscal discipline, and fret that regardless of the possibility that it stayed on the course of budgetary control, it would not have the ability to develop economically and to improve its debt to-GDP proportions. Of course, their worries came true. Soon, everybody realized that Argentina’s economic situation was unsustainable. It had taken more loans than it could repay. The Argentine economy kept on declining.
The Argentine story continued developing as a tragedy. By late 2001, the circumstances were critical to the point that international investors suggested that Argentina should start restructuring its debts. Adequately, they were requesting that Argentina paid them less of what it owed. The Argentine government reacted with a plan of debt-restructuring, that would cut Argentina’s interest installments by $4 billion every year. Rating agencies replied by minimizing Argentina’s bond rating. Instantly, everyone started going to the banks, trying to take out their money, before the banking system collapsed.
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