Argentina economic crisis summary

In 1991, the government pegged the peso to the United States dollar to restore confidence and in an effort to combat hyperinflation. With world economic conditions prosperous, stability returned to the national economy as the strong growth continued.

For the next three years, Argentina's economic output expanded by an average of 7.7% a year. At the same time the country attracted large foreign investments which attracted further cash. With abundance of money available, government spending reached higher levels as a consequence contributing to the development of corruption in the society.

Large amounts of money evaporated from the system following massive tax evasion and money laundering with offshore banks. National public debt grew enormously during the 1990s, but no one seemed to be worried while the International Monetary Fund kept lending money and postponing Argentina payment schedules. The problem was also growing with each new loan, because linking the peso to the dollar created a situation in which Argentina adopted a currency whose exchange rate bore little relation to their own economic conditions.

In time the country suffered the disadvantages of such a fixed peg, especially when the Brazilian real plummeted in 1999. National currency was unable to follow suit, which left Argentine exports far more expensive than those of its biggest trade partner. Furthermore, a decline in world farm products prices and the global economic slowdown compounded country problems. Newly created conditions of a lower export levels suddenly limited the national ability to earn the foreign currency needed to repay dollar-denominated debts.

The national debt crisis
During the last week of 2001, Argentina was no longer able to meet the national debt payments that came to light. A government led by Rodríguez Saá thus declared a default on the larger part of the public debt, in total of more than $132 billion. People began to fear the worst and started withdrawing large amounts of money from their bank accounts, simultaneously turning pesos into dollars. Most of the money withdrawn was sent abroad, while many more bank runs took place in homeland.

Argentina lost the investor confidence completely as the flight of foreign funds away from the country increased greatly. The government responded with a set of measures that effectively froze all bank accounts for twelve months. Measures allowed a withdrawal of minor cash sums, initially just $ 250 a week. Not being able to use any of their life's savings, many Argentines became enraged and participated in street demonstrations, most notable in Buenos Aires.

A type of popular protests was known as cacerolazo, a simple loud gatherings of people banging pots and pans. A lack of solution to the crisis at hand eventually turned the protests violent and highly destructive. Several thousand newly homeless and jobless Argentines found work as cardboard collectors. Some estimates claim that between 30,000 to 40,000 people scavenged the streets for cardboard to make a living by selling it to recycling plants. The unemployment rate soared at nearly 25% and Argentina experienced a total economic meltdown.

Next: Argentina economic crisis aftermath