Argentina economic crisis introduction

Argentina is a well-known tourist hotspot which attracts thousands of visitors from all over the world. Beautiful landscape combined with the extreme biodiversity makes the country a very desirable destination for holidays, relaxation or adventure. Argentina is the eighth largest country in the world and the second largest in Latin America.

Covering an area of 2,776,890 sq km, with a population of over 40 million inhabitants this country stands firm as one of the most prospective emerging markets. But ten years ago, Argentina shook the investor's confidence with a national debt default and an unprecedented economic crisis. To fully understand the foundations on which the crisis developed, we need to look in the 1970s.

In that period the National Reorganization Process occurred from 1976 until 1983, amassing a huge national debt. The money gathered on the international markets was unwisely spent in numerous dubious projects and the nationalization of private debts. The Falklands War also took a tremendous toll on the unstable economy at the time, further increasing the national debt.

The austral collapse and hyperinflation control
In 1983, the election of President Raúl Alfonsín restored democracy in the country. His government planned to stabilize economy with the creation of a new currency called the austral. But the plan had many basic faults, since the currency didn't change the poor economical structure. When Argentina became unable to pay the interest of national debt consequently the confidence in the austral currency collapsed.

Inflation that was previously held between 10 to 20% a month spiraled out of control reaching in July 1989 levels over 200%. Living conditions decreased significantly, massive protests began nationwide and inflation topped at 5,000% for the year. As a response to hyperinflation, government fixed the value of Argentine currency at 10,000 per United States dollar. To boost the effect, another measure was taken so citizens could go to a bank and convert any amount of domestic currency to dollars.

Following advice from the International Monetary Fund, later political decisions lead to a law which restored the peso instead of austral, keeping the value fixed at one dollar equaling one peso and both currencies easily convertible. The convertibility law resulted with a sharp drop in inflation, restored price stability and preserved the value of the national currency.

In essence, investor confidence was obtained at the expense of the monetary policy. New conditions affected the quality of life since common people could afford travels, expensive imported goods and request loans in dollars at very low interest rates. During the 1990's Argentina was considered a success in developing its economy. With the low inflation rates and fast growing economy foreign investors poured billions of dollars into the country. All was well until the bill for the international debts was delivered, triggering the Argentine economic crisis in 2001.

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