The paper discussed the reasons of the balance of payments crisis in Argentina in 2001-2002. Various external and internal factors are analyzed and estimated. There is a discussion of the government’s actions during the crisis. The role of the IMF is discussed.
Buildings with elegant ornaments and wide Buenos Aires boulevards is an evident proof confirming that the Argentine’s economy was once flourishing. As many consider, this was happening, among other factors, due to agricultural export. In 1913 Argentina was among ten of the wealthiest countries in the world. In 1998 it degraded to the 36th place in world ranking. 132 billion of Argentina’s external debt was one seventh of the total amount debt amount of developing states in 2001. Since 1983 the IMF has nine times granted this country credits to avoid financial disaster. What was the reason for this striking decline? It is considered, that the reason for this lies in excessive expenditures on national and local levels in condition of economic decline. This means excessive spending of a “welfare state” and excessive wages in state sector. High levels of corruption play their important role as well. 
As a result of these developments state borrowing went out of control. Argentina was not able to meet the goals stated in the program coordinated with the IMF.
Although the national currency, peso, was tied to the US dollar, which restrains inflation, financial system was not flexible enough. It would’ve been wrong to devaluate peso for export incentive and income increase. Thus, despite the price stability, strict measures of saving led to wages decline and fall in consumption.
Economical Causes of Crisis
This crisis was a sad result of an experiment aimed to stabilize and liberalize the economy, which was considered to one of the most successful. Indeed, it would be a rough simplification to blame the currency board established in 1991. It has played a positive role and this fact is impossible to deny. In just a few months of 1992 it managed to gain control over hyperinflation bringing the rate of price growth from over 5000% annually to less than 10%.
Then, there were other liberalization measures: import tariffs were lowered; government regulation was relaxed; state-owned enterprises were privatized, entry barriers to international companies were lowered. It seems to be a miracle, yet, tightening peso to dollar didn’t lead to decline in manufacturing. On the contrary, growth of production constituted over 65% in the 8-year period (which is over 5% annually). 
Peso being tied to dollar has stabilized the currency, which had positive impact on the economy. Yet, there’s reverse to the medal. Since the mid 90’s dollar was growing against other world currencies and because of that the competitive ability of Argentine economy was falling. Moreover, Argentina found itself in unequal situation with Brazil as it had real exchange rate tightened to the dollar but in a less strict manner. That is why Brazil has devaluated real in 1999 with less serious consequences. Brazil’s devaluation was considerable blow at Argentine economy – especially at internationally competing industries such as agricultural. 
Besides, contradictory macroeconomic policy played its part. Strict anti-inflationary measures were not accompanied by adequate fiscal reforms. Argentine economy has for too many years suffered chronic fiscal crisis caused by drawbacks in tax structure. It is too complicated on one hand and has many loopholes on the other. These peculiarities caused uneven tax burden and allowed for some industries to accumulate considerable tax debt. Deviation from debt only on VAT amounted to about 40%. 
Another problem typical to all developing economies and undermining liberal reforms was corruption. It revealed itself in virtually all spheres of economy and become the most prominent in course of privatization. Powerful influential groups didn’t allow the government to effectively control government spending. There also was budgetary crisis: by year 2001 regional budgets owed banks under $10 billion and demanded the central government additional transactions. Inability to deal with corruption caused resignation of Domingo Cavallo – the father of Argentine reforms.
As the central government was completely deprived of inflationary budget financing sources and the state finance systems remained weak, budget deficit and public debt extension were inevitable. For instance, budget deficit estimated 2.8% of GNP in 2001. In absolute figures, the amount of state debt by 2001 was about $142 billion and debt burden per head was at the level of $4,000. Current debt payments were high as well – by the end of 1990’s they amounted to about $5 billion annually.
The role of Argentine financial system openness and peso tightening is dubious. The presence of international banks resulted in lower levels of risk to international liquidity crises. Bank supervision measures were positive. Reformation of financial system allowed the private sector to borrow in peso as well as in dollar. More favorable conditions for borrowing increased consumption and promoted domestic demand. On the other hand, in case of peso devaluation, accumulation of dollar indebtedness would force a considerable number of households and enterprises to bankruptcy.
Due to high level of integration into international economy Argentina has seriously suffered from universal recession of 2001. These tendencies were redoubled by restrictive measures in monetary and fiscal policies, which were introduce in accordance with the IMF instructions. Argentina tried to follow these instructions as long as it could.
Development of the Crisis
As the crisis broke out it become evident that it is just the right time to carry out reforms that were postponed for the last ten years. During just one day Argentineans, while being worried by economic problems, have withdrawn from their accounts over two billion dollars. The first move of the government designed to prevent disaster was a limitation on usage of personal bank accounts. It was decided, that people would be allowed to withdraw $800 monthly at most. This move has risen a wave of protest over the whole country. The government has promised that it will relax these limitations gradually, yet, the Argentina Supreme Court has declared it to be invalid. The next step was to declare a final transition of the economy to transactions in national currency. This was the government’s method to convert almost $45 billion that were accumulated on bank accounts into peso. Moreover, it was announced, that the exchange rate of peso would from now on float against dollar freely. 
It is obvious that banks were the main victims of these reforms. The point is that all loans denominated in dollars were converted into peso at one-to-one exchange rate. Some other assets were converted at 1 to 1,4 rate – these were the money on savings accounts. Therefore, Argentineans who had borrowed money from banks won in the long run, and those who were keeping their money in banks lost their money. Worth mentioning, that banking sector in Argentina is mainly owned by foreign capital. 
Immediate Consequences of the Crisis
It is obvious that the people reacted to these reforms in a negative way. Especially since in the run of few weeks all savings accounts were blocked and people could not withdraw their money. It was explained, that there were no peso tightened to dollar left. The total amount of peso in Argentine banks amounted to 23 billion, while the total amount of deposits – 45 billion. Government has acknowledged that it mistreated its people, however it is explained not be a desire to rob the people, but as a result of inability to deal with the crisis, which has already been officially acknowledged as being the deepest in the past 100 years. 
Along with the decision concerning the national currency, the government has published details of the budget designed with a view to acquire $20 billion from the IMF. The IMF has suspended the payments a year before that. Budget deficit that year summed up to $10 billion. As a measure of dealing with it, it was declared that state expenditure would be decreased by $3,5 billion.
Eduardo Duhalde, the president of the time has also announced, that he would stay in his position until September 14 2003, despite growing complaints (80% of the population did not approve of the government’s policy). Apprehending rushing demand for the foreign currency, Argentine government, after announcing of new financial policy, has closed the banks and different currency exchange facilities for a week. After that week has passed, peso was freely traded for the first time for the last ten years. Despite the skeptical prognoses peso managed to hold its positions against dollar. In the first day of free exchange the exchange rate settled up at the level of 2,15 peso for one dollar. 
This exchange rate was close to that established before the beginning bank recess. However, national stock exchange has lost 10% of capitalization and no one could give dependable prognosis concerning the future development of the exchange rate. The price of peso – 2,15 for a dollar, was not a good result as well, as in the past month before the described events peso has devaluated 54%.
There was a long-lasting debate between the Argentine government and the IFM on possible ways of overcoming crisis. Generally speaking, there was almost complete consent on the essence of measures. The debated issue was the sequence of actions. The government was insisting on receiving loans first and then proceeding to reforms. The IMF required everything to be just the opposite way. 
The efficiency of immediate measures taken by the government is debatable. However, the capacity of the government to act needs attention as well. The political situation that arose in Argentina the wave of protests was constraining government’s moves. The fact, that in just a few weeks Buenos Aires has seen 5 different presidents turns down any questions about what could the government do. The measures is has taken seem to be the only possible ones in the situation. 
The Role of the IMF
The role of the IMF in the crisis should not be underestimated. In 2004 it has acknowledged that it failed to recognize the oncoming disaster despite the presence of many indications. The IMF has incorrectly estimated growth of Argentine economy in 1990’s. This led to euphoria concerning tax system reforms. The Fund’s forecast was too optimistic. Specialists of the IMF consider, that the scope of disaster could have been smaller if Argentina has restructured its debt earlier in a timely manner. Worth pointing out, that the crisis broke out shortly after the IMF has suspended its financial help to Argentina, which was previously totally agreed upon. Presently, Argentine government can pay out $0,25 for each dollar of debt defaulted in 2002. International creditors insist on at least $0,65 for each dollar. 
The Argentine crisis of 2001-2002 is not a history yet and debate over its reasons and consequences is heated. It would be misleading to accuse solely the government or the IMF or anyone else in this crisis. It was the last one in the series of crises, which hit pound sterling and Italian lira, Mexican peso and Thai bath. So far it is the last crisis of such scope. Whatever the case, it would take many years to learn of the real substance of the matter.
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