The cries of Argentina

Timothy Schmidt

The cries of Argentina
By Tim SchmidtThe people of Argentina are currently in the middle of a economic crisis that has far-reaching implications. In only two weeks, five men have been president of the South American nation. But the economic hole that Argentina has fallen into is the result of economic problems that have beset the country for years.
In an effort to bring down massive hyperinflation, economy minister Domingo Cavallo pegged the Argentine peso to the dollar on a one-to-one ratio in 1991. The central bank vowed to back the currency and the “hard peg” stuck. With investors both foreign and domestic now reassured about the stability of the currency, foreign investment flowed into the country. While other nations were in an economic slump, Argentina flourished through the mid-1990s.
But behind the rosy exterior the real problems of the Argentinian economy were left unsolved. The government owed $140 billion dollars to bondholders, a figure ten times the nation’s gross domestic product. In the early 90s, the government also continued to run up deficits, increasing the debt significantly. The International Monetary Fund (IMF) bailed the country out time and time again, but the government did little to fix underlying problems.
Other Latin American countries started to devalue their currencies in the late 1990s, most notably Brazil. With the worth of the Argentine peso rising in comparison to Argentina’s main trading partners, it became harder for domestic industries to compete with foreign industries whose products were much cheaper. The dollar also grew stronger in this time, pulling the peso with it.
Soon, Argentina was mired in a recession, with unemployment high and money hard to come by. The IMF continued to push for fiscal reforms, as well. In previous years this might have been possible, with the economy running strong. With an economy deep in a recession, though, the “austerity measures” simply worsened the state of the Argentine economy.
The house of cards came tumbling down when the IMF refused to grant another loan to the beleagured country on Dec. 5, 2001. Argentine citizens, fearing the worst, ran to withdraw their savings from the banks. The government transformed pension funds into government bonds in a desperate attempt to prop up the system, to no avail. Riots began in the streets of Buenos Aires, killing 28 people, and a state of emergency was declared by the government. President de la Rua resigned, followed in quick succession by three other presidents.
The newest president, Eduardo Duhalde, has promptly defaulted on all of Argentina’s debt (the largest in world history) and devalued the peso by 29 percent.
The citizens of Argentina now face an uncertain future. Every day 2,000 of Argentina’s 37 million people slip below the poverty line, according to **************The Economist****************. The country’s output continues to shrink, and a global economic slowdown leaves little hope for the future.
With economies as interconnected as they are today, however, few wish to see Argentina come undone politically and economically. Many observers expect to see the IMF and other nations help Argentina however they can. But first Argentina must become fiscally responsible.