Domestic Bonds

The financial crises in Argentina analyzed through collective guilt — LA REVUE DES AFFAIRES INTERNATIONALES

In Argentina, the concepts of debt and crisis are etched on the skin of its recent past, causing the international financial crisis to present a set of unique characteristics intrinsic to the fiscal and monetary history of the country. Although the causes of economic disaster are, in part, the result of a country’s internal problems, it is essential to remember that in such a globalized and interconnected world, nation states and their economies are intrinsically linked. In other words, it is essential to examine the causes, consequences and impacts of an economic crisis in a country through the prism of collective guilt because the problems of a nation-state do not stop not at its borders; they turn into a domino effect that has international repercussions. This case study will examine Argentina’s financial situation and demonstrate how collective guilt provides a more concise understanding of why Argentina is going through a financial crisis today.

To understand Argentina’s current financial crisis, one must look at its history. For example, during the 1990s, Argentina outperformed nearly all South American countries in creating high per capita incomes, lowering unemployment, and controlling inflation. However, in 1998, Argentina’s hard currency peg to the US dollar, pro-cyclical fiscal policies, and massive foreign borrowing began to seriously shock its economy. On November 30, 2001, the Argentine peso suffered a massive devaluation, nearly all foreign accounts were frozen, and interest rates rose sharply overnight. Additionally, spreads between US Treasuries and Argentinian government bonds increased to 5,000 basis points. This spread increase is significant because the larger or “wider” the spread, the greater the interest rate credit risk of the government bond. The bank rush began – many customers withdrew their money from Argentinian banks because they thought the banks would stop working. On December 1, Economy Minister Domingo Cavallo froze all deposits, causing the collapse of the conversion plan that pegged the Argentine peso to the US dollar on a one-to-one basis. Four days later, the IMF announced that it would end its support because Argentina still did not meet the conditions attached to the rescue program agreed in September 2001. This decision caused Argentina to lose its last source of foreign capital, $22 billion, in 2001. by the end of the year, Argentina’s sovereign debt was $93 billion, its employment was 22.5%, and its poverty line was 57.5 %; in response, the president and most of his cabinet resigned. The 2001 financial disaster in that country was not only the result of Argentina’s economic mismanagement; it was a combination of disadvantaged relationships established by the United States, the harms of virtually imposed neoliberal policies, and the IMF’s nefarious decision to abandon Argentina when it was at its lowest.

Interestingly, Argentina handled the 2007-2008 global financial crisis and the Great Recession differently. After the collapse of the sub-prime mortgage market in the United States, Argentina immediately suffered economic repercussions. However, thanks to the evolution of banks’ business models in the domestic market, from 2003 to 2008 the Argentine economy performed well. The government recorded a budget surplus, reflecting strong growth in government revenue and public debt as a percentage of GDP. However, from 2008 to 2009, the balance turned into a deficit and the economy stopped growing.

In addition, the public debt ratio has destabilized, reflecting a short-term deterioration in the internal economic situation linked to policy distortions, starting with the fiscal accounts. Nonetheless, Argentina managed to somewhat survive the 2008 financial crisis by implementing economic policies that helped stabilize the country. In 2009, Argentine leaders adopted the Bicentenary Fund for Stability and Debt Reduction, to which was attached a second decree, the Argentine Debt Reduction Fund. These bills assured creditors that funds would be available for scheduled payments by setting aside international dollar reserves. Although the impact of the 2008 financial crisis was not a severe blow to the Argentine economy, this does not mean that Argentina did not experience problems such as shortage of meat, a drop in food exports and an increase in foreign debt of 81.8 billion dollars, 11.2 billion dollars. of which was owed to private investors. In this particular case, Argentina’s economic crash resulted from the global financial crisis and Argentina’s national debts.

Finally, the current debt and financial crisis started in 2018 and is one of the most pressing issues for the Argentine economy. The Argentinian currency crisis of 2018 led to a severe devaluation of the Argentinian peso, caused by high inflation and a sharp drop in the perceived value of the Argentinian peso locally, as it continuously lost purchasing power as well as other factors. national and international. In 2020, Argentina had a foreign debt of more than 323 billion dollars (274 billion euros), which several economists agreed that Argentina could not repay. Many of those billions are owed to the IMF and to bondholders, particularly in the United States. While Argentina received broad support from bondholders to restructure its external debt, the country struggled to emerge from its ninth default in history. The strategy of leaders like Finance Minister Martín Guzmán is to renegotiate debt with the IMF, seeking a $44 billion payment to win back acquiescence after imposing austerity measures that have relentlessly drained Argentine capital.

Meanwhile, in 2020, the economy has shrunk by 10% and businesses fear that the currently leftist government will hold power in the country. Argentina’s questionable current account balance is creating uncertainty and scaring off international investors who fear the government will default on their debt and continue to borrow from the IMF and repeat the mistakes of 2001. The inflation problem Argentina’s longstanding is another element of the crisis. The most recent figure is around 50.9% of annual inflation. It is one of the highest in the world, but not exceptional in the history of Argentina since, in the early 2000s, the inflation rate in Argentina reached more than 20%. Finally, the Central Bank raised the interest rate to around 60% in an attempt to control inflation and stabilize the peso. Once again, the financial crisis in Argentina is the result of Argentina’s disorderly monetary policies, the IMF’s ill-considered approaches to Argentina, and the impact of the global pandemic.

In summary, it is essential to look at crises and financial affairs holistically and to think about collective guilt when assessing the situation. Finger pointing is counterproductive, delays effective action and takes away the possibility of avoiding problems in the future. Entities like the IMF, the World Bank, and even members of government should look at predicaments and crises through collective guilt. In the case of Argentina’s most significant financial challenges, applying collective guilt to the analysis gave a fuller perspective of why the country went through or is going through that specific situation, and it highlights highlights some of the actions the government needs to improve, such as mitigating the effects of corruption and keeping more transparent and organized financial records to avoid difficult economic events in the future.