The Fiscal Mismanagement and Fixed Exchange rate were the cause of Argentina 2001 Crisis
Summary: Argentina’s economy verge to a state of collapse in the year of 2001, but the economy started to struggle with an economic recession in 1997. The fiscal mismanagement paired with the fixed exchange rate policy conducted the country to a financial crisis. IMF policies in lending to a country with struggling economy made people think if IMF was the responsible for the default crisis that affected Argentina in 2001.
Public Deficit – The Major “devil”
As economic reforms were happening in Argentina, the country started to face large capital inflows, as it was able to borrow large capital ...view middle of the document...
The Convertibility regime – The second “devil”
Argentina Peso was fixed at 1-to-1 to US dollar, and it helped to improve macroeconomic stability before 1998. However, when Brazil currency faced depreciation and US dollar faced an appreciation among other major currencies, the Argentina currency was overvalued and the country lost competitiveness.
The IMF Role and Banking runs
Argentina currency board gained credibility when passed the Tequila Effect in 1995 and for this reason IMF considered supporting Argentina and the convertibility plan. For this reason IMF was a target of many critics. It also supported a contractionary fiscal policy during the recession period which ended up slowing the economy. So, the basic mistake of IMF was to keep supporting the Argentina economy despite its weakness. What happened when the investors lost confidence in the country is that the banking runs started. People
were running to withdrawal their capitals causing a liquidity issue in the banking system.
Argentina fiscal policy could have been more sustainable if the...