I would like to discuss the problems which Argentina is facing now, and explore some ways out, if any. Remeber that, as Paul Krugman says, it only takes a big country´s or corporation default to shake the financial system to it´s roots.

By Adrian Ilie on Friday, May 25, 2001 - 09:24 am:

Argentina's way out is to keep the currency board as it is and to avoid measures that threaten the credibility of their commitment.

By carlos leon on Friday, May 25, 2001 - 02:21 pm:

But, if you keep the currency board as it is, and the Competitive Plan proposed by Cavallo doesnt work quick, the you will keep depression economics on the way. I know dismantling the Currency Board is really troublesome, specially because of the huge foreign debt/PIB (above 50%), and because the turbulence it would cause to all developing markets, but recession is not an easy option either.
If capital doesnt flow quick into Argentina, the monetary policy will constantly undermine growth, and credibility and confidence will be lost anyway... worsening it all.

By Javier Finkman on Sunday, June 3, 2001 - 08:36 pm:

Some common sense to the discussion. Argentine debt/GDP ratio (52% on a consolidated basis) is far from being a large one. The main problem of Argentina is its large degree of dollarised liabilities (a back of the envelope calculation takes you to US$ 200bn) therefore rendering a devaluation out of the question (for those who propose the Brazilian solution). Anyway, whatever improves your "flows" (trade, FDI) worsens your "stocks" (solvency ratios). The closest to a catch 22 I have ever seen.

By carlos leon on Monday, June 4, 2001 - 01:32 pm:

I agree with you Mr. Finkman. The liabilities dollarization makes an exchange rate adjustment so costly, that it is merely unthinkable. But... we have to keep in mind that no overvaluation that high (in a an emerging market) has ended happily (without an adjustment). Moreover, developed countries, as UK/1992, were not able to mantain pegs without hurting employment, growth and competitiviness, and finally adjusting exchange rates. Argentina is quite different, it is not just a peg, it´s a currency board, but some fundamentals are so worrying that it seems more and more like UK -and even Argentina- before abandoning Gold Standard in 1930´s!!. So, I dont see devaluation as a solution, but what else is in hand? Next time I tell you what is in hand, and is the same solution Keynes found for the UK in the 1930´s!!!

By Fundamentals matter on Tuesday, July 10, 2001 - 01:21 pm:

Doesn't matter what the debt-GDP ratio is; Argentina can't finance the existing debt. That's called a debt-default.

By carlos leon on Friday, January 11, 2002 - 09:58 am:

It is not pleasent to say it, but.... I told you so.

No fixed rate regime which causes great currency over-valuation has escaped from being adjusted; the adjustment can be done on time, without great crises, or alas Argentina or México.... with crises, bailing out, loss of confidence.....

A country without competitiveness can NOT get
the foreign exchange enough to meet its external obligations. Moreover when the debt is so high and when the currency system is a straight-jacket which condemns the central bank to restrain money supply in time of recession.

It is not the first time something like this happens. It´s time for taking into account experience in order to avoid repeating mistakes. In this case, big mistakes.

By mar on Tuesday, February 12, 2002 - 11:02 am:

I looking for some information about how the currency board worked in Argentina (1991-2002) and why it failed

By nelson on Sunday, February 17, 2002 - 02:02 am:

I fully agree with C. Leon.
The main lesson from the Argentine's currency board failure is that pegging the exchange rate it's far from being an optimun policy. And this is true even if you have a dollarized liabilities financial system (so, I completely desagree with my friend Finkman). The difference with Mexico and other countries with minor or null degree of dollarized financial system is the traumatic cost of exiting from the peg.
But dollarized or not, a country that faced a huge negative external shock must change its real exchange rate. This correction can be done by devaluation or by deflation. In the long run the result is the same: a debt-deflation process which negatively affects aggregate supply, as Fisher put it clearly in the 1930s.
So, mar, my answer to your question is that Argentine's currency board failed for the same reason that almost every fixed exchange regime usually fails: it's inability to cope with high external negative shocks.
Another minor secondary reasons can be added. For example, the overconfidence than someones have in the stupid assertion that international reserves can buy all currency notes. It's stupid because in a dollarized liabilities financial system, international reserves not only backup domestic currency notes, but dollarized deposits aswell. That's the second lesson from recent Argentine experience.

By R Loring on Wednesday, February 20, 2002 - 09:35 am:

Nice posting Nelson. Fully agree. Here is the ilogic logic of the board currency: Because our policy is so reckless and our goverment is untrustworthy lets give our monetray policy to a foreign national bank -the FED- wich targets on US inflation and US growth.
This can work for a while and it was succesfull stopping inflation but sooner or later the monetary policy you are obliged to follow will be contrary to the one you need.
The same job that the currency board did can be done by an independent national bank who targets on inflation objective.
I think this is accepted by most economists and supported by mainstream economic theory. But, why then IMF and its economists supported the board currency until the very end?.

By carlos leon on Wednesday, March 27, 2002 - 10:16 am:

Answering to R Loring, the IMF supported the currency board for a long time, making Argentina one of the biggest IMF loans recipient.

The reason? At the beginning of the 1990´s Argentina was the most succesful case of open markets and sound money (Washington Consensus). IMF wanted every country to watch Argentina´s success against inflation, and it´s new and strong access to international capital markets. Argentina, leaded by Cavallo, was the best pupil IMF policies could have.

IMF continued its support until they had a "good reason" to stop. When Argentina announced the draconic capital controls (against open markets), IMF had the perfect excuse. It´s no coincidence why they left Argentina alone in december/2001.

Unfortunately, due to many reasons, well summarized by Nelson, or Stiglitz, or Krugman, the stabilization program is exactly that: for stabilization. Not to run a decade long.

By carlos leon on Wednesday, March 27, 2002 - 10:22 am:

I forgot something. Has someone given a thought to what the Argentina´s external debt/GDP will be?

If the exchange rate has reached 4$/U$......

Just imagine that the exchange rate closes 2002 at 2$/U$... if the consolidated debt/GDP was over 50% at the middle of 2001.......

By bob benston on Tuesday, May 7, 2002 - 12:30 am:

one quick question that im not totally clear on...if argentina does declare default on there some 132 billion dollar debt...does that mean they are never goign to pay it back or does that mean they just are not goign to pay back the loan for a while...thanx

By R Loring on Wednesday, May 22, 2002 - 10:47 am:

It means the second thing. Argentina has suspended the payment of private debt for the moment. In some years when the situation has improved and the recovery has started, Argentina will probably meet his private creditors under the auspices of IMF, to renegonciate the debt payment(some of the payment will surely have to be forgiven). Why Argentina will be willing to pay something(or part) is refusing to pay now?, To regain access to international capital.

What if....

If sooner(early in 2001 or even August when Argentina's situation was quite desperate) default would had been done acompanied by floating exchange rate , and the money wasted to defend the peg woul had been used to avoid the collapse of the banking system we could be talking of a crisis like in Asia or Mexico some years ago. A crsis taht will pass in one or two years, but instead what Argentina faces now in caos. And it will take many more than a year to recover.

Now what...

Policy now passes through avoiding hyperinflation of three digits and try to get international help to put to operate the banking system again.

By RLoring on Monday, May 27, 2002 - 04:50 am:

I will also like to add something not yet said about the causes of Argentina's default, maybe because is so evident. It's true that the currency peg was one of the main causes but at the end every default is cause by the deficits runned by the goverment and the impossibility to pay . The budget system of Argentina where public spending by its provinces is not restreind by law or any budgetary process is in the root of the problem.