In Good Times Prepare for Crisis by Lieberman Ira;

Author:Lieberman, Ira;
Language: eng
Format: epub
Publisher: Brookings Institution Press

What Issues Led to Such a Deep-Seated Crisis?

As is usually the case, no one factor led to the crisis. In Argentina a series of factors contributed to the initial crisis and thereafter its deepening. These included, among others: (i) persistent budget deficits, in particular the consolidated budget deficit (when the provincial deficits were included with the federal deficit); (ii) excessive borrowing, even though the government generated large privatization revenues for several years preceding the crisis; (iii) turmoil and erratic or desperate policy decisions by government, especially as the crisis loomed; (iv) a decision to prolong pegging the exchange rate to the dollar and retain the Convertibility Plan, including the currency board, when more exchange rate flexibility was necessary; (v) the “corralito,” which bottled up the public’s savings and also the working capital of thousands of small family businesses dependent on their businesses for their livelihood; (vi) the government’s decision to raid the newly privatized pension funds and stuff them full of public debt; (vii) the decision to devalue the peso and to arbitrarily force a dual rate mechanism on the banks, which together with rising NPLs and losses on government loans, totally decapitalized the banking system; (viii) deep corporate distress as demand declined; revenues, particularly for recently privatized utilities, were now generated in pesos, while debts were largely external in dollars or euros; and, (ix) a convergence of several exogenous shocks leading to contagion—the East Asian crisis, the Russian crisis, the devaluation of the Brazilian real after the collapse of Brazil’s Stability Plan, and the Turkish crisis, which made it increasingly difficult for Argentina to roll over its debts and tap the bond market for new funds. To the extent that the government could borrow, it was at wider and wider spreads. These factors are discussed below in more detail. Comparing Argentina to the earlier crises, an ING Barings analyst noted, “The situation in Argentina has rapidly deteriorated to be worse than other worst-case scenario emerging market crises, notably Indonesia in 1997–98 and Russia 1998–99.”13

During the period 1993–98, when the Argentine economy was performing well and the government received substantial revenues from privatization, which in principle should have been used to retire debt, the public sector debt-to-GDP ratio rose by 12 percent.14 This reflected the lack of fiscal discipline. It also reflected Argentina’s easy access to the bond markets. “Indeed with the collapse into the financial crisis of many previously successful Asian emerging market economies in 1997–1998 and the developing difficulties in Russia and Brazil, Argentina stood out as the one success story.”15

At the end of 1999, the external debt was estimated at $148 billion, or some 52 percent of GDP, larger than the debt of other middle-income countries at the time. The size of debt relative to exports of goods and services and remittances was very high, at some 436 percent. The ratio was over four times that of Mexico; nearly ten times larger than Brazil’s; larger than Turkey’s, which experienced a crisis in parallel with that in Argentina; and the largest of any emerging market borrower.

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