Argentina Crisis
Introduction:
The Argentine economy has a distinguished history littered with bouts of financial crises and economic turmoil resulting from failed economic stabilization programs that stretches as far back as the Baring Crash of 1890 - considered to be the world’s first full-fledge emerging market currency crisis. For example, by some accounts, Argentina has had as many as eight major episodes of currency crises since 1970. Notwithstanding this litany of banking and economic debacles, the underlying causes for the failure of the numerous stabilization plans implemented has never been directly addressed - namely a combination of monetary indiscipline and fiscal indiscretion.
After years of experiencing hyperinflation in the thousands of percent per annum in the late 1980s, Argentina opted for an inflation based stabilization plan called the BB Plan in
February 1989. This program, however, did not last very long as the Argentine authority financed their huge fiscal imbalances by printing money, and as a consequence of this the BB
Plan collapsed seven months after it was implemented. The failure of the BB Plan, however, finally brought home the message that the Argentine authority lack any credibility in fiscal and monetary management and thus could not be trusted with managing domestic price levels without taking into account the fiscal promiscuity that has been the hallmark of most
Argentine governments since 1890. To this end, an exchange rate based stabilization (ERBS) program - which removed the enticements of using money creation to finance the pervasive fiscal imbalances - was embarked upon in 1991.
Under the tutelage of the IMF2 and the leadership of Economy Minister Domingo Cavallo,
Argentina instituted a Currency Board Arrangement (CBA) called the Convertibility Plan in
April 19913, tying the Argentine peso to the US dollar at parity. The two main elements of this plans were the legal guarantee by the authorities of parity in
The Argentine economy has a distinguished history littered with bouts of financial crises and economic turmoil resulting from failed economic stabilization programs that stretches as far back as the Baring Crash of 1890 - considered to be the world’s first full-fledge emerging market currency crisis. For example, by some accounts, Argentina has had as many as eight major episodes of currency crises since 1970. Notwithstanding this litany of banking and economic debacles, the underlying causes for the failure of the numerous stabilization plans implemented has never been directly addressed - namely a combination of monetary indiscipline and fiscal indiscretion.
After years of experiencing hyperinflation in the thousands of percent per annum in the late 1980s, Argentina opted for an inflation based stabilization plan called the BB Plan in
February 1989. This program, however, did not last very long as the Argentine authority financed their huge fiscal imbalances by printing money, and as a consequence of this the BB
Plan collapsed seven months after it was implemented. The failure of the BB Plan, however, finally brought home the message that the Argentine authority lack any credibility in fiscal and monetary management and thus could not be trusted with managing domestic price levels without taking into account the fiscal promiscuity that has been the hallmark of most
Argentine governments since 1890. To this end, an exchange rate based stabilization (ERBS) program - which removed the enticements of using money creation to finance the pervasive fiscal imbalances - was embarked upon in 1991.
Under the tutelage of the IMF2 and the leadership of Economy Minister Domingo Cavallo,
Argentina instituted a Currency Board Arrangement (CBA) called the Convertibility Plan in
April 19913, tying the Argentine peso to the US dollar at parity. The two main elements of this plans were the legal guarantee by the authorities of parity in