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Argentina Shall Overcome?
Subject Recovery
Topic International Finance
Key Words Debt, Default, Devaluation
News Story

In December 2001, Argentina defaulted on almost all of its $141 billion debt, intensifying an economic crisis that threw Argentina into the worst depression in its history. Furthermore, the crisis impacted every neighboring country to some degree. Bank deposits were frozen, unemployment and poverty soared and the flow of international trade has greatly diminished. But, things are better today in Argentina and many Argentines hope that the modest upturn can be transformed into a full-scale recovery.

Argentina is slowly recovering. Consumers have started spending and bank deposits were unfrozen in early December. Argentina's peso which traded on a par with the dollar last year, is now worth 28 cents. Ordinarily, the fall in the peso would have attracted foreign capital and boosted the Argentine economy. However, foreigners suffered big losses in the default and are wary of taking another plunge. Argentina has also defaulted on its World Bank loans, making it virtually impossible to get relief from international agencies. Domestic capital is virtually unavailable, as Argentines no longer trust local banks.

Added to all these woes is political uncertainty and the lack of a clear and comprehensive economic policy. Eduardo Duhalde is interim President of Argentina. An election to select a permanent President is slated for April 27, with a second round on May 18, if needed. Argentina's new president will be sworn in on May 25 for a four-year term.

Argentina's crisis had a devastating effect on trade within Mercosur, South America's common market. For example, trade between Brazil and Argentina, the largest economies within Mercosur, fell 50 percent compared to its peak. Chile's growth rate dropped by more than half this year, but new trade pacts with the European Union and the United States are expected to provide needed stimulus to Chile's economy. Brazil's economy is stagnant and has over $250 billion in debt. Brazil's new president, Luis Inácio Lula da Silva, has promised to stimulate growth by providing incentives for domestic industries and lowering interest rates. Antonio Palocci, Brazil's new Finance Minister, has vowed to hold inflation to single digits and wants to return to the 7 to 8 percent growth rates that Brazil enjoyed during the 1970s.

(Updated February 5, 2003)

Questions
1.

Last year, Argentina defaulted on its debt payments to both foreigners and local citizens. What is a default? What is the impact of Argentina's default on its ability to attract foreign capital?

2. Argentina's peso has lost almost 75 percent of its value. What are the consequences of this devaluation on Argentina's exports and imports? Why did the peso lose so much of its value?
3. Mercosur is South America's common market. How does a common market promote trade between its member countries? What is the impact of increased trade on these economies?
Source Larry Rohter, "Amid Financial Despair, Argentines See a 'Little Summer,'" The New York Times, December 16, 2002.

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