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Argentina's Ds -- Debt, Default, Devaluation
Subject Monetary Policy
Topic International Finance
Key Words Recession, Economic Growth, Debt, Default, Devaluation
News Story

When the Asian financial crisis hit during the 1997 - 1998 period, it unleashed a series of devaluations and economic slowdowns that threatened to throw the global economy into recession. Many countries are still in the recovery process. Four years later, an economic crisis is facing Argentina and many fear that the impact of the current crisis will spread to other Latin American countries and perhaps even farther. The problem is Argentina's massive foreign debt. Argentina has a $130 billion debt that it cannot repay. It is possible that Argentina will default on its foreign debt and that its currency will be devaluated.

Argentina's problems have been growing over a number of years. In the early 1990s the government privatized many government held industries and eliminated regulations. However, government spending rose at twice the rate of economic growth. The Asian financial crisis slowed Argentina's economy and the slow growth reduced taxes and increased the fiscal deficit. Argentina has suffered through a three-year recession that saw unemployment exceed 16 percent and a number of business failures. Last year, the International Monetary Fund (IMF) put together a $40 billion rescue package for Argentina, but the rescue was only a band-aid, and comments by the IMF and President Bush indicate that the country will receive no additional aid.

The growing crisis has been compounded by rapidly rising interest rates fueled by increasing doubt that the country can meet its fiscal obligations. Money has been leaving the country at a rapidly escalating rate, as investors believe that a devaluation is imminent. The government has reacted to the crisis by trying to cut spending. The government reduced wages for government workers by 8 to 10 percent and increased efforts to red4ce tax evasion. Economic Minister Domingo Cavallo also vowed to keep the value of the Argentine peso pegged to the U.S. dollar. The stock market fell 8.6 percent in reaction to Mr. Cavallo's statements.

Argentina's worries are impacting its neighbors. Brazil's currency has lost 30 percent since January, the Chilean peso has fallen 17 percent, stock prices in Latin countries have fallen and interest rates have risen.

(Updated August 1, 2001)

Questions
1. Another factor contributing to Argentina's problems is the economic slowdown in the U.S. How does a reduction in U.S. economic growth affect Argentina?
2. Brazil is Argentina's largest trading partner. Its currency has fallen as a result of the crisis in Argentina. How does a fall in the value of its currency impact Brazil?
3. The Argentine crisis has scared away foreign investors. Why would investors be reluctant to invest in Argentina? Why would investors be reluctant to invest in Brazil? In Latin America?
Source Anthony Faiola, "Latin Turmoil Deepens," The Washington Post, July 13, 2001.

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