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Default with Argentina
Subject Default, National Debt
Topic International Finance
Key Words Debt, Default, Devaluation
News Story

Adolfo Rodriguez Saá, newly appointed interim president of Argentina, declared Argentina to be in default on the country's $132 billion debt. Mr. Saá was appointed president after economic concerns precipitated a week of rioting and looting, forcing Fernando de la Rúa to resign from office. Argentina's economy is plagued with recession, 20 percent unemployment, a banking system on the verge of collapse, government workers who have not been paid for weeks, a public health system in trouble and concerns that retirement benefits will not be paid.

Argentina's debt amounts to $132 billion, of which $45 billion is owed to foreign banks. Argentineans, pension funds, financial institutions and the International Monetary Fund hold the remainder of the debt. Default by the national government will likely cause the 24 provincial governments to cease payments on the $22 billion in debt that they hold.

This default is the largest in history. Unlike Russia's default in 1988, however, economists do not believe it will cause an international financial crisis. Argentina's crisis has been slow to develop and this has provided creditors the opportunity to limit their risk. Banks and pension funds within Argentina will be most severely impacted.

President Saá announced the $10 billion saved this year by not making debt payments will be used to create jobs and support social programs. Currency controls will remain in effect, limiting bank withdrawals to $1,000 per month. The peso will remain pegged to the dollar and the President stated that the currency would not be devalued. Many economists do not believe the President will be able to avoid devaluation.

As a consequence of the default, Argentina will have limited access to international financial markets. There have not been any statements from the new government as to when or if debt payments will be resumed. Any decision on debt repayments will likely be left to the next president who will be chosen in a general election in March 2002.

(Updated January 15, 2002)

Questions
1. What is a default? What happens to a country when it does not make its scheduled debt payments?
2.

The Argentine government has not been able to pay its workers for many weeks. Instead of paying them in pesos, the government has been issuing low-interest bonds. Given the difficulties Argentina is having with its credit, what do you expect to happen to the value of these notes? Why?

3.

If Argentina does devalue its currency, what will happen to the peso vis-à-vis the dollar? What will happen to they buying power of Argentine consumers?

Source Clifford Krauss, "Argentine Leader Declares Default on Billions in Debt," The New York Times, December 24, 2001.

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