Maastricht School of Management, MSM

Maastricht, the Netherlands

Regional IT Institute, RITI
Cairo, Egypt

Presented By:
Ibrahim Kamel
Miral Mourad
Odette Morkos
Suha Osman

28-1-2010 1
 Background
Causes
Impact & Effects
Attempted Solutions
Current Economic Status
Lessons Learnt
Recommendations
Domestic Case-Egypt
References
28-1-2010 2
Official name: Argentine Republic
Population: 40.2 million (UN, 2009)
Capital: Buenos Aires
Area: 2.8 million sq km (It is the eighth
largest country in the world by land area)
Major language: Spanish
Currency: peso

28-1-2010 3
 Main exports:
exports Food and live animals, mineral fuels,
cereals, machinery
GNI per capita:
capita US $7,200 (World Bank, 2008)
GDP - real growth rate is :8.7%
: (07 est.)
Unemployment rate:rate 8.5% (07 est.)
Life expectancy:
expectancy 72 years (men), 79 years (women) (UN)
Population below poverty line:
line 26.4% (Jun 2007)
Argentina is rich in resources, has a well-educated
workforce and is one of South America's largest
economies.
Argentina is the second largest country in South
America
28-1-2010 4
 from 1976 to 1983(Military dictatorship):-
Huge debt was acquired to implement projects of National
reorganization process . These projects were unfinished and
debts had to paid .
Defeat in the Falklands War (against UK 1982) destroyed the
infra structure .
Introduction of neoliberal economic platform.
The State takeover of private debts.
By end of 1982 the industry severely affected and
unemployment 20%.

28-1-2010 5
Argentina’s history of crisis
According to monthly data from 1885 to 2003, there
were 19 crises in 118 years of history, which implied 32
crisis years. That is, Argentina had a crisis year every
3.7 years. It seems very difficult to match that record.
The five “deep crises” identified correspond to the
years, 1890-91, 1929-32, 1975-76, 1989-91 and 2001-02.
The latest crash in 2001/ 2002, brought about a 15%
decrease in real GDP and pushed vast sectors of the
population below the poverty line.
 from 1976 to 1983(Military dictatorship):-
Huge debt was acquired to implement projects of National
reorganization process . These projects were unfinished and
debts had to paid .
Defeat in the Falklands War (against UK 1982) destroyed the
infra structure .
Introduction of neoliberal economic platform.
The State takeover of private debts.
By end of 1982 the industry severely affected and unemployment
20%.

28-1-2010 7
 From 1990 to 1999 (convertibility regime & GDP growth )

convertibility regime (Pesso at parity with US dollar) was introduced

and had lead to:
1.Decrease the three decades of chronic inflation, (12 months afterwards
inflation was controlled and its annual rate fell to 10% (end1993) and the
rate kept falling after 1993 to level below 5% and to even deflation level at
certain period.
2.numerous structural reforms, including privatization and opening of the
economy.
3. improvements in tax administration and greater control on expenditure.
4.Large domestic credit growth and a consumption and investment boom
due to large capital inflows to the economy.
5. The real GDP grow to an average of 8% (1991-1994).

28-1-2010 8
28-1-2010 9
 Despite a few recessionary episodes were experienced, they
were short lived and, except for the one that followed the
Mexican crisis in early 1995, relatively mild. interest rates rose
sharply, output fell substantially, and unemployment increased
to over 18 percent.

The 1998 recession (both prolonged and severe) was triggered

and then compounded by a series of adverse external shocks the
Russian default and the LTCM (Long-Term Capital
Management) crisis in August-September 1998 and the
devaluation of the Brazilian real in January 1999.

28-1-2010 11
 Lower export takings have limited the country's ability to earn the
foreign currency needed to repay dollar-denominated debts .

The debts grew enormously ( because the IMF kept lending

money and government spending continued to be high and
corruption was rampant) and the country showed no true signs of
being able to pay it.

Decline in industrial activity has denied the government the cash

to balance budgets, while levels of unemployment and
"underemployment" top 30%.
28-1-2010 12
In 2000, Argentina began to experience severely diminished access to
capital markets. The IMF responded to this by providing exceptional
financial support.
Uneven implementation of promised fiscal adjustment and reforms, a
worsening global macroeconomic environment, and political instability, led
to the complete loss of market access.
By 2001, intensified capital flight and a series of deposit runs (through
massive tax evasion and money laundering) began to have a severe impact on
the health of the banking system. In December 2001, authorities imposed a
partial deposit freeze.
This allowance limit and the serious problems it caused in certain cases,
many Argentines engaged in a form of popular protest that became known as
Cacerolazo (banging pots and pans). These protests occurred especially
during the period of 2001 to 2002.

At first the cacerolazos were simply noisy demonstrations, but soon they
included property destruction, often directed at banks, foreign privatized
companies,
28-1-2010 and especially big American and European companies. 13
 1. Fiscal policy (excessively lenient)
 Poor transparency of financial operations
 widespread tax evasion,
 the limited ability of the federal government
to control the expenditures of the provincial
governments.
 Irresponsible policies were pursued, such as
using proceeds from privatization for current
expenditures instead of debt reduction.
28-1-2010 14
 2- The convertibility regime :

Pegging the PESO to the USD

although the USD appreciating & the
brazilin real devaluating

Causing a loss in competitiveness,

slow in growth & exports

Aligning monetary policy with that

of the US leading to
1.Increase debt service ratio
2.Widening the current account
deficit

28-1-2010 15
 3- Decline in capital flows:-

 Following the sharp reduction in

global capital flows to emerging
market economies in 1998, and
slow development of domestic
financial markets, Argentina,
found it costly to raise funds in
the international markets.
 This was due to convertibility
regime and relatively small size
of its export sector.
 Outcome:-
the fall in inflows was not sudden
because most of the debts had long
maturities.

28-1-2010 16
 4- Structural reform :-

 Attempts to reform the labor market came to a virtual halt

in the mid-1990s and progress in the liberalization of other
areas was slow, such as :-
1.Product markets
2.Foreign trade
3.Utilities and Infrastructure

 Even though lots of trade barriers were removed, Argentina

was still relatively a closed economy, limiting its ability to
earn foreign exchange to repay its external debt .

28-1-2010 17
 5- Institutional and political factors
limited the ability of the federal government to take decisive
actions when confronted with a crisis.

Provinces are entrusted with public expenditures:

Reducing flexibility of fiscal policy

Corruption and other governance issues have also been cited

as factors undermining the credibility of the authorities.

28-1-2010 18
 7- Debt dynamics:
the combination of a large existing stock of external debt,
rising country risk premia and sluggish growth caused the ratio
of debt to GDP to rise uncontrollably.

28-1-2010 19
 7- The banking system:

The final stage of the crisis, a weakening of prudential

defenses in the banking system, which contributed to the loss of
confidence in the currency and complicated attempts to restore
stability once the convertibility regime collapsed.

28-1-2010 20
 The origin and causes of the 2001 disaster are at the core of the current
policy debate.
For some analysts,
 The fixed exchange-rate regime was the a main drive for the destruction of the
Argentine Economy , despite having allowed the Argentine economy to recover from
hyperinflation and grow at unprecedented rates for a good number of years before its
collapse.

For others, macroeconomic mismanagement,

 Argentina fell victim of an unusual sequence of external shocks that outbreak in
emerging market economies in the second half of the 1990s, In particular the capital
market crises in Asia and Russia,
 The sharp decline in commodity prices, the strong appreciation of the US dollar and
the successive devaluations in Mexico and Brazil.
 Finally, was not the exchange-rate regime per se the centre of Argentina’s problems
but its lax fiscal policy that, the argument goes, allowed the public debt to balloon to
unsustainable levels.

28-1-2010 21
28-1-2010 22
 - To Resolve the Massive fiscal budget deficits:
In 2000, Government raised Income tax.
In 2001, Government imposed taxes on financial transactions.
Results:
Worsening Recession, Poverty and Unemployment - Climbing Budget Deficits
– Weaker Government Position - Loss of Confidence & Capital Outflows –
Increased Inflation and Devaluation
Climbing Budget Deficits – Weaker Government Position

Year 2000 & 2001

Increased Higher
Income Taxes Recession Loss of
Increased Climbing I.R. Confidence &
Devaluation (40-60%) Capital Out Flows
Increased Capital
Finance Taxes Outflows

28-1-2010 23
 Unemployment & Poverty Inflation

28-1-2010 24
 -Again, To Resolve the Devaluation & Budget Deficits:
At End 2001, Government moved to Dual Exchange Rate system
Results:
Failure in reassuring the public & deposits withdrawal
At Start 2002, Government moved to Floating Exchange Rates.
Climbing Budget Deficits – Weaker Government Position

Year 2000 & 2001

Dual Loss of Freezing Financial Floating

Exchange Rate Confidence Bank Deposits Crisis Peso

28-1-2010 25
 Maintain peaceful relations with the poorest sectors of society through welfare programs (ex. Heads of
Households), in exchange, beneficiaries had to engage in a work or training activity

Success in negotiating some temporary loan agreements

A new tax program is implemented coupled with creating a culture of taxpayers

Government negotiated position with its private creditors that would involve at least 75% reduction in the
value of defaulted independent debt, plus likely reductions in interest rates on new bonds

Increased export competitiveness by the “convergence factor” for foreign trade in no energy goods where
exporters received a reimbursement, and importers paid a tax, equivalent to the difference between the
exchange rate pegged to the U.S. dollar

Government imposed limits on cash withdrawals from banks by remaining deposits frozen until at least
2003.

Attempted to impose a harsher budget aimed at restoring the $ 2.7 billion loans suspended by IMF &
international agencies.

Further cuts in the public sector workforce and a reduction in the salaries of government servants.

Delayed the payment of pension and decreased expenditures in the social sector by 70%.
28-1-2010 26
 The economy soon began to recover, GDP grew robustly by 8-9% in each of the years 2003-2005, led by strong
exports

Unemployment dropped from 21% in 2002 to 10% at the end of 2005.

The Peso strengthened to its current level of 3:1.1 participants limiting their ability to raise prices

Signs of economic recovery started to appear; a GDP expected growth of 5%, inflation was decreasing, as well as
country risk premium, Peso was appreciating against the US dollar from 3.8 in June 2002 up to 2.8 in April 2003

Foreign currency reserves of

Argentina's Central Bank, in
millions of USD

28-1-2010 27
 IMF supported tax increases to reduce the government deficit

IMF encouraged the devaluation process & discouraged the dollarization

IMF disregarded Congress approval to increase the IR at least 3% for countries facing
problems in their BOP and kept on lending with
2.29%.

IMF allowed Argentina to delay repayment of $2.8 billion for 1 year in order not to let
it default and yet Argentina defaulted.

IMF took steps to strengthen its banking system, welcoming foreign ownership and
improving regulation and supervision

The IMF agreed to lend Argentina $13.5 billion, handed out in stages over three
years, to help the country repay past loans. In return, Argentina would reform its
economy and negotiate in good faith with the private creditors who hold $88 billion of
sovereign debt it no longer services

28-1-2010 28
Lessons learnt
The lessons from Argentina crises are summarized as:
Choosing the right exchange rate regime
The central importance of banking
regulations/transparency
The proper sequence of reform measures (capital
account liberalization)
The importance of contagion
 Egypt pegged its currency to the dollar in 1991 but
abandoned its peg in mid-2000. Pressure on the pound has
increased since 1998, as capital flowed out of the country
following the Asian crisis, while tourism was affected by the
aftershocks of terrorist attacks at home and abroad.
Moreover, the appreciation of the dollar against the euro and
the yen intensified the loss of competitiveness.

28-1-2010 30
 Egypt initially addressed the pressures through
exchange market intervention and tighter credit
policies, but official reserves continued to decline
and economic growth slowed. Exchange rate
pressures did not decrease after an initial
depreciation in mid-2000, and, in January 2001,
the country adopted an adjustable currency band

28-1-2010 31
 Domestic extension

However, pressures on the pound intensified again after

September 11, leading to a depreciation of more than 35%
against the dollar from mid-2000 to early 2003.

Foreign currency remained in short supply in the formal

market at the prevailing official exchange rate, and a parallel
exchange market emerged. Following the recent move to a
floating regime, the exchange rate depreciated by 20%, and the
availability of foreign exchange in the formal market improved.

28-1-2010 32
Summary
The Argentine crisis was a CURRENCY, a BANK and DEBT larger
sovereign DEFAULT in history) crisis and – Inter-related but
caused by a combination of different factors.
 1980s – Argentina implemented successive inflation stabilization
plans involving currency reforms, price controls, and other measures.
 1990s – Argentina adopted a currency board (peso-dollar peg).
 2001-2002 – Argentina defaulted on its debts and abandoned the
peso-dollar peg.
 Its rigid peg of its peso to the dollar proved painful as the dollar
appreciated in the foreign exchange market.
 2001 – Argentina restricted residents’ withdrawals from banks in order
to stop the run on the peso, and then it stopped payment on its foreign
debts.
 2002 – Argentina established a dual exchange rate system and a single
floating-rate system for the peso.
 Source: http://www.oecd.org/dataoecd
Source: http://en.wikipedia.org/wiki/Argentina
Source: www.mecon.gov.ar/progeco/dsbb.htm
Source: http://www.epinet.org/subjectpages/trade.cfm
Source: www.eurostat.statistics
Source: Banco Central de la República Argentina, Argentina's Central Bank
Source: http://www.imf.org/External/NP/ieo/2004/arg/eng/index.htm
Source: bbc.uk.co
Source: www.wikipedia.org

28-1-2010 34
 Thank you

28-1-2010 35