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The 2001 Default

by on December 8, 2011

Yes, you know the one. The infamous “largest debt default ever” in 2001 of Argentina, as an economic crisis brought the country to a standstill, cast 50% of the population into poverty, casting doubt on the neoliberal model once and for all. The one that brought about five presidents in two weeks, a mass capital flight, and televised violence of a country once at the cusp of being considered “first world.”

This most talked about crisis, one of many in the history of Argentina, is serving as a reflection for many Eurozone members in wake of Ireland, Portugal, Spain, most notably Greece…ok the list just keeps going. How does it really compare though? First off, the Eurozone, part of the European Union, is unofficially the largest economy in the world. Argentina, even in the boom/bust 90’s, is nowhere near such amount of wealth (also because it is one country versus 23). Besides these obvious size issues, Argentina did not/does not have the institutional strength that even some of the smaller countries enjoy.

But let us back up a bit. The Guardian has a great timeline of the crisis available here. With a slowly brewing storm of budget deficits, slowing investment, rising capital flight, a slowing economy/recession (starting to look familiar?), the Argentine President Fernando de la Rua (from a political alliance based on the UCR) brought back former President Carlos Menem’s right hand economic minister Domingo Cavallo, responsible for many of the 90’s neoliberal policies. Here is a great interview PBS did with him about the crisis. In July of 2001, Cavallo and the government devised a “zero-deficit” austerity plan, with large cuts in all sectors of government spending, and tightening the tax code. This sharp reduction in spending, not followed by new taxes or other forms of income, temporarily crippled the government and country as unions called for nation-wide strikes.

At the same time, Argentines started withdrawing their money from banks. In the 1990’s the peso and dollar were pegged 1:1, but this rate was unsustainable due to inflation and the overvaluation of the peso. Lines at banks started to form, as savers withdrew their accounts in dollars. The government, now with a liquidity problem and nervous investors, decided to cap weekly withdraws at 250 pesos, but nonetheless on December 1st and 2nd a run on banks and ATMs occurred. At the same time the IMF said the Argentine measures (the drastic cuts) were not enough, and prevented the disbursement of a $1.3 billion loan to help keep the federal government, bankrupt provinces, and banks with liquidity.

By this time banks would not open doors to customers, cheques for public sector workers were not delivered, and services in general started falling apart. The corralito is when the world started paying attention, as dramatic images of lines at banks filled television screens across the world. The IMF allowed Argentina to wait in some debt repayments but in return the Argentine government had to cut spending by 20%. This happened on December 17, but by then it was too late. Indignant middle-class groups took to the streets, banging pots and pans. The protests spread, and by December 19th de la Rua appeared on Argentine televsion and decarled an “official state of siege,” allowing the National Guard to enforce martial law. The protests got more violent, and with protesters being shot and killed in front of the Casa Rosada, Cavallo and de la Rua resigned the next day. The country’s debt default was imminent as chaos reigned in the streets, the government literally took flight, and world institutions proclaimed the diagnosis all but certain.

The President Pro-Tempore of the Senate, Ramon Puerta was sworn in as President due to the previous Vice President’s resignation (the Argentine line of succession is roughly akin to the United States’). After one day, the Congressional leaders assembled and nominated San Luis governor Adolfo Rodriguez Saa (a Peronist) as temporary president. Saa confirmed a default on Argentina’s foreign debt, and ended the state of siege. But by the end of the week, he realized he had lost support of the Peronists, and decided to resign. Puerta refused to be caretaker president again, and with the other top governmental leaders unable or unwilling to take up the office, the Speaker of the House of Deputies, Eduardo Camano, became president. The term ended on midnight of January 1st, as the legislature met in heated session, electing the loser from 1999’s presidential race Eduardo Duhalde, as president.

Phew. So, after these intense events, Duhalde remained in office the rest of de la Rua’s term, implementing the “peso-ification” measures. $81 billion of the estimated debt was held in bonds with 152 face issues in six currencies and eight jurisdictions. With the debt default, the IMF and other world lenders forced Argentina into devaluing the peso, into a fixed exchange rate at first of 3 pesos per dollar, and then a floating rate. The anger generated by the massive devaluing of assets, bank accounts, and of the debt owed to many first-world groups helped turn on its head the supposedly ‘positive’ values of neoliberalism. Not only was Argentina now an international pariah, distrust in the government was high.

Yet, Argentina played by the rules set forth by the first world institutions and banks. The creation of this meltdown is attributed not only to mismanagement by these groups, but by political parties and figures intent on gaining power from discrediting such a system. While there are theories galore, the implicit lesson that Argentina played the game and lost shows just how brutal austerity and imposed measures can be on flailing economies. While Argentina could control the peso, Greece cannot control the euro on its own, meaning those larger institutions which should be governing the Eurozone will have to absorb Greece’s effects.

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