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Argentinas Economic Crisis

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It is said that the third incident began in 1995. A steady rise in real appreciation of the U. S dollar began, and due to the one-on-one backing to the Argentine peso, the latter too began experiencing the same rate of real appreciation. The Argentine GDP recorded a rise of 5.5% in 1996 and 8.1% in 1997. However, there was a definite worsening of the current account deficit and debt measures positions. The fourth incident took place in July 1997. The East Asian financial crisis began, soon spreading to Russia and Brazil by 1998.

As a result, Brazil devalued its currency (the ‘ real’ ) in January 1999. The Argentine peso could not follow the path of the Brazilian real. The resultant overvaluation of the peso caused Argentine exports to become much more expensive as compared to those of Brazil. The matter was exacerbated by the fact that Brazil was the destination of 30 percent of Argentina’ s exports. 13 One of the export items was a unique type of long-grain rice liked by Brazilians; even though Brazil experienced a hunger crisis, huge quantities of Argentine rice lay unsold, unable to be marketed to Brazil due to the peso’ s overvaluation. 14 In addition, a reduction in global farm product prices, and an increase in world oil prices added to Argentina’ s economic woes.

All these factors combined to severely dent its capability to earn valuable foreign exchange need to repay its dollar debts. 15 The fifth incident occurred in September 1999. The Argentine Congress enacted the Fiscal Responsibility Law that required mandatory cuts in federal and provincial government expenditure. 16 This law, coming at a time when the economy was already grappling with overvalued peso fallout, triggered off a vicious cycle: the government was forced to curtail its expenses to pay back foreign debt, but by doing so brought the economy to a virtual halt; this leads to a reduction in government revenue, which forced it The tenth incident occurred on July 10, 2001.

Minister of Economy Domingo Cavallo declared the country’ s intention to adopt an austerity plan to balance its budget. The plan, named “ Zero Deficit Law, ” was eventually passed by the Argentine Congress 19 days later, but not before 2 things happened: the markets immediately reacted negatively by showing a decline in confidence, and the country was traumatized by a countrywide strike instigated by unions against the Zero Deficit Law. 26

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