Argentine Debt Crisis

Argentina is the world’s third largest Latin-American economy. Despite being an export-based industrial economy with abundant natural resources and a highly literate population, the country has seen a large number of economic and political vicissitudes due to unstable and frequently changing governments with conflicting ideologies after its independence from Spain in 1810.

The country did not have any stable nationwide government till 1862, after which followed three decades of export-led boom. In 1891, Argentina suffered from its first severe financial crisis when the ratio of Debt to GDP rose substantially and the Juarez Celman government defaulted on its payment to the Baring Brothers merchant bank. Celman’s successor managed to restore the economic stability with the help of banking reforms and the rapid growth rates soon returned, making Argentina one of the wealthiest countries in the world by the first decade of the 20th century. However, the golden period did not last long as the international flow of goods declined with the onset of World War I in 1914. The exports and growth rate remained sluggish. In addition to that, the country also faced political problems as the Military repeatedly kept seizing the power from the democratically elected government.

In 1983, democracy was established for good in Argentina by Raul Alfonsin. In 1985, Austral was made the new currency of Argentina. The economy began to grow only to soon be faced with continual Fiscal and Current account deficits and hyperinflation. The inflation rate went up to 4923.3 in 1989. In order to control the situation and revive confidence in domestic currency, the Austral was pegged to USD in 1991. The currency was then changed to Peso in 1992. A fixed exchange rate was established at 10,000 Austral or 1 Peso per USD. The prices stabilized and imports became cheaper. However, there was a flipside to the situation. The imports dramatically increased and the