Financial Crises in Argentina analyzed through Collective Guilt

In  Argentina, the concepts of debt and crisis are etched onto the skin of its recent past, causing the international financial crisis to display a set of unique characteristics intrinsic to the country’s fiscal and monetary history. Although the causes of an economic disaster are, in part, a result of the internal issues of a country, it is vital to remember that in such a globalized and interconnected world, nation-states and their economies are intrinsically linked. In other words, it is critical to look at the causes, consequences, and impacts of an economic crisis in one country through a lens of collective guilt because the problems of one nation-state do not stop at its borders; they cascade into a domino effect that has international repercussions. This case study will examine Argentina’s financial situation and demonstrate how collective guilt provides a more concise understanding of why Argentina is in a financial crisis today.

To understand Argentina’s current financial crisis, one should look at its history. For instance, during the 1990s, Argentina outperformed almost every country in South America by creating high revenue per capita, decreasing unemployment, and regulating inflation. However, by 1998, Argentina’s hard currency peg to the U.S. Dollar, pro-cyclical fiscal policies, and extensive foreign borrowing started to shock its economy severely. On November 30th, 2001, the Argentine peso suffered a massive devaluation, almost all foreign accounts were frozen, and interest rates rose sharply overnight. Moreover, spreads between U.S. Treasury bonds and Argentine government bonds increased to 5,000 basis points. This increase in the spread is significant because the larger or “wider” the spread, the higher the credit risk of the interest rates of the government bond. The bank run began — many clients withdrew their money from Argentine banks because they believed the banks would cease to function.  By December 1, the Minister of Economy Domingo Cavallo froze all deposits causing the Conversion Plan that coupled the Argentine peso to the U.S. Dollar on a one-to-one basis to collapse. Four days later, the IMF announced it would cut off its support as Argentina continuously failed to meet the conditions tied to the rescue program agreed to in September 2001. This move lost Argentina its last source of foreign capital, $22 billion, in 2001. By the end of the year, Argentina's sovereign debt reached $93 billion, its employment reached 22.5%, and its poverty line rose to 57.5%; in response, the President and most of his cabinet resigned. The financial catastrophe of 2001 in this country was not only a result of Argentina’s economic mismanagement; it was a combination of disadvantaged relationships established by the United States, the wrongdoings of practically imposed neoliberal policies, and the IMF’s harmful decision to abandon Argentina when it was at its lowest.

Interestingly, Argentina managed the 2007-2008 Global Financial Crisis and the Great Recession differently. After the United States subprime mortgage market collapse, Argentina immediately suffered economic repercussions. However, thanks to changes in bank business models in the domestic market, from 2003 to 2008, the economy in Argentina performed well. The government ran a fiscal surplus, reflecting strong growth in public revenue and public debt as a percent of GDP increased. However, from 2008 to 2009, the balance turned into a deficit, and the economy stopped growing.

Additionally, the public debt ratio destabilized, which reflected a near-term deterioration in the internal economic situation related to policy distortions beginning with the fiscal accounts. Nonetheless, Argentina managed to somewhat survive the 2008 financial crisis by implementing economic policies that helped stabilize the country. In 2009, Argentinian leadership passed the Bicentennial Fund for Stability and Debt Reduction, which had a second decree attached to it, the Argentine Debt Reduction Fund. These bills assured creditors that finances would be available for scheduled payments by setting aside international dollar reserves. Although the impact of the 2008 financial crisis was not a massive blow to Argentina’s economy, this does not mean that Argentina did not experience challenges like meat shortage, a decline in food exports, and an increase in the foreign debt of $81.8 billion, 11.2 billion of which was owed to private investors. In this particular case, Argentina’s economic crash resulted from the global financial crisis and Argentina’s national debts. 

Lastly, the current debt and financial crisis started in 2018 and is one of the most pressing issues for the Argentinian economy. The 2018 Argentinian monetary crisis resulted in a severe devaluation of the Argentine Peso, caused by high inflation and a steep fall in the Argentine peso’s perceived value at the local level as it continually lost purchasing power as well as other domestic and international factors. As of 2020, Argentina had a foreign debt of over $323 billion (€274 billion), which several economists agreed that Argentina could not pay back. Several of these billions are owed to the IMF and bondholders, particularly in the United States As Argentina received widespread bondholder support to restructure its overseas debt, the country struggled to arise from its ninth default in history. The strategy from leaders like Finance Minister Martín Guzmán is to renegotiate the debt with the IMF, looking for a payment of $44 billion to regain acquiescence after having imposed austerity measures that have drained the Argentinian capital relentlessly.

Meanwhile, in 2020, the economy contracted by 10%, and corporations are fearful of the currently leftist government holding power in the country. Argentina’s dubious current account balance creates uncertainty and pushes away international investors who are afraid that the government will not repay their debt and continue to borrow from the IMF and repeat the 2001 mistakes. Argentina's long-standing inflation problem is another element in the crisis. The most recent figure is around 50.9% of annual inflation. That is one of the highest globally, although not exceptional in Argentina's history since, in the early 2000s, Argentina’s inflation rate reached upwards of 20%. Lastly, the Central Bank has raised the interest rate to roughly 60% in an attempt to control inflation and stabilize the peso. Once again, the financial crisis in Argentina is a result of the messy monetary policies of Argentina, the not-so-thoughtful approaches of the IMF toward Argentina, and the impact of the global pandemic. 

In summary, it is essential to look at crises and financial affairs through a holistic lens and think of collective guilt when assessing the situation. Finger-pointing is unproductive, delays effective action, and takes away from the possibility of avoiding issues in the future. Entities like the IMF, the World Bank, and even members of the government ought to examine challenging situations and crises through collective guilt. In the case of Argentina’s most considerable financial challenges, applying collective guilt to the analysis gave a more comprehensive perspective of why the country went or is going through that specific situation, and it highlights some of the actions that the government has to improve to, like mitigating the effects of corruption and keeping more transparent and organized financial records to avoid challenging economic events in the future.