The 2001 economic crisis in Argentina resulted in the biggest sovereign default in history.
Some are drawing connections between the economic and political conditions in Argentina then and now.
But there are also some key differences that analysts say could prevent the current crisis from spiraling to 2001 conditions.
A significantly overvalued currency, soaring twin deficits, debt largely denominated in dollars, and cutting deals with the International Monetary Fund. There are some haunting similarities between the 2001 financial and economic crisis in Argentina, which resulted in the largest sovereign default in history, and what’s happening in the country now.
“The 2001 crisis is having a major psychological impact on how current events are seen,” Jill Hedges, a senior analyst on Latin America at Oxford Analytica said. “People remember 2001 very well and are already beginning to worry about whether a similar outcome could happen.”
Further stoking flashbacks, earlier this month, President Mauricio Macri reached out to the IMF — which was widely blamed for worsening the country’s economic crisis in 2001 — reportedly for a $30 billion credit line. In 2004, an independent evaluation office within the IMF authored a 193-page report pointing to where it went wrong during the crisis.
Hedges said both foreign investors and Argentines are “very wary” of another crisis, but added that there are a few “critical” differences in economic and political conditions now and in 2001.
“As such, policymakers have more tools to help prevent the unfolding currency crisis from morphing into something more severe,” Capital Economics analyst Edward Glossop said.
Free-floating exchange rate
Previously, a currency board held the Argentine peso at a fixed exchange rate. This played “the central role” in turning Argentina into a crisis country, the IMF said in a 2003 report. Trading one-to-one with the dollar, Glossop said it provided “much-needed stability” in the 1990s but left policymakers powerless once investor confidence faltered.
President Mauricio Macri lifted currency controls in 2015, allowing the peso to float. The central bank is now able to hike interest rates, potentially shoring up capital inflows. The IMF, as it prepares to aid Argentina once again, said it supports a floating exchange rate this time around.
As the peso spirals, the Central Bank of Argentina has raised rates three times this month to 40%.
Gross domestic product
The economy had been in a deep recession for four years leading up to …read more
Source:: Business Insider