Argentina Survives a Crisis— Again It was the star of Latin…

KidCrane2541 Argentina Survives a Crisis— Again It was the star of Latin…Argentina Survives a Crisis—Again It was the star of Latin America throughout the 1990s. For 10 years, the Argentine peso was fixed at parity to the dollar through a currency board and the economy was doing well. But Argentina cut its tie to the dollar in January 2002. As the peso floated freely on currency markets, it plummeted and quickly lost two-thirds of its value. Within months, Argentina defaulted on its $155 billion of public debt. It was the largest default by any country ever. The newly weakened peso made repaying Argentina’s debt in foreign currencies far more expensive. Strapped for cash, the government froze citizens’ savings accounts and restricted the amount they could withdraw at one time. Street protesters turned violent and attacked dozens of banks. Following its default, Argentina’s economy shrank by 15 percent, unemployment shot up to 21 percent, and poverty engulfed 56 percent of its citizens. The government ordered electricity and gas companies to switch their contracts from dollars to less-valuable pesos, then froze utility rates to protect consumers. The government’s plan of stimulating demand by raising wages, imposing price controls, holding down the peso’s value, and increasing public spending worked for a time. Yet local companies were failing because they had difficulty obtaining funds to pay foreign suppliers. This was partly due to the requirement that they obtain central bank authorization to send money abroad. And importers had to wait months for authorization to make payments in dollars. Companies also struggled with new rules that raised taxes on exporters and other cash-rich firms to pay for the government’s social services. Many foreign companies that entered Argentina during a wave of free-market changes and privatizations in the 1990s were growing weary. Argentine subsidiaries of foreign parent companies fought to manage mounting losses. These subsidiaries mostly collected revenues in pesos. Yet they faced difficulties repaying dollar-denominated debts as the peso’s value declined. Years later, the government tried to reduce its debt and restore credibility with the International Monetary Fund. It ordered its massive $50 billion in dollar-denominated government debt to be swapped into pesos. The swap was aimed at unlocking $10 billion in IMF loans that were frozen when Argentina failed to meet certain economic targets. US and European investors owned another $46 billion in government bonds, which were restructured in a separate transaction. Argentina defaulted for the ninth time in its history in May 2020. By the end of 2021, Argentina’s yearly inflation rate was roughly 50 percent, it had chronic fiscal deficits, and lacked the foreign currency to repay its debts. The economy had seen almost no growth since 2008 and inflation had outpaced wages in eight of the 10 years from 2011 to 2021. For 2020 and 2021, the amount of money in circulation increased 50 percent each year. Meanwhile, the value of Argentina’s currency declined by 60 percent against the dollar. Rumors circulated about a possible devaluation of the peso. In early 2022, Argentina still had debts with the IMF of around $45 billion that it agreed to repay by 2032. There are at least several main reasons for Argentina’s difficulties, including decades of protectionism and lavish subsidies for domestic industries, imposing an exchange rate that kept the peso artificially strong, and printing money to make up for chronic fiscal deficits. The IMF encouraged Argentina to get itself on the road to solvency by no longer financing government programs with monetary policy (essentially printing money), and increasing interest rates to help lower inflation. Most economists agree that Argentina is likely to continue muddling through crisis after crisis because it lacks a long-term plan to restructure its economy.1. Why did Argentina peg its currency to the dollar in the first place? 2. How are local and international companies adapting to Argentina’s business environment? 3. How have Argentina’s economic difficulties affected the savings and purchasing power of ordinary Argentines? 4. What steps has Argentina taken to reform its economic policies since late 2021? BusinessBusiness – Other