Argentina’s economic problems
... new Peso that would be fixed to the American Dollar. Though the IMF was against the dollar-peso fixing, it worked closely together with Carlos Menem to reform the Argentinean economy. The reforms mostly involved massive privatization of the economy. One of the privatizations was the Argentine Social Security in 1993. The sell-off of public owned companies and the new monetary stability provided a solid basis for foreign investment that made U.S. and European, especially Spanish, companies invest heavily in Argentina through the beginning of the 90’ies. The big inflows of cash made the economy boom, with growth rates of up to 8 % P/A. The boom lasted until 1995 where Mexico devaluated its peso and brought a financial crisis to the whole Latin America, as their currencies became expensive compared to the Mexican Peso. Compared to other Latin American countries, the recession was short and mild in Argentina though, mostly because of the close cooperation with the IMF. Capital flight was limited due to IMF assurances to the Argentine government, which was still under the lead of Carlos Menem. The economy never revived to the same levels as before 95-though. Mostly because the dollar – and thereby the Argentinean Peso, became more comparatively more expensive as other Latin American currencies lost value. But again, in 1998, the economy got into recession. Argentina’s biggest trading partner, Brazil, was in a recession and devaluated its Real. This made the Argentine Peso even more expensive and caused the Argentine economy to go into recession. The current most pressing problem in Argentina is the huge debt at 130% of GDP. Normally, big debts like this are caused by big government budget deficits, but in the case of Argentina the deficit was never more than 4.2% of GDP, which was in 1998. The deficit is not big compared to that of other countries, for example Japan, which this year runs with a deficit of 8+ %, and the whole deficit and more to is caused by interest payments on debt. The accumulated debt rose from 65% of GDP in 1995 to 130% in 2002. In December 2001 the Argentine government chose to default on its external debt payments, which make up the most of the total debt. At the same time they floated the peso, which quickly dropped compared to the dollar. One dollar...