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The Role of Convertibility in the 1999-2002 Argentinian Crisis

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Student
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General public
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economics
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Solvay...

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documents in English
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Type
case study
Pages
20 pages
Level
General public
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  1. Introduction
  2. The economic transformation of the '1990s: the convertibility plan
  3. One-to-one convertibility: an example of a fixed exchange rate.
  4. How convertibility turned into a problem
    1. The overvaluation of the Peso.
  5. Conclusions

Convertibility definitely succeeded in blocking running hyperinflation and developing a financial sector that before was almost non-existent. Nonetheless its maintenance during the decade turned out to be counter-productive because its consequences partly caused the crisis which from 1999 to 2002 hit Argentina. In particular there are three aspects which played a significant role. First of all the overvaluation of the Peso, especially after 1999, worsened the current account, determining an increase in the already high level of unemployment. Secondly, the limitations imposed by convertibility made impossible for the Central Bank to act as lender of last resort and rescue the government and the banks, which had been forced to increase their exposure to Argentinian bonds. Finally, the expectations that convertibility generated continuously brought to ?double the bet? and stay with that regime until it was no more possible to sustain it.

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