2001 crisis: what was Convertibility and why did it lead to economic collapse

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Argentina lived for more than ten years an exchange stability generated by law: one peso was worth the same as one US dollar.

The Convertibility Plan It was a monetary system devised between March and April 1991 by the Minister of Economy Domingo Felipe Cavallo. Its creation was focused on stopping the hyperinflation, which had destroyed the last stage of the government of Raúl Alfonsín, who was succeeded by Carlos Menem.

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Convertibility established a fixed exchange rate link between the new Argentine currency, the peso, and the US dollar. It was popularly called “one to one.”, and it was considered that by tying the peso to a more stable currency such as the one used in the United States, the volatile economy of our country could stabilize.

But it had one condition: that parity forced the Argentine State to have a backup in reserves of the circulating currency. This led to the monetary issue being tied to the increase in funds in the National Treasury.

Initially, the measure was effective, so much so that the Government described that formula as a success. It was not be for lowerly: in just one year inflation fell from 1,344% to 25%. Furthermore, with this recipe, price stability was achieved and the amount of non-productive foreign capital increased.

At the same time, the opening of imports allowed the population to access international products at a very low price, and also the possibility that hundreds of thousands of Argentines could travel abroad. It happened that at the same time, silently the worst crisis in Argentine history was building.

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The collapse of the Convertibility

The opening of imports attacked the national industry, since Argentine products could not compete with the low prices of what came from abroad. Among the consequences observed, many factories had to close, a scenario that led to a gradual increase in unemployment and poverty.

At the same time, in addition to unemployment and the deindustrialization, new factors began to splinter the economy as of 1995. While multinational companies turned their profits and dividends towards their headquarters, a significant number of local businesses, taking advantage of a favorable international context and an apparently strong weight, they had borrowed in dollars.

There were also external factors that undermined the local economic program. The first of these was the 1995 Tequila crisis, generated in Mexico but with worldwide repercussions. In Argentina, that year an unemployment rate of 17.5 percent was reached, very high for a country that was used to figures of a single figure.

The gradual deterioration of the macroeconomic variables caused great pressure on the balance of payments, which became in deficit. The Government opted for a gamble to cover this gap: it got into debt in foreign currency.

At the same time, the relationship between imports and exports of the country in the 11 years of convertibility were not positive. In six of these fiscal periods, there was a negative balance in the trade balance (more imports than exports). Argentina had two periods of three consecutive years of deficit (between 1992 and 1994, and between 1997 and 1999).

Other blows received from abroad were seen in 1998, the year in which the final decline began. The crisis in Russia was a factor, but it especially affected Brazil’s devaluation of its currency, which generated a monetary asymmetry with the region’s main partner but also competitor. Thus, with the local economy tied to a very expensive peso, the competitive edge to attract investors was very low.

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The deterioration of the economy during the Convertibility years was reflected in the INDEC statistics. The unemployment rate in May 1991 was 6.9%, while in 1994 it rose to 10.7%, it reached the ceiling of 17.5% in 1995 and although it was reduced, for the year 2000 it had been set at 15, 4%. The same happened with poverty, which increased from 19% in 1990 to more than 35% in 1995.

When the economic collapse came, Menem was gone. With no chance of going for a second reelection, Eduardo Duhalde (who had been his first vice president but with whom he was in conflict at the end of the 90s) headed the Justicialismo list in the 1999 elections. The Alliance built by forces such as the Unión Cívica Radical and the Frepaso, among others, with Fernando de la Rúa as a candidate.

Curiously, the two candidates for the Presidency of the Nation had in their electoral platforms the defense of Convertibility, so much so that they gave guarantees of their permanence, regardless of who won.

De la Rúa, Menem’s successor, put into practice different economic recipes to avoid collapse, many of them aimed at maintaining Convertibility, so much so that in the final stretch of his administration, in the second half of 2001, he summoned Domingo Cavallo as Minister of Economy.

The last measure was the implementation of the so-called “playpen”, that before the decapitalization of the banking system caused the retention of the deposits in savings banks and checking accounts, and that only 250 pesos a week could be available to withdraw from the banks.

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De la Rúa also defected and, after his resignation on December 20, 2001, he had to leave the Casa Rosada by helicopter, in the midst of a bloody social outbreak that left 38 people dead.

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