Argentine Economic Crisis - 1990s

1990s

After a second bout of hyperinflation, Domingo Cavallo was appointed Minister of the Economy in late 1990. In 1991, he fixed the value of Argentine currency at ₳10,000 per U.S. dollar. Australs could be freely converted to dollars at banks. To secure this "convertibility" the Central Bank of Argentina had to keep its U.S. dollar foreign exchange reserves at the same level as the cash in circulation. The initial aim of such measures was to ensure the acceptance of domestic currency because, after the 1989 and 1990 hyperinflation, Argentinians had started demand payment in U.S. dollars. This regime was later modified by a law (Ley de Convertibilidad) which restored the Argentine peso as the national currency.

The convertibility law reduced inflation sharply and thereafter preserved the value of the currency. This raised the quality of life for many citizens who could again afford to travel abroad, buy imported goods or ask for credit in dollars at traditional interest rates.

Argentina still had external public debt that it needed to roll over.

The fixed exchange rate reduced the cost of imports, which produced a flight of dollars from the country, as well as the progressive loss of industrial infrastructure and employment.

Government spending remained too high and corruption was rampant. Argentina's public debt grew enormously during the 1990s without showing that it could service the debt. The International Monetary Fund kept lending money to Argentina and extending its payment schedules. Massive tax evasion and money laundering contributed to the movement of funds toward offshore banks. A congressional committee started investigations in 2001 over accusations that Central Bank governor (Pedro Pou) and members of the board of directors had overlooked money laundering within Argentina's financial system. Clearstream was accused of being instrumental in this process.

Other Latin American countries, including Mexico and Brazil (both important trade partners for Argentina), faced economic crises of their own, leading to mistrust of the regional economy. The influx of foreign currency provided by the privatisation of state companies had ended. After 1999, Argentine exports were harmed by the devaluation of the Brazilian real and the dollar. A considerable international revaluation of the dollar directly weakened the peso relative to Argentina's trading partners: Brazil (30% of total trade flows) and the Euro area (23% of total trade flows).

By 1999, newly elected President Fernando de la Rúa faced a country with critically high unemployment and economic damage due to the continued borrowing. In 1999, Argentina's GDP dropped 4% and the country entered a three-year long recession. Economic stability became economic stagnation (even deflation at times) and the economic measures taken did nothing to avert it. The government continued its predecessor's economic policies. Devaluing the peso by abandoning the exchange peg was considered political suicide and a recipe for economic disaster. By the end of the century, complementary currencies had emerged.

While the provinces had always issued complementary currency in the form of bonds and drafts to manage shortages of cash, the scale of such borrowing reached unprecedented levels during this period. This led to their being called "quasi-currencies". The strongest of them was Buenos Aires's Patacón. The national government issued its own quasi-currency—the LECOP.

In a 2001 interview, journalist Peter Katel identified three factors, converging at "the worst possible time", to explain why the Argentinian economy unraveled:

1. The fixed exchange rate between Argentine peso and the US dollar (created at the start of the 1990s by the Economy Minister at the time, Domingo Cavallo).
2. The large amounts of borrowing by former Argentine president, Carlos Menem.
3. An increase in debt due to reduced tax revenues.