Abandonment of The Peg
During the second half of 2001, the pressure mounted on the currency board but there was no clear way out. Since most of country's debt was denominated in U.S. dollars, there would be a huge cost to breaking the peg, not to mention the long-term damage to Argentina's credibility in world capital markets. On the other hand, allowing the market to determine the exchange rate would radically improve competitiveness and eliminate the current account deficit along with the need to borrow money to finance it. Many solutions were considered, including changing the peg to a currency basket of U.S. dollars and euros (which would have entailed an effective and controlled devaluation of the peso), and dollarization (using U.S. dollars as the country's only currency).
On December 3, 2001, the minister Domingo Cavallo restricted bank deposit withdrawals to a maximum of 1000 pesos/dollars per month until 3 March 2002. This was popularly known as Corralito. The effect of the Corralito was so unpopular that the president de la Rúa and Cavallo had to resign. First Ramon Puerta took the presidency and 2 days later Rodriguez Saa assume. In the week he was in charge, Argentina suspended payments on its external debt. In January 2002, the new president, Eduardo Duhalde, repealed the Convertibility Law and adopted a new, provisional fixed exchange rate of 1.4 pesos to the dollar (a 29% devaluation) and the conversion of all the bank' accounts denominated in dollars into pesos and its transformation in bonds ("Corralon"); soon afterward it completely abandoned its peg and allowed the peso to float freely, resulting in a swift depreciation of the peso, which lost 75% of its value with respect to the U.S. dollar in a matter of months.
The reason of this incredible depreciation of the peso was not the economic crisis or the overvaluation, it was the "pesification" of all the accounts. As a consequence of the pesification of every account in Argentina, the 100 billion dollars that were in the banks were changed to 100 billion pesos. This caused an enormous demand for dollars and transformed the normal change of 1.40 pesos per dollar to 4 pesos per dollar in 5 months.
Read more about this topic: Argentine Currency Board
Famous quotes containing the words abandonment of, abandonment and/or peg:
“I am black: I am the incarnation of a complete fusion with the world, an intuitive understanding of the earth, an abandonment of my ego in the heart of the cosmos, and no white man, no matter how intelligent he may be, can ever understand Louis Armstrong and the music of the Congo.”
—Frantz Fanon (1925–1961)
“I am black: I am the incarnation of a complete fusion with the world, an intuitive understanding of the earth, an abandonment of my ego in the heart of the cosmos, and no white man, no matter how intelligent he may be, can ever understand Louis Armstrong and the music of the Congo.”
—Frantz Fanon (1925–1961)
“So much of the trouble is because I am a woman. To me it seems a very terrible thing to be a woman. There is one crown which perhaps is worth it all—a great love, a quiet home, and children. We all know that is all that is worthwhile, and yet we must peg away, showing off our wares on the market if we have money, or manufacturing careers for ourselves if we haven’t.”
—Ruth Benedict (1887–1948)