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1Research Department
TWO PROPOSITIONS ON
ARGENTINA
IDB SEMINAR ON “ARGENTINA: PERSPECTIVES AND LESSONS FOR
LATIN AMERICA”
March 10th 2002, Fortaleza, Brazil
Miguel SebastiánChief Economist
2Research Department
Proposition one: “the argentine crisis was not
caused by a fiscal problem”
Proposition two: “there was no orthodox exit of the
Convertibility”
3Research Department
Debt sustainability condition
We consider two different subperiods:
• 1992-1997
• 1998-2001
Debt sustainability = a function of GDP growth, Interest rates, Primary balance, Initial public debt
+ - + -
Sustainability Condition
-6
-4
-2
0
2
4
6
8
10
12
-4 -3 -2 -1 0 1 2 3 4 5 6 7 8 9 10
GDP (%)
Rea
l in
tere
st r
ate
(%)
Primary balance (% GDP)
Explosive debt
Sustainable debt
4Research Department
Growth was strong in the first subperiod of the Convertibility
GDP growth (%)
-6,0
-4,0
-2,0
0,0
2,0
4,0
6,0
8,0
10,0
12,0
19
92
19
93
19
94
19
95
19
96
19
97
19
98
19
99
20
00
20
01
Average
5,3
5Research Department
Real interest rates were reasonable
Real interest rates
-4.0
3.3
5.9 6.1 6.1
-5.0
-3.0
-1.0
1.0
3.0
5.0
7.0
9.0
11.0
13.0
15.0
1993 1994 1995 1996 1997 1998 1999 2000 2001
Source: BBVA
6Research Department
The primary fiscal balance was close to zero*. Was it
appropriate?
* Excluding privatization revenues (+0.5% otherwise)
Consolidated primary surplus (% GDP)
-0.4
1.2
-0.7
-1.0
0.0-0.1
-1.5
-1.0
-0.5
0.0
0.5
1.0
1.5
199
2
199
3
199
4
199
5
199
6
199
7
199
8
199
9
200
0
200
1
Average-0.2
* Including Provinces (+0.5% otherwise)
7Research Department
Fiscal policy was sustainable throughout 1992-1997
Sustainability Condition
-6
-4
-2
0
2
4
6
8
10
12
-4 -3 -2 -1 0 1 2 3 4 5 6 7 8 9 10
GDP (%)
Rea
l in
tere
st r
ate
(%)
Primary balance (-0,2 % GDP)
92-97
Explosive debt
Sustainable debt
8Research Department
Of course, consolidated public debt was on a sustainable path
Consolidated Public Debt (% GDP)
53
45 45
4142
4139
35
40
45
50
55
60
19
91
19
92
19
93
19
94
19
95
19
96
19
97
19
98
19
99
20
00
20
01
Source: BBVAIncluding Provinces
9Research Department
But the debt picture changed dramatically from 1998
onwards. What is to blame?
Consolidated Public Debt (% GDP)
53
45 45
4142
4139
42
49
52
59
35
40
45
50
55
601
99
1
19
92
19
93
19
94
19
95
19
96
19
97
19
98
19
99
20
00
20
01
Source: BBVA
10Research Department
The primary fiscal balance did not change*
Consolidated primary surplus (% GDP)
-0.4
1.2
-0.7
-1.0
0.0-0.1
-1.5
-1.0
-0.5
0.0
0.5
1.0
1.5
19
92
19
93
19
94
19
95
19
96
19
97
19
98
19
99
20
00
20
01
-0,2
0.1
-1.1
0.1 -0.3
-0,3
* Excluding privatization revenues (+0.2% otherwise)* Including Provinces (+0.6% otherwise)
11Research Department
Real interest rates rocketed
Real interest rates
-4.0
3.3
5.9 6.1 6.1
-5.0
-3.0
-1.0
1.0
3.0
5.0
7.0
9.0
11.0
13.0
15.0
1993 1994 1995 1996 1997 1998 1999 2000 2001
Source: BBVA
5.8
8.39.2
26.6
12Research Department
And real growth plunged
GDP growth (%)
-6,0
-4,0
-2,0
0,0
2,0
4,0
6,0
8,0
10,0
12,0
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
Average 5,3
Average -1,1
13Research Department
The new macroeconomic environment made the fiscal
policy unsustainable, not viceversa
Required primary surplus jumped to over +8% of GDP.
Sustainability Condition
-6
-4
-2
0
2
4
6
8
10
12
-4 -3 -2 -1 0 1 2 3 4 5 6 7 8 9 10
GDP (%)
Re
al
inte
res
t ra
te (
%)
Primary balance (-0,2 % GDP)
92-97Explosive debt
Sustainable debt
98-01
14Research Department
Proposition one: conclusion
There was no reasonable fiscal policy to ensure public debt sustainability
15Research Department
Proposition one: “the argentine crisis was not originated by a
fiscal problem”
Proposition two: “there was no orthodox exit
of the Convertibility”
16Research Department
• DOLLARIZATION
• DEVALUATION - SINGLE MONEY
• DEVALUATION - BIMONETARY
Three possible Convertibility exit strategies
17Research Department
Three possible economic environments
• Confidence
• Lack of domestic confidence
• Lack of external confidence
18Research Department
Policy measures surrounding Convertibility exits
Dollarization was the only “orthodox” exit, but only if confidence
survived
Heterodoxy
Orthodoxy
Dollarization "Corralito"
Capital controls External default
Devaluation -single moneyDeposit
pesification "Corralito"
Capital controls External default
Devaluation - bimonetaryDomestic
default "Corralito"
Capital controls External default
Lack of domestic confidence
Lack of External confidence
Confidence
19Research Department
External confidence disappeared in late 2000 and domestic confidence in late
2001
Private deposits(domestic confidence)
50000
55000
60000
65000
70000
75000
sep
-97
mar-
98
sep
-98
mar-
99
sep
-99
mar-
00
sep
-00
mar-
01
sep
-01
mil
lio
ns o
f p
eso
s
Soverign Spread(External Confidence)
0
500
1000
1500
2000
2500
3000
sep
-97
mar-
98
sep
-98
mar-
99
sep
-99
mar-
00
sep
-00
mar-
01
sep
-01
b.p
.
20Research Department
Heterodoxy policies have not been a “will” but a “must” for
exiting the Convertibility
Long-term orthodoxyLong-term orthodoxy
Free floatFree float
Sustainable fiscal policySustainable fiscal policy
Credible monetary policy (inflation targeting)
Credible monetary policy (inflation targeting)
Reasonable bankruptcy LawReasonable bankruptcy Law
Payment of the external debt
Payment of the external debt
Short-term heterodoxyShort-term heterodoxy
Corralito
Dual exchange rate
Capital controls
Domestic default
External default
Deposit pesification
Asking for an “orthodox exit” is going back to May 1968……...
The key is to ensure long term orthodoxy.
21Research Department
Paris, May 1968Paris, May 1968
22Research Department
TWO PROPOSITIONS ON
ARGENTINA
IDB SEMINAR ON “ARGENTINA: PERSPECTIVES AND LESSONS FOR
LATIN AMERICA”
March 10th 2002, Fortaleza, Brazil
Miguel SebastiánChief Economist
