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BACKGROUND: How Argentina went through default a decade ago

By Juan Garff Jun 28, 2011, 14:08 GMT

Buenos Aires - Almost 10 years ago Argentina was on the brink of bankruptcy.

Towards the end of 2001, Buenos Aires could no longer service a debt load at the time of around 240 billion dollars. Four heads of state resigned one after the other, and unemployment and public protests reached critical levels.

The International Monetary Fund (IMF) had pledged 20 billion dollars to Argentina a year earlier in order to try to shore up the economy, which was then in the middle of a recession - but with strict conditions attached.

The high budget deficit and an increasing flight of capital out of the country, however, quickly undermined the financial support.

In November 2001, the government froze the bank accounts of millions of people when the IMF refused to hand out a credit tranche of 1.2 billion dollars because the state had not achieved its agreed-on savings targets.

The people took to the streets, blocking bank branches and in some cases plundering supermarkets and other stores. Police moved in to curb the violence in Buenos Aires, leading to deaths and injuries.

With the situation threatening to spin completely out of control, President Fernando de la Rua fled by helicopter from the government building on December 20, 2001, right after he submitted his resignation letter.

On December 24, interim president Adolfo Rodriguez Saa declared that Argentina was insolvent and at the same time he devalued, by presidential decree, the peso by 65 per cent.

The peso had previously been fixed by law at parity with the US dollar for 10 years. With the devaluation, Argentina's foreign debts-to-gross domestic product ratio rose from 50 per cent to more than 100 per cent.

If such a scenario were in store for Greece, it would mean Athens quitting the euro and reintroducing its own currency. But with one big difference - whereas Argentina could act unilaterally, Greece would need the approval of other countries.

After a brutal collapse of the GDP by around 11 per cent in the following year, Argentina's recovery got under way - and has been going on without interruption to this day.

Nestor Kirchner, elected president in 2003, began working to gradually regain the confidence of international investors. This process - Kirchner died last year - is still not yet completed as the effort has been continued by his successor and widow, Cristina Fernandez de Kirchner.

A former undersecretary in the Foreign Ministry, Eduoard Sguiglia, recalls those early-Kirchner administration efforts.

'In many informal talks with government representatives around the world we were listened to with respect, even from then US president George W Bush,' he told the German Press Agency dpa.

'It was only a meeting with then-IMF president Horst Koehler in the presidential residence that was tense after Koehler expressed his doubts and warned that banks might avoid Argentina,' Sguiglia said. 'Koehler's stance toughened further afterwards.'

Lobbyists representing holders of Argentina's bonds expressed hefty criticism. There were heated discussions in the autumn of 2003 in the Argentinian embassy in Washington with representatives of conservative think tanks.

'I asked them, why they were behaving so aggressively,' Sguiglia said. 'The answer was, 'we're afraid other countries will follow Argentina's example'.'

Today, it's the crisis management work of international financial organizations as a whole which is being criticized. Even Michel Camdessus, head of the IMF until 2000, admitted recently in Buenos Aires that 'many dumb things, many mistakes' were made during his time.

'The neo-liberalism which dominated at the time was accompanied by enormous institutional deficiencies and failed regulation mechanisms,' Camdessus admitted at a meeting with Argentinian businessmen.

Argentina's ongoing positive foreign trade balance is meanwhile attracting so much currency from abroad that they cover a large portion of the foreign debt repayments falling due each year.

The rest must still be covered by new borrowing. Still lacking an agreement on the repayment of loans with the so-called Paris Club of state creditors, this can only be achieved by paying high interest rates.

But in view of almost China-like growth rates - 7.1 per cent year-on-year in April - along with a flexible currency policy and a state budget surplus are a guarantee that, despite still restricted access to international finance markets, Argentina's economy will remain stable.

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