Why Did Argentina's Currency Board Collapse?

摘要

Four years after the Mexican crisis of 1994-95, the largest South American economy, Brazil, was hit by a financial crisis that forced the authorities to give up defending the prevailing parity of the real, which lost more than one-third of its value in January 1999. The exchange-rate-targeting strategy that was followed by the Brazilian central bank was abandoned and replaced by a floating exchange rate regime accompanied by an explicit inflation target. The maintenance of tight fiscal and monetary policies supported the floating of the real and Brazil recovered more rapidly than expected. Less than two years after the Brazilian crisis, the second-biggest South American economy, Argentina, was in turn hit by a liquidity crisis in November 2000. It would have defaulted on its external borrowings without a massive rescue package negotiated with the International Monetary Fund (IMF). The Currency Board Arrangement (CBA), which tied the Argentinean peso to the US dollar at parity, led to a significant loss of competitiveness of the domestic economy between 1999 and 2001, after the continuous appreciation of the American currency against that of Argentina's main trading partners. The CBA lost its credibility with the combination of the rise of the US dollar, the sharp fall of the real following Brazil's financial crisis, low prices for Argentina's commodities and the drying up of capital flows to emerging markets in the aftermath of the 1998 Russia crisis. Given the orientation of Argentina's external trade, it was particularly vulnerable to adverse exchange rate developments in Brazil, by far its dominant trading partner. With a peso that had become severely overvalued and domestic producers that were increasingly unable to compete in third markets, economic growth came to a standstill, the country entered deflation and the rising cost of capital made the public external debt inflate to unsustainable levels.