Argentina’s economic crisis resulted from the hard currency peg, currency overvaluation, economic rigidities, ineffective fiscal policy, external shocks, large-scale foreign currency borrowing, a sudden stop in capital inflows, and IMF support. Due to political and social instability, Argentina’s economic crisis became one of the worst in emerging economies (GezmiÅŸ, 2018). The Argentine economy recovered quickly from its slump due to global growth and a favorable export exchange rate. The 2001-2002 Argentine Financial Crisis was caused by an exaggerated response to hyperinflation, a failure to implement structural reforms, and a management strategy that left the country vulnerable to external shocks and fluctuations in international capital flows (GezmiÅŸ, 2018). Argentina entered the new millennium with a massive output contraction and the most significant foreign debt default.
The Russian financial crisis of 2014-2016 can be traced back to the rouble’s precipitous value drop in that year’s second half. Investors’ loss of faith in the Russian economy caused them to sell their Russian holdings, lowering the value of the Russian rouble and raising fears of a financial crisis (Davydov, 2018). Two significant factors caused people’s lack of trust in the Russian economy. One example was the drop in oil prices in 2014. Crude oil, Russia’s main export, fell nearly half in price between its yearly high in June 2014 and December 16, 2014 (Davydov, 2018). The second factor is the fallout from international economic sanctions imposed on Russia in response to its role in the annexation of Crimea, the Donbas War, and the broader Russo-Ukrainian War.
The United States wielded significant influence over both countries’ economies during Argentina and Russian financial crises. Therefore, it can be viewed that as a similarity, there was the influence of other countries and international bodies, the case of IMF for Argentina, for the two case crises (Eiteman et al., 2016). Russia blamed the depreciation of the ruble and sanctions, whereas Argentina blamed hyperinflation and a lack of solid macroeconomic cultural reforms. Oil price was directly related to the unstable economy that led to the Russian crisis.
The first is to emphasize complex systemic issues rather than surface-level macroeconomic indicators. Argentina’s GDP grew by an average of 6% per year from the CP’s inception in 1991 to 1997, and the country could keep its overall debt under control (World Bank, 2019). However, GDP growth obscured that significant new borrowing had occurred, which could not be reversed if the economy suddenly contracted (Eiteman et al., 2016). As depicted by the Russia case, aversion should be implemented to avoid inaction on systemic issues such as labor reform, federal-provincial relations, cronyism, pensions, and vulnerability to external factors.
Second, the two cases demonstrate the dangers of deferring necessary reforms during periods of rapid economic expansion. If the peg had been removed for Argentina, the peso would have lost value immediately concerning the dollar (GezmiÅŸ, 2018). During development, it would not experience the same capital flight as in 2001-2002. The Mexican Peso Crisis contagion taught the wrong lesson; President Menem should have been concerned, not reassured, that the economy was hit so hard (World Bank, 2019). In the Russian case, overreliance on the influence of other countries should be averted, as being sanctioned by the USA contributed to adverse effects on the troubled economy.
Dependence on erratic foreign capital inflows poses risks. Argentina continued to rely on foreign financing to cover its budget deficit even after the oil price shocks of the 1970s. Gaining from widening spreads over US Treasuries put them at risk when investor sentiment shifted due to external crises, but it also provided incentives to pursue this strategy (World Bank, 2019). The long-term consequences of Latin America’s ongoing trend of substituting foreign capital for domestic savings remain unknown (Davydov, 2018). Portfolio investments require more scrutiny than foreign direct investment or private bank lending due to their high liquidity, which allows investors to flee the market at the first sign of concern. Prudential banking regulation includes stress testing, as do other important international institutions.
References
Davydov, D. (2018). Does state ownership of banks matter? Russian evidence from the financial crisis. Journal of Emerging Market Finance, 17(2), 250-285. Web.
Eiteman, D. K., Moffet, M. H., & Stonehill, A. I. (2016). Multinational Business Finance. 15th Edition.
Gezmiş, H. (2018). From neoliberalism to neo-developmentalism? The political economy of post-crisis Argentina (2002–2015). New political economy, 23(1), 66-87. Web.
World Bank. (2019). Global financial development report 2019/2020: Bank regulation and supervision a decade after the global financial crisis. The World Bank. Web.