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“The Barber of Buenos Aires”: Finance Case of Argentina Report

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Updated: Oct 18th, 2021

Introduction

Financial problems are typical for every person and every country. Every state in the history of the mankind faced financial problems that sometimes were just timely declines and were than substituted with the periods of growth, like for example the United States of America, Great Britain or France. While other countries declined totally due to the financial problems they had to face but could not solve. The brightest example of the country of this kind is the USSR.

That is why modern science pays so much attention to the situation in finance. All countries of the modern world are concerned with their development and see the sphere of finance as the leading one in order to reach success.

Situation

Thus, the case considered in this very essay is the case of the country that was trying to overcome its economic and financial crisis in order to reach the period of growth of all economic figures and not to be among those countries that does not exist any more because of their financial problems. We are going to consider the economic situation that formed in Argentina by 2005 and was called “The Barber of Buenos Aires”. We shall consider it in order to see its historical background, reasons and consequences for the country. Another aim of ours is to make respective conclusions from the data processed and present certain recommendations for the improvements of the situation.

The situation under consideration was being formed in Argentina through its whole history. After the Spanish rule was dismissed in 1810, the country got independence but was constantly torn apart by inner political and economical conflicts and crises. Having overcome the initial crises, the country was on the edge of breaking into several small states but managed to preserve territorial integrity and become one of the richest in the world by 1913.

The World War I destroyed the stability that was built for such a long time and the economy began to suffer again. The regime of Juan Peron who came to power in 1946 tried to change the situation paying great attention to the economy. Peron’s government, for example, implemented the policy according to which the production of agriculture was bought at domestic prices and sold abroad at world prices, while the difference was shared among the workers. But, in other aspects, that government did not satisfy the demands of the country and was dismissed in 1954.

Already by 1975, inflation reached the level of 400% while the budget deficit was 17% of the country’s total GDP for that year. The implementation of the so called “Austral Plan” (according to the name of the newly introduced currency) in 1989 caused the increase of the inflation to the level of 3, 300%. The Convertibility plan of 1991 managed to improve the situation but for a short period of time. Its essence was in setting the equal value of the Argentinean Peso and the US dollar.

At once, the GDP level was increased for another 9% and with the permanent growth of about 5 – 7% for the next 3 years. But, at the same, time the funds of currency and gold in Argentina became exhausted as the National Bank had to always keep the currency at the dollar level, and the inflation cane back with even greater rates. The GDP fell another 10% by the year 1995 and the government had to resign.

Analysis

By the year 2000, the situation got so bad that Argentina had to take a loan of $40 billion but it did not help. The situation did not support the image of President Duhalde who soon had to leave the office for Nestor Kirchner, who became President in 2003.

The public debt of Argentina by that moment was at the level of $21 billion and the International Monetary Fund demanded that it should be paid because $12, 3billion of the sum was the property of the IMF, and the rest were the loans from the highly developed countries. Kirchner’s policy managed to stabilize the situation at the beginning as the inflation fell to single figures, while the state budget received additional profit of 42% of its sum from export taxes, and 25% from corporate profit taxes.

But again, in 2005 the inflation started to grow. So, the only measure acceptable that was found by the Government was the cutting of then prices of bonds in which all the state debt of Argentina lied. The reduction of the bond values was 75%, so that bondholders could receive only 25% of their money. The head of the National Bank of Argentina stated that 25% was already more than Argentina could afford and bondholders should be satisfied with the sum they will get.

The GDP kicker was invented that promised 5% of the bonds price will be returned over those 25% if the GDP grows considerably in the following years. Lots of the unsatisfied bondholders had to address the International Center for the Settlement of Investment Disputes (ICSID) so that to get their money but only in 2006 Kirchner promised to pay all the debts and issued another amount of bonds valued by dollar and able to be devaluated once again.

As far as the plot of the situation is the “haircut” of the debt of Argentina, we can analyze this in connection with other economic factors, such as budget profit, national incomes, GDP level and the amount of public and domestic debt of the country. The national incomes decreased from early 1990s till 2003 when gradually started to grow, probably due to the policies of “haircut” of the debt. At the same time, the budget indicators such as overall spending and social security experienced rise in the early 2000s while the new policies led to their considerable decline.

Simultaneously, GDP level grew gradually beginning from late 1990s and continued its growth through 2004 – 2005 which can also be connected with the “haircut” policy implemented by the government of Kirchner. To illustrate the situation with the Argentinean debt better, the following table will be helpful:

Factor 2002 2003 2004 2005
Total foreign debt 150 166 182 118
Public Debt 92 99 102 63
Private Debt 29 28 27 24

Conclusions

The situation with the public and private debt of Argentina is rather controversial. The economic crises that occurred in the country in all times resulted in the situation when they became not the problem of Argentina exclusively. International debtors were furious of the policy of “haircut” and demanded to return the whole amount of the money they lent. So, the country will have to look for money in order not to cause some international conflict based on the financial interests of powerful countries.

Recommendations

The following can be recommended in this situation. Firstly, Argentina should pay more attention to the appointment of people to carry out the governmental financial operations so that to avoid such issues in future. To pay the debt, an appropriate way out may be short term small loans from other organizations that will be paid partially and gradually make it easier to pay off all the debts of the country in several stages.

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