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In 1983, Raul Alfonsin became Argentina’s first democratically elected president after years of military dictatorship. He had campaigned on the slogan, “with democracy one can eat, be educated, and be cured of illness,” however, he could not make it a reality, for his government became plagued by economic distress suffering from the legacy of the military dictatorship.18 “The most pressing economic issue that the new democracy needs to face,” as one commentator flatly put it, “is the external debt, “totaling US$ 45 billion in 1983, 70% of the country’s GDP.”19 20 Being unable to repay it, the country lost the right to borrow in the international markets, and the ensuing credit crunch was accompanied by hyperinflation.21 22 Inflation had to be reduced if Argentines themselves were to regain confidence in the economy, while foreign investment necessary for economic recovery depended on price stability.

During his first year in government, Alfonsin took measures to improve the country’s economy. As a democracy, Argentina was able to obtain an extended IMF loan to foster its recovery for example, but this success was short lived, for in 1985 the country suffered a hyperinflationary outburst, with levels of up to 672.2%.23 24 The situation worsened and Argentina fell into a spiral of hyperinflation that “bedeviled and liquidated the Raul Alfonsin presidency (1983-1989) six months before the end of its constitutional term.”25 Under the new president,Carlos Menem, hyperinflation continued despite his commitment to neoliberal measures — notably the deregulation of the economy, and some privatizations of state assets. It was only in 1991, with the Convertibility Law (described below), that inflation was finally put to rest.


The eight-year long financial crisis had severe social effects. Sustained, and at times exponential, increases in the prices for goods and services did not coincide with growth in earnings, which affected the lower classes in particular by making them effectively poorer.26 27 28 Additionally, average people who had their savings in the national currency found themselves with a considerable decline in purchasing power. Wages were only adjusted at the end of the month, whereas goods such as groceries were adjusted on a daily basis. This meant that the general population had to very carefully select when to purchase their groceries and, as a means of survival, desperately search for stores that had still not adjusted their prices.29 This phenomenon resulted in economic chaos and consequently social chaos followed. The figures below show the runaway inflation, peaking in the years of 1989 and 1990. These numbers, however, only suggest the suffering that Argentinians experienced.

Annual Inflation Rate for Argentina from 1983 to 1990:30


Inflation rate (%)



















Menem’s government only began to successfully slow inflation down in 1991, with the implementation of the Convertibility Law instituted by the new Finance Minister, Domingo Felipe Cavallo — a neoliberal economist with a PhD from Harvard University. Cavallo took office on the February 1st; by March 27th he had received congressional approval to enforce his Convertibility Plan, which consisted of fixing the peso to the US dollar on a one-to-one basis.31 “From then on,” Ronaldo Munck has established, “domestic money creation would have to match the available US dollars, in order to avoid the money-printing syndrome of the inflationary past.”32 This meant that the Central Bank could only print pesos that were backed up by dollar reserves and that the Argentine monetary system would become inherently dependent on its ability to accumulate dollars, resulting in the stabilization in the price of the peso. Indeed, for nine years Argentina had no inflationary concerns, a welcomed relief. The data attest to this, truly an astonishing feat when compared to the inflation of the previous decade. Inflation was reduced to single digits within the first three years of the program.

Annual Inflation Data for Argentina from 1991 to 2000:33


Inflation rate (%)





















In order to maintain convertibility, which controlled inflation, Argentina needed to guarantee the balance between the net inflow of dollars and domestic monetary creation. There are two principal ways to do so: “(a) large surpluses in the current accounts (exports greater than imports) or (b) net capital inflows of other kinds.”34 Surpluses increase the Treasury’s dollar supply both directly and indirectly. Some exports are paid for in dollars and these go directly into the Treasury, other goods are paid for in pesos, which can be used to buy dollars in foreign exchange markets – indirectly increasing dollar supplies. This, however, was not a reality for Argentina. The reasons as to why have been covered in the previous section (page 16). For their part, capital inflows “could be stimulated by […] privatization of public activities such as utilities where a steady flow of rents is always guaranteed; and/or borrowing on international financial markets.”35 Argentina followed these two policies extensively during the 1990s. Ensuring a steady inflow of dollars into the economy, these measures translated into a growing monetary base, which in turn led to economic stability.

During the process of privatization, as previously covered, the state sold a number of its public assets to private companies, both foreign and national, to generate financial profits (rents).36 Cavallo did not invent this policy, for it had begun for key industries such as railways, airlines, telecommunications, and petroleum prior to his ministry. Indeed, “a portion of Telefonica, Telecom, and Aerolineas Argentinas had already been sold” when he took office.37 After Cavallo began his term, however, the pace accelerated. As one expert summarized it:

“Privatizations were accelerated, by December of 1992, important companies, such as Entel, Segba, Aerolineas Argentinas, Somisa, Gas del Estado and Obras Sanitarias had been fully or partially sold. […] Soon after came the privatization of the petroleum companies Bahia Blanca, Encotes and of the airports. From the beginning of the privatization process up to 1999, it had been estimated that US$ 35,000 million (US$ 35 billion) had been raised.”38

The selling of state assets led to an inflow of capital into the Argentine economy and improved the country’s economic conditions. As one commentator put it, “privatization and budgetary austerity attracted capital, thereby expanding domestic monetary creation and leading to a euphoria that, between 1991 and 1995, generated a growth rate in excess of 4 percent per year.”39

In tandem with privatization, the Argentine government increased its debt by borrowing in the financial markets. Part of this came from loans issued by the IMF and prolonged throughout the 90s, as the process of privatization continued and gave the IMF further evidence of Argentina’s commitment to free markets. The other part originated from “international financial companies [that] were pushing loans” onto the country’s local capitalists.40 The key tenant for this to happen was the signing of the Brady Bonds that I covered in the preceding section. In the end, total national indebtedness increased eleven-fold from 1991 to 2001.41 Accordingly, rising indebtedness was made possible by all of the reforms undertaken by the country. As has already been touched upon, for IMF officials the Brady agreements came to be as a result of Argentina adopting market oriented reforms, of which privatization only played a small role. In the case of lenders who purchased Argentine debt, they were also influenced by all of the reforms. In subsequent sections of this thesis I will show how Cavallo’s accounts challenge this perception – he believed that privatization was at the center of the country’s borrowing policy/ability, not just attendant to it.

The combination of capital inflows, a growing money supply and price stability set the foundation for economic growth. At a domestic level, the dollar to peso parity gave Argentines increased purchasing power because they now earned in “dollars.” The improvement of services through privatization meant that demand for amenities was also rising. Private companies tend to provide better services than state companies because they are subject to competition and experience higher risk of default, while state companies act in a monopoly in which customers have no choice of service provider. The latter can also be unprofitable — as the state has to cover losses — resulting in low levels of investment in infrastructure, leading to bad services. A quotidian example of this phenomenon is the implementation of phone lines. Prior to the selling of the state telephone company for example, families had to wait for years to get working lines. After privatization they could have the service within a week.42 At a macro level, the stability achieved with the convertibility law contributed to accelerating capital investments from industrialized economies. This stimulated consumption, which in turn stimulated the Argentine economy.43

Indeed, the results were positive. GDP rose from 1990 to 1998, with only one year of negative growth during Mexico’s financial crisis in 1995. Moreover, what economists sometimes call the misery level (= inflation + unemployment – GDP growth) declined during this period. Argentina was also being hailed as the exemplary case of success in the developing world. International publications praised the country and Latin Finance Magazine named Cavallo economist of the year.44 For a period, it seemed as though convertibility had solved the country’s problem, returning Argentina to a level of prosperity that had only been experienced in the late 1800s.45 46

Misery Level (in %, see above for definition) for Argentina from 1990 to 1998:47


Misery Level (%)



















Gross Domestic Product Annual Variation (in %) for Argentina from 1990 to 1998:48


Toward the end of the decade, however, Argentina’s economy began to show signs of strain, mostly caused by the convertibility program. Roque Fernandez had replaced Cavallo as Finance Minister in 1996, but “the difference between them was primarily in style,” not in policy.49 More importantly, the convertibility model setup by Cavallo was still in place but the privatization program had exhausted itself. By the end of the century most of Argentina’s industries had been denationalized, which meant that the country was solely dependent on borrowing to feed its treasury. As Di Pietro explains, “the financing of the negative balance of payments with foreign capital was not sustainable, this was because the movement of capital can occur for multiple reasons.”50 For example, “an increase in interest rates in the US would rapidly volatize foreign capital.”51 In other words, if the return on investing in American bonds were to increase, the capital invested in Argentina would be transferred to the US in order to take advantage of the added returns and the relatively lower risk of American securities.52 Foreign capital was also volatile because of the “country-risk” associated with emerging economies — the danger that the country will not be able to honor its debts. If there is speculation that this will happen, foreign capital tends to flee. As one scholar has put it, “In the case of peripheral countries, a persistent and rising external deficit is immediately translated into the threat of insolvency.”53

Mexico’s 1995 economic crisis caused further worry; lenders in Argentina became apprehensive and, according to the traditional economic explanation, a crisis was averted only because of trade expansion within the newly created Mercosur area, a free trade market in between Argentina, Brazil, Paraguay, and Uruguay.54 This calmed lenders as Argentina’s fiscal situation improved as exports increased. Yet the country’s GDP contracted by around 3 percent and, worse still, the crisis exposed its dependence on foreign capital. Argentina’s vulnerability to regional crises continued. By 1998, Mercosur was absorbing 35 percent of the country’s exports and in the same year Brazil’s economy collapsed (Efecto Caipirinha).55 The immediate effect was the real (Brazilian currency) being devalued by 40 percent. The devaluation of the real meant that Argentine goods had become relatively even more expensive, thus were less in demand. “From January 1999 onwards there was a direct [encarecimiento] of [Argentina’s] exportable products” that led to a decline in the level of exports.56 Consequently, the country began experiencing negative GDP growth, which lasted until 2002.

Argentina’s monetary policy was also impacted by Brazil’s crisis. First, it “put to rest any illusion regarding long-term growth in the Southern Cone countries of Latin America,” diminishing market confidence in the region.57 Second, and more importantly, it underlined a fundamental truth: “real production could not possibly sustain the enormous debt and interest burden of Argentina.”58 Undoubtedly, the country was not capable of exporting enough to overcome the debt that had been accumulated over the past 8 years. The combination of these two weaknesses meant that Argentina had difficulties renewing existing debt and issuing new obligations. If they borrowed they now had to do it on increasingly unfavorable terms as lenders feared devaluation, which would result in a significant loss in their investment. The outcome was what one commentator described it, “an economic, not a political, debate about the necessity to devalue the Argentinean currency.”59 The conclusion among experts was that the peso to dollar parity could not be sustained much longer, but Argentina’s government decided to maintain the policy.60 As a result, its exports remained “expensive” and declined in demand, while the country continued to borrow in the financial markets, increasing its overall debt. The recession deepened as the GDP continued to fall, and confidence in Argentina’s credit steadily declined.


This situation worsened in 2001. Fernando de la Rua, the country’s president at the time, called Cavallo back to his post as Finance Minister, from which he had resigned in 1996 after falling out with President Menem, with both men claiming that the other was involved in corruption scandals. Under Cavallo’s guidance and the IMF’s recommendations, de la Rua’s government undertook a series of orthodox austerity policies, including reducing public sector wages as well as pension entitlements. In spite of these policies, international lenders did not gain confidence and continued to flee, as interest rates on foreign debt rose further. In the end, the country could no longer borrow and the devaluation of the peso became a certainty. By the end of the year, lenders were withdrawing $1 billion per day. To make matters worse, it was evident that Argentina was going to default on its foreign loans. The decline in exports meant that the country had limited real production to generate tax revenues available for debt service. The increase in interest rates, which had been taking place since the Brazilian crisis, meant that the new loan payments were more expensive. The Argentine bond jumped by around 800 basis points over the US Treasury bond in 1998.61 Finally, the unavoidable devaluation, a result of no more privatization and no access to loans, meant that Argentina was likely to have to pay off its dollar loans in an undervalued peso.62 The bond-spread variation can be seen below.


A further consequence of the foreseeable devaluation was that Argentines rushed to withdraw all their savings from the banks. For nine years they had earned in “dollars.” If they did not withdraw their deposits before the end of convertibility, they would effectively lose their money, as they would not be able to exchange pesos for dollars at the parity rate. The demand for currency overwhelmed both the private and federal banks.64 Fearing a bank run, Cavallo implemented a “state–imposed freeze on bank accounts […], severely curtailing access to savings,” a process called El Corralito.65

Enforced in November 2001, this measure was met with social revolt. Picture yourself unable to withdraw money from your bank. Picture yourself knowing that the savings you had accrued for years would most likely be worthless if you could not get them out. The result was chaos. Argentina’s economic crisis had transformed into a sociopolitical one. People took to the streets, ransacking supermarkets and other convenience stores in the city of Buenos Aires on the 19th of December. That same night President de la Rua announced a state of emergency. This led to further revolts, with protestors famously banging pots and pans in criticism of the government’s political economy (Cacerolazos). On the 20th of December rioters gathered outside the Casa Rosada, Argentina’s presidential mansion, screaming “que se vayan todos, or, all politicians should quit. The same day protestors picketed outside Cavallo’s home, resulting in the minister’s immediate resignation. The next day President de la Rua also renounced his post, fleeing the Casa Rosada by helicopter after broadcasting his decision on national television. Indeed, “under Menem [and his successors] politics were completely subdued under the economic question.”66 When economics failed politicians had to pay.

The run on banks was not the only problem. After de la Rua’s resignation the interim government announced that the country would default on its international debt. Adolfo Rodriguez Saa, the acting president, claimed that Argentina was insolvent and hence would not be making payments on its contracted debts. This was the largest debt default in history, amounting to US$ 155 billion. In fact, negotiations regarding debt restructuring are still taking place today. More importantly, with the default Argentina was officially and determinably cut off from foreign capital.

With the official end of borrowing, no more privatization, and dwindling foreign reserves, Argentina’s currency finally devalued in the first month of 2002. Because of the corralito, ordinary citizens lost around three quarters of their savings, embodying the failure of the economic model.67 For those who had their deposits in pesos — mostly the working class — devaluation resulted in significant decline of their purchasing power. For those in the middle-upper class who had their deposits in dollars the loss was even greater.68 The government converted all these savings into pesos at the new official rate, which was below the market rate. “The dollar, once ‘freed’ rapidly went up to 1.70 pesos, and by 2002 the dollar was being valued at 3.5 pesos and more.”69 The dollar to peso exchange rate was subject to the forces of the market and responded to Argentina’s economic prospects. Instead of basing their conversion on the market rate, the government instilled their own conversion metric. The government also decreed that all deposits in dollars were to be converted into the local currency. Their metric overvalued the peso (or undervalued the dollar), and thus resulted in immense losses for the middle class. For instance, an average Argentine who had saved up US$100,000 would have this converted to pesos at the official rate, which I will set at 2:1 (2 pesos = US$1) to simplify this example. In exchange for his dollars he would receive 200,000 pesos. If he wanted to convert this back to dollars, and put his savings in a foreign bank or buy American assets, he would need to go through an exchange dealer. This dealer would quote him the market rate, which I will set at 3.5:1 (3.5 pesos = US$1). The Argentine would receive roughly US$57,000. In effect, he lost US$43,000, and his savings almost halved. Furthermore, the higher (peso worth more dollars) the government set its exchange rate, or the lower (peso worth fewer dollars) the market rate, the more Argentines lost through this operation. The population ended up paying for the failures of Argentina’s political economy.

Beyond the immediate causes of the crisis, such as the devaluation of the Brazilian real, and “the world economy moving to a generally recessive phase,” the neoliberal policies of Cavallo also played a role in Argentina’s predicament.70 At the very least, one can make the argument that Argentina’s monetary policy imposed too much discipline on a system that needed elasticity.71 That is to say, the peso to dollar parity was too rigid. In 1999 the peso did not devalue with the real. This may have been out of fear of hyperinflation with an un-pegged currency or because Argentina had contracted debts in dollars (Brady bonds were dollar denominated), so paying them off in a devalued peso would be costly. Regardless of the motivation, the result was that Argentina committed to an unsustainable monetary policy. Thus, forcefully maintaining parity led to a more severe crisis — a larger default, with unprecedented effects on the entire Argentine population. At most, one could also say that Argentina’s economic policies were the underlying cause for the crisis that ensued. Parity in Argentina, as Halevi explains, needed privatization and borrowing. The former had to end at some point, as states have only so many assets that can be sold, and the latter was dependent on market sentiment. Argentina needed lenders to be confident about the country’s ability to pay back its loans. In the end, Argentina accumulated too much debt for its real production to be able to offset and the country, as a result of lender’s confidence during the 90s, had become too highly levered. Argentina’s economy was not yielding enough to cover its debts – exports were low, as improvements in their quality, through investments in infrastructure, had not advanced enough to cover their high sale price. Therefore, Argentina was continuously selling an expensive yet ‘inferior’ good, leading to its low demand. Upon realizing that the country’s production levels from activities such as exports could not possibly handle such obligations, financial capital fled the country and loans were not extended. Leading to a default, this phenomenon ended the prized convertibility program. The rest of this thesis will be devoted to understanding Cavallo’s thoughts on the borrowing-privatization relationship, which was fundamental in maintaining the convertibility scheme, and then judging whether they were applicable to Argentina’s case.

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