Ed Andrews Writes About Asset Returns and Economic Growth
Economics 113 Midterm 2

Argentina's Last Crisis

Brad Setser looks back at Argentina's recent crisis:

Brad Setser's Web Log: What happened to Argentine banks in 2001? And why?: Retrospective analysis of what went wrong in Argentina back in 2000 and 2001.... Argentina's crisis was a searing experience for me. In my no doubt biased view, the case studies are the real strengths of this just released IMF paper (fully disclosure: I contributed to the Argentine case study).... The core thesis of the Argentine case study is simple: Argnetine's banks were in far better positioned to survive a devaluation and a government debt restructuring at the end of 2000 than they were at the end of 2001. Consequently, waiting a year had real costs....

[D]uring the course of 2001, Argentine banks got rid of precisely those assets that would (potentially) have performed in the event of a devaluation and government debt restructuring. They ran down their best assets -- their liquid offshore reserves -- to pay off depositors (and to pay off maturing cross border credits). They also reduced their peso lending to Argentine firms dramatically. Peso deposits fell more rapidly than dollar deposits (that, incidentally, does not mean dollar depositors did not run: some peso depositors shifted into dollars, and some dollar depositors ran). To stay matched, currency wise, the banks had to reduce their peso lending commensurately.

That left the banks with dollar-denominated lending to the government, and dollar-denominated lending to Argentine firms. Both types of lending were almost sure to go bad in the event of a restructuring and a devaluation...