|Argentina experienced accelerating negative economic growth in 1999, 2000 and 2001. During 2001, notwithstanding a major new IMF support package, confidence faded in Argentina’s ability to service its foreign debt and maintain operation of the convertibility (currency board) system. The crisis of confidence came to a head in December 2001 when the government froze bank deposits to halt an accelerating run that had seen approximately US$20 billion of funds leave the banking system since the start of the year.|
The then Economy Minister, Domingo Cavallo, froze all deposits and established foreign-exchange controls. During the subsequent short-lived Rodriguez Saa Presidency at the end of December 2001, Argentina declared default on its private foreign debt. Early in 2002, the peso was devalued and subsequently floated, and within weeks had dropped by some two-thirds against the US dollar. US dollar-denominated bank deposits, bank loans, rentals and many other contracted values and prices were “pesified” at varying rates.
The Argentine economy contracted by a hefty 11% in 2002. Unemployment and poverty soared. Following the very large devaluation of the peso, consumer price inflation climbed to 41% for the year to December 2002. There were wide fears – including on the part of the IMF – that the banking system might be close to collapse and that the authorities could resort to printing money to seek to avert that, creating an inflationary spiral. That did not eventuate and the economy has gone on to bounce back much faster than expected.