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Sovereign default by Argentina: 'slow motion train crash' or self-fulfilling crisis?
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García Fronti, Javier I., Miller, Marcus, 1941- and Zhang, Lei, Dr. (2002) Sovereign default by Argentina: 'slow motion train crash' or self-fulfilling crisis? Discussion Paper. Centre for Economic Policy Research (Great Britain), London.
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Abstract
To check hyperinflation, Argentina pegged the peso at one US dollar in 1991. This stopped inflation in its tracks: but, with the rise of the dollar against the Euro and the substantial devaluation of the Brazilian real, the peso became increasingly over-valued leading to a significant country-risk premium on Argentine dollar liabilities as devaluation with ‘pesification’ was anticipated. Here, we apply the Ozkan and Sutherland (1998) model of over-valuation and currency crisis to analyse three scenarios: (i) that Cavallo unnecessarily delayed devaluation, (ii) that the delay was reasonable, and (iii) Cavallo’s view, that the peg should have been preserved but was destroyed by self-fulfilling panic. In conclusion, we argue that, as the costs associated with devaluation and default are largely determined ex post, so the appropriate interpretation depends on how the crisis is handled.
| Item Type: | Working or Discussion Paper (Discussion Paper) |
|---|---|
| Subjects: | F History United States, Canada, Latin America > F1201 Latin America (General) H Social Sciences > HJ Public Finance |
| Divisions: | Faculty of Social Sciences > Economics |
| Library of Congress Subject Headings (LCSH): | Debts, Public -- Argentina, Devaluation of currency -- Argentina, Currency crises -- Argentina, Argentina -- Economic conditions -- 1983- |
| Series Name: | Discussion paper (Centre for Economic Policy Research (Great Britain)) |
| Publisher: | Centre for Economic Policy Research (Great Britain) |
| Place of Publication: | London |
| Date: | May 2002 |
| Number: | No.339 |
| Number of Pages: | 20 |
| Status: | Not Peer Reviewed |
| Access rights to Published version: | Open Access |
| Funder: | Economic and Social Research Council (Great Britain) (ESRC) |
| Grant number: | R000239216 (ESRC) |
| References: | Calvo, Guillermo (2000). “Capital markets and the exchange rate with special reference to the dollarization debate in Latin America”. Mimeo, April. Available on line at http://www.bsos.umd.edu/econ/ciecalvo.htm. Cavallo, D. (2001a) "An Open Letter to the Market" April 12, 2001 was in http://www.infoarg.org/PDF/open.PDF at May 2001. Cavallo, D. (2001b) "Queremos evitar que la Argentina entre en el caos". La Nacion. Buenos Aires. December 2. Duhalde, E. (2002) ‘El discurso de asunción de Eduardo Duhalde’. La Nación. Buenos Aires. Jan. 1. Fenix Plan (2001) Hacia el Plan Fenix: Diagnostico y propuestas. Una estrategia de reconstrucción de la economía argentina para el desarrollo con equidad. Enoikos N.19. Buenos Aires: Universidad de Buenos Aires. Available on line : http://www.econ.uba.ar/www/destacados/deuda.htm Fronti, Javier I. G. (2002). “Could a country with a policymaker completely committed to a fixed exchange regime devalue? The case of Argentinean crisis 2001.” Mimeo, University of Warwick. Hausmann, R. (2001) ‘A way out for Argentina’. Financial Times. London.October 30. Miller, Marcus and Lei Zhang (1996) “Optimal target zones”, Journal of Economics, Dynamics, and Control. (20) pp.1641-1660. Ministry of economy (2001). Información económica, Ministerio de economía de Argentina, Avaliable on line: http://www2.mecon.gov.ar/infoeco/. Ozkan, Gulcin and Alan Sutherland (1998) “A currency crisis model with an optimising policymaker” Journal of International Economics (44) pp.339-364. Sachs, J. A. Tornell and A Velasco (1996) “The Mexican peso crisis: sudden death or death foretold?” Journal of International Economics, Symposium, 41,265-283. Smalhout, J. (2001) ‘Cavallo's high-stakes confidence game’. Euromoney, London; May 2001. Wallin, M. and Druckerman, P. (2001). ‘Argentina's Beleaguered Government Collapses --- President de la Rua Resigns, Unable to Quell Violence Fueled by Finance Crisis’ Wall Street Journal; New York, N.Y.; Dec 21, 2001. |
| URI: | http://wrap.warwick.ac.uk/id/eprint/1697 |
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