When a short boom in the early 1990s of
portfolio investment from abroad ended in 1995, Argentina became reliant on the
IMF to provide the country with low-interest access to credit and to guide its economic reforms. When the recession began in 1999, the national deficit widened to 2.5% of GDP, and its external debt surpassed 50% of GDP. Rising bond yields forced the country to turn to major international lenders, such as the IMF, the
World Bank, and the
US Treasury, which would lend to the government below market rates if it complied with conditions. Several more rounds of belt-tightening followed.
José Luis Machinea resigned in March 2001. He was replaced with
Ricardo López Murphy, who lasted less than three weeks in office before being replaced with Cavallo. Cavallo reacted by offering bondholders a swap: longer-term, higher-interest bonds would be exchanged for bonds due in 2010. The "megaswap" (
megacanje), as Cavallo referred to it, was accepted by most bondholders, and it delayed up to $30 billion in payments that would have been due by 2005; but it also added $38 billion in interest payments in the out years; of the $82 billion in bonds that eventually had to be
restructured (triggering a wave of holdout lawsuits), 60% were issued during the 2001 megaswap. Cavallo also attempted to curb the budget crisis by instituting an unpopular across-the-board pay cut in July of up to 13% to all civil servants and an equivalent cut to government pension benefits, De la Rúa's seventh austerity round—triggering nationwide strikes, and from August, it paid salaries of the highest-paid employees in
IOUs instead of money. up from a 14.7% a month earlier, The crisis intensified when, on 5 December 2001, and it demanded budget cuts, 10% of the federal budget. On 4 December, Argentine bond yields stood at 34% over U.S. treasury bonds, and, by 11 December, the spread jumped to 42%. By the end of November 2001, people began withdrawing large sums of dollars from their
bank accounts, turning pesos into dollars, and sending them abroad, which caused a
bank run. On 2 December, the government enacted measures, informally known as the
corralito, which allowed for only minor sums of cash to be withdrawn, initially $250 a week.
December 2001 riots and political turmoil The bank withdrawal freeze led to widespread protests, particularly in Buenos Aires. They engaged in protests known as
cacerolazo (banging pots and pans). Initially peaceful, these demonstrations later involved damage to property, including banks and foreign-owned companies, particularly those from the United States and Europe. resigned on 21 December 2001. Confrontations between the police and citizens became common, and fires were set on Buenos Aires avenues. De la Rúa declared a
state of emergency, but the situation worsened, precipitating the violent
protests of 20 and 21 December 2001 in
Plaza de Mayo, where clashes between demonstrators and the police ended up with several people dead and precipitated the fall of the government. De la Rúa eventually fled the
Casa Rosada in a helicopter on 21 December. Following the presidential succession procedures established in the
Constitution of Argentina, the Senate chairman was next in the line of succession in the absence of the president and the vice-president. Accordingly,
Ramón Puerta took office as a caretaker
head of state, and the Legislative Assembly (a joint session of both chambers of Congress) was convened.
Adolfo Rodríguez Saá, the governor of
San Luis Province, was eventually appointed as the new interim president.
Debt default During the last week of 2001, the administration
defaulted on the larger part of the public debt, US$132 billion, a seventh of all the money borrowed by the
Third World. Politically, the most heated debate involved the date of the following elections. Proposals ranged from March 2002 to October 2003, the end of De la Rúa's term. Rodríguez Saá's economic team came up with a scheme designed to preserve the convertibility regime, dubbed the "Third Currency" Plan. It consisted of creating a new, non-convertible currency, the
Argentino, that would coexist with convertible pesos and US dollars. It would circulate as cash, or but not in checks, promissory notes, or other instruments, which could be denominated in pesos or dollars. It would be partially guaranteed with federally managed land to counterbalance inflationary tendencies. Argentines having legal status would be used to redeem all
complementary currency already in circulation; their acceptance as a means of payment was quite uneven. It was hoped that convertibility would restore public confidence, and the non-convertible nature of this currency would allow for a measure of fiscal flexibility (unthinkable with pesos) to ameliorate the crippling recession. Critics called the plan merely a "controlled devaluation" but its advocates countered that since controlling a devaluation is perhaps its thorniest issue, that criticism was a praise in disguise. The plan had enthusiastic supporters among mainstream economists (the most well-known being perhaps
Martín Redrado, a former
Banco Central de la República Argentina president) citing technical arguments. However, it was not implemented because the Rodríguez Saá government lacked the required political support. Rodriguez Saá lost the support of his own
Justicialist Party and resigned before the end of the year. The Legislative Assembly convened again, appointing Peronist Senator
Eduardo Duhalde of
Buenos Aires Province, who had been the runner-up in the 1999 race for the presidency. ==End of fixed exchange rate==