Argentine 2002 crisis prevented sub-prime crisis to affect the country
As it was shown in several economic and social indicators and in different economic publication from international and national agencies, the consequences of the 2008 economic crisis affected every social class (mainly working classes) and, in our time more than ever, every country in entire world. The chosen country is Argentina where since 2003 until 2015 the same party was democratically elected three times. Graphs (in annex below) indicate a fluctuating behavior in the main macroeconomic indicators due to internal and external causes. The argentine economy always was very vulnerable and dependent of the business cycle of the rest of the world and, specifically, on the primary product international prices. In this sense, the activity level largely depends on international trade and the ability to get foreign currency (dollars mainly) to finance its development. The first great crisis of this millennium was between 1998 and 2002, mainly caused by non-financed public deficit and mistrust in banking system. International creditors limited capital flows that were used to finance public investment, consumption and imports. However, the crisis was gestated before, influenced by other countries of the world: Mexico (1995), South-East Asia (1997), Brazil (1998) and so on (in the framework of capital and “dot com” crises), becoming Argentina more vulnerable to external shocks and with serious lack of confidence in economic performance. The main important costs were unemployment (rise to more than 20%), poverty (around 50%), and a fall in the GDP of more than 20%.
Then, the recovery took place distinguished by high commodities prices, high exchange rate, idle capacity and a large labor supply. Public expenditure had an important role too. The default of public debt and the arrangement of 2005 with a haircut of around 65% allowed the public sector to increase expenditures, specifically social expenditures. In 2008 the government still had some space for expansive fiscal policy so it was used as a countercyclical tool. What is more, the small financial market of Argentina prevented the country to suffer most of the effects of the international crisis. However, just a few years later, Argentine economy began to suffer a slow process of stagnation in the growth rate, employment and consumption. This is matched with a deceleration of international commodities prices and its main business partners, Brazil, China and the UE.
To reduce influence of foreign speculative capital and global crises the State had an active countercyclical monetary and fiscal policy. Firstly, the recovering of the national pensions system and monetary emission were used to finance public expenditure; secondly, most of these expenditures were subsidies and social plans for lower classes (unemployed and informal workers with children). To sum up, in the short term, these policies were effective to counteract a larger crisis (e.g. Mexico). However, in the long run, the excessive monetary emission and a growing public deficit produced an increasing inflation and a deterioration of job creation. So, after the recovery, unemployment and poverty rates stopped decreasing.
Beyond sub-prime crisis, in 2012 Argentina ruled Capital Markets Law (no. 26.831). This new focus approaches to international standards and practices of main capital markets of the world and gives new faculties to the current National Commission of Values. (CNV in Spanish). The CNV is now in charge of the authorization, registration, control and punishment of market agents and stock exchange activity. The law has also new requirements in concept of release of information that some critics consider as an advance of the public control over stock’s market. There is a special article (no. 141) in this norm about the systemic risk but it is vaguely specific on this term and about what actions should be taken by CNV.
Although the new law is an approach to international standards, the Argentine stock market actually is a smaller one of the region. After 2002 crisis the size of the capital market fell down, largely behind Brazil, Peru, Chile and Colombia. The nationalization of pension’s system contributed to this. Now the pension’s system is one of sharing instead of capitalization, before 2007 workers could choose between private or public funds (private funds used capitalization model), so they had an active participation in stock markets indirectly. Nowadays, working classes do not usually access to this kind of assets, they just prefer a fixed-term deposit or to save foreign currency (dollars). This prevents relatively the typical volatility of the country, but the real economy is affected because the capital market to finance the investment remains too small. So, the new party elected last November (PRO) has a friendly relationship with financial markets and entrepreneurship, and it is expected that in following years the size of the market will grow in tune with less capital and markets controls. If it really comes true, the vulnerability of Argentina’s economy will grow up.
At the present time, the relationship between Argentina and United Kindom is less significant than it is used to be historically. Actually, the UK represents just 1% of total Argentine exports and imports. This means that Argentine international trade is not going to be affected by the Brexit. However, taking into account the relevance of England in financial markets and the risks that the Brexit brings to the international economy, some investors could prefer to stay in less risky markets, such as United State, Europe and London, instead of financing a risky developing country as Argentina. To sum up, at least for now, the event was not significant enough to produce a global crisis. Besides, Argentine relationship with the UK is not very important, so the country will not probably be affected by the Brexit.