Question

In: Economics

1. How did the Argentine crisis end? depreciation, government debt default and resumed economic growth devaluation...

1. How did the Argentine crisis end?

depreciation, government debt default and resumed economic growth

devaluation to a sustainable fixed rate against the USD, international restructuring of Argentina's debt to avoid default

a long and deep recession with fiscal policy contraction designed to increase budget surpluses for paying foreign creditors

a bailout from the IMF allowing the currency to remain stable and ward off speculative attack

2. In hindsight Argentina held onto its fixed currency too long. Which of the following helps explain why the IMF may have contributed to that mistake?

the IMF wanted to see Argentina fail. Because Argentina would not take the IMF's policy advice.

The IMF would profit from depreciation as the institution had taken huge bets against the country's currency

the IMF had recommended the currency peg in the first place and would "lose face", creidbility if the system failed.

the IMF was busy helping Turkey at the time and did not have manpower for advising Argentina

3. One structural fragility that increased the likelihood of default for the Argentine government in the event of a depreciation was?

prevalence of original sin

lack of representation in the IMF

maturity mismatches

a populist oriented Prime Minister

4. Which of the following helped created the "perfect storm" for the genesis of Argentina's crisis? (select all that apply)

multiple adverse trade shock

foreign interest rate shock

capital outflow and speculative attack

financial sector instability caused by speculative real estate investment

Solutions

Expert Solution

1). a long and deep recession with fiscal policy contraction designed to increase budget surpluses for paying foreign creditors

Argentina's economic crisis is the result of avoidable mistakes.  After a poor primary-election outcome, Argentinian president Mauricio Macri finds himself running for another term under economic and financial conditions that he promised would never return.

2). the IMF had recommended the currency peg in the first place and would "lose face", creidbility if the system failed.

a currency whose value in relation to another currency or other currencies is kept at the same level by a central bank.

3). lack of representation in the IMF

"The representation of member countries in the IMF should be in line with the changing economic realities for this institution to continue staying relevant," she said.

4). A) multiple adverse trade shock, and B) foreign interest rate shock

A perfect storm is an unusual combination of events or things that produce an unusually bad or powerful result. Investors are faced with the perfect storm of slowing economic growth, rising prices, and an unstable housing market.


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