Chauvco Resources Ltd: The Argentina Decisions (B‪)‬

Argentina's fiscal deficit rose suddenly and substantially after 1995. This increase in deficits caused an increase in Argentina's debt. Argentina's problem was that it did not generate enough foreign exchange through exporting or through foreign investment in Argentina to cover its debt service payments in U.S. dollars. In order to prevent a run on its currency, the government of Argentina raised interest rates, but this caused high unemployment and business losses. In 2001, a foreign exchange panic did develop, and the peso fell by two-thirds vis-a-vis the dollar. Argentina was no longer able to service its debt, resulting in a "debt default." This drastic action of devaluing the peso and defaulting on debt lead to economic recovery. However, by 2005, inflation had climbed once more. Perhaps the inflation/devaluation cycle was about to reappear. Meanwhile, external debt was still very high. Perhaps Argentina would have to default once again. Argentina's president rejected IMF policy recommendations, and he pointed to the IMF as the cause of the 2001-2002 recession. Instead, he relied on price controls and borrowed from Hugo Chavez in Venezuela.