Why did Argentina's Currency Board Collapse
This paper sheds light on the risks associated Currency Board Arrangements, referring to the liquidity crisis that emerged in Argentina in November 2000. The inability of the Argentinean economy to grow because of an overvalued peso increased the country’s reliance on external borrowings, which seriously undermined the credibility of its fixed exchange rate regime. This paper shows that with rigid labour markets, a lack of fiscal discipline and the absence of a natural anchor currency, Argentina was never a strong candidate for a hard peg. When the years of euphoric growth ended, the currency board arrangement became a trap that could not be removed smoothly given Argentina’s highly dollarised financial system. A series of measures aimed at reviving growth were implemented in order to prevent the country from defaulting on its foreign debt. But with no signs of upturn in demand, increasingly distrustful international investors and growing social unrest, the country was forced into default in December 2001, one year after the initial eruption of the liquidity crisis, putting an abrupt end to Argentina’s decade long experiment with hard money
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