Argentina Devaluation Raises Fears of a Crisis
The issue raised by the devaluation of the Argentinian currency has brought uncertainty not only to the country but also to the rest of the world. Argentina suffered an economic crisis back in the late 1900’s – early 2000’s and it might expect another crisis in the near future. An exchange rate control was applied in this country many years ago which basically consists on not allowing citizens to exchange their Pesos for Dollars in the free market. The government’s idea behind the exchange control is to increase the GDP by encouraging citizens to keep their capital in the country and investing in it. However, because the situation in Argentina is not appealing for investors they prefer to convert their Pesos into US Dollars and just keep their money out of the country. The constant depreciation of the currency means a loss of money for each extra day people keep their pesos instead of exchanging them for a foreign currency. Devaluation of the currency means that the value of the Pesos is worth less, which makes imports even more expensive than before and finally leading to an inflation issue in the country. The fact that Argentina imports more products than what they produce makes the devaluation have a huge impact in inflation. Due that the main objective of this strategy is to encourage people to stay and invest in the country, interest rates have to stay low in order to make loans more affordable for investors. Argentina has a major economic problem because the fiscal balance is extremely negative. The borrowing part of the country is extremely high compared to their savings. The fact that as explained in the article Argentina has lost almost half of their reserves in trying to preserve the stability of the currency shows that the country has no income that sustains the economy and that it only prevails by borrowing money or spending the federal reserves. A situation like this happened a few years ago when...
Please join StudyMode to read the full document