A Comparative Analysis of Turkey and Argentina

Topics: Balance of payments, Argentina, Currency Pages: 6 (3853 words) Published: October 26, 2014

Finance 351 – International Finance
A Comparative Analysis of Turkey and Argentina
Paper No. 1

Executive Summary
In our analysis of the Argentinean and Turkish crisis we found that each country’s crisis was caused in different ways but both cases witnessed common mechanisms. When comparing Turkey and Argentina it can be seen that both crises were preceded by a large amount of capital inflows. These capital inflows came predominantly from portfolio investments from US and Europe, and in both cases it these inflows were able to offset the countries’ devaluing currency and current account deficit.1 In both Turkey and Argentina the crisis occurred after a drop in foreign investor confidence and the immediate withdrawal of capital. The countries overreliance on “hot money” created a situation where the two economies relied on the confidence of foreign investors to fund their countries current account deficits. That said the context of both crises were different between Argentina and Turkey. The Argentinean crisis for example was influenced more by emerging market contagion than the Turkish crisis. In Argentina the devaluation of the Brazilian real greatly hurt the country’s ability to export. With a third of exports destined for Brazil, Argentina’s current account deficit widened and the peso needed to devalue in order to compete with the rest of the Latin American’s devaluating currencies. The Turkish Crisis however, was cause more by its own internal problem than from international contagion. In Turkey the lack of confidence from investors related more so with Turkey’s own political and economic struggles rather than a case of throwing the baby out the with the bathwater. That said it is important to note that Argentina had many difficulties of its own, but also had international contagion effect its crisis more severely. In our analysis we concluded that the top three factors for each country’s crises were as follows (in no particular order): Argentina:Turkey:

Loose Fiscal Policy - Corruption Contagion - Political Instability
IMF Involvement - Banking Sector’s Uncovered Interest Arbitrage Today it seems that both Turkey and Argentina are once again struggling to maintain a stable political and economic environment. Argentina’s situation seems much graver than that of Turkey however both show a possibility further deterioration. The general consensus in for Argentina is an inevitable crisis. The IMF has already stepped in to try to turn the country around but it is debatable if their presence is making maters better or worse. Argentina today has practically no investor confidence and until its debt is restructured and a new political party comes to office the situation is not expected to get any better. In Turkey however there is more optimism in its outlook than in Argentina. There is a material amount of political turmoil in the country however it is believed that the current ruling party will win the power struggle which reduces a bit of the uncertainty in the region. For Turkey retaining and improving existing investor confidence is key to preventing another crisis, considering its reliance on “hot money” and fragility of its current account balance. Both Argentina and Turkey have tightened monetary policy in the hopes of regaining investor confidence and increasing investment into the country however both actions did little to stir up markets. The future of both nations will be greatly dependent on how the political dynamic changes and the ability to restore investor confidence. ____________________________

1 Bustelo, Pablo. "Capital Flows and Financial Crises: A Comparative Analysis of East Asia (1997-98) and Argentina (2001-02)." Working Paper No 2004-017 (2004): n. pag. Web. An Examination of the Respective Crises in 2001/2002

Crisis in Argentina
The beginnings of the Argentina crisis date back to March 27,...
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