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Author(s):
Christina Daseking, Atish Ghosh, Timothy Lane, and Alun Thomas
Published Date:
February 2005
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    Appendix I Argentina’s Potential Output Growth

    As a result of Argentina’s strong growth performance following the stabilization at the beginning of the 1990s, and its recovery from the Tequila crisis, by mid-decade it was commonly assumed that Argentina’s potential output growth was in the range of 4½ to 5 percent per year. At least in retrospect, however, there are reasons to believe that this represented a significant overestimate of potential output growth.

    Potential output growth is the growth rate of the economy at which, in the absence of monetary impulses, there should be no inflationary pressures. Conceptually, potential output growth need not be constant. Indeed, to the extent that Argentina’s structural reforms (including deregulation, privatization, and labor market reforms) in the early part of the decade gave a boost to the level of potential output, potential output growth would surge initially but then return toward its longer-run rate—especially as structural reforms began to fizzle and in, some instances, to be reversed.

    One approach to estimating potential output growth is to fit a smoothing filter to actual real GDP. This allows for some variation in the growth rate of potential output. Given the structural changes of the economy, however, the key question concerns the period over which the filter should be applied. Quarterly (seasonally adjusted) national accounts data are available from 1993, and given that growth in 1991–92 was probably driven by a rebound from the collapse during the hyperinflation, 1993 provides a convenient starting point. More tricky is the choice of the end-point. Figure 14 shows two possible choices, ending the sample period in 1999: Q4 (labeled A) or 2000: Q4 (labeled B); beyond these terminal dates, potential output growth is extrapolated using the final quarter’s growth rate.44

    Figure 14.Potential Output and Output Gap

    1 A Hodrick-Prescott filter is applied to the period 1993:1–1999:4 (Trend A) or 1993:1–2000:4 (Trend B); potential output thereafter is extrapolated using the last quarter’s growth rate.

    2 Output gap implied by Trend A; positive output gap indicates actual output above estimated potential output.

    Using Trend A, output was on average 2 percent above potential in 1997 and, on average, almost 3½ percent above potential in 1998. The growth slowdown brought the economy to 2½ percent below potential in 1999, 5½ percent below potential by 2000, and almost 12 percent below potential by 2001. Using Trend B, output was almost 4½ percent above potential in 1998, close to its natural level in 1999, 2½ percent below potential in 2000, and 7½ percent below potential in 2001. The deceleration in potential output growth in 1999–2000 implied by trend B seems implausibly large, and the small output gaps inconsistent with the behavior of other macroeconomic data. For instance, consumer prices, purged of the effect of import prices, were increasing through the first half 1998, but began to decline in the fourth quarter of the year and continue to fall through 2001 (see Figure 14, bottom panel).45 Likewise, unemployment reached its lowest level in the second half of 1998 (only semi-annual data are available) and started increasing thereafter. The evidence thus suggests that, while output was above potential in the first part of 1998, by end-1998 and early 1999, a clear output gap was emerging—consistent with Trend A, but not with Trend B.

    According to Trend A, potential growth decreased from 3½ percent per year during 1993–97 to 3 percent by 1998 and 2½ percent thereafter. For the period 1993–2001, potential output growth averaged 3 percent per year—well below the 4½ to 5 percent potential output growth underlying medium-term debt sustainability projections. This may also be compared to Argentina’s fitted growth rate implied by the cross-country growth regression reported in Box 8 of the text, which also yields an average growth rate of 3.0 percent per year when the effects of deflation are excluded.46

    Appendix II Chronology of Key Developments in 2001–2002
    2001
    Jan. 12IMF approves augmentation of Argentina’s Stand-By Arrangement to $14 billion and completes second review.
    Mar. 2–3Economy Minister Josehuis Machinea resigns. Ricardo Lopez-Murphy is appointed Minister of Economy.
    Mar. 16Economy Minister Lopez-Murphy announces plan of budget cuts to meet fiscal targets agreed with the IMF.
    Mar. 19–20Economy Minister Lopez-Murphy resigns. Domingo Cavallo is appointed Minister of Economy.
    Mar. 26–28Risk rating agencies lower Argentina’s long-term sovereign rating (S&P from BB to B+ and Moody’s from B1 to B2).
    Mar. 28Economy Minister Cavallo secures “emergency powers” from Congress. Announces economic program comprising a tax on bank transactions, changes in other taxes and tariffs, and sectoral “competitiveness plans.”
    AprilCentral bank reduces liquidity requirements and allows banks to include government securities up to 2 billion pesos among liquidity requirements.
    April 16Minister Cavallo sends to Congress a bill to include the euro in addition to the U.S. dollar in the Convertibility Law.
    April 23Authorities suspend scheduled auction of government bonds.
    April 26Roque Maccarone replaces Pedro Pou as President of the Central Bank.
    May 8Standard & Poor’s lowers Argentina’s long-term sovereign rating further from B+ to B.
    May 21IMF completes third review of Argentina’s Stand-By Arrangement, reprofiling the path for the federal government deficit target during 2001 to accommodate the deviations observed during the first quarter.
    June 3Authorities announce the completion of the “mega-swap.” Government bonds with a face value of $29.5 billion are voluntarily exchanged for longer-term instruments.
    June 15Economy Minister Cavallo announces package of tax and trade measures, including a trade compensation mechanism for exporters and importers of nonenergy goods.
    July 10Government pays yield of 14.1 percent to place $827 million of 90-day paper.
    July 11Economy Minister Cavallo announces drastic program of fiscal adjustment aimed at eliminating the federal government deficit from August 2001 onwards (the “zero-deficit plan”).
    JulyRisk rating agencies lower Argentina’s long-term sovereign rating further (S&P from B to B–and Moody’s first from B2 to B3 and then from B3 to Caa1).
    July 30Senate approves the zero-deficit plan (lower house of Congress had approved it on July 20).
    Aug. 21IMF announces likely $8 billion augmentation of Argentina’s Stand-By Arrangement credit.
    Sept. 7IMF approves augmentation of stand-by credit to about $21.6 billion and completes Fourth Review.
    Sept. 20The Central Bank activates the contingent repo facility with international banks, boosting gross reserves by about $1.2 billion ($500 million was disbursed in October).
    Oct. 9–12Risk rating agencies lower Argentina’s long-term sovereign rating further (S&P from B–to CCC and Moody’s from Caa1 to Caa3).
    Oct. 14Ruling coalition obtains less than 25 percent of the votes in mid-term congressional elections.
    Oct. 28Economy Minister Cavallo announces that he will seek a “voluntary” restructuring of all the government debt.
    Oct. 30Standard & Poor’s lowers Argentina’s long-term sovereign rating from CCC to CC.
    Nov. 1The authorities announce a new fiscal package, including a new batch of competitiveness plans, the rebate of VAT payments on debit card transactions, a temporary reduction in employee social security contributions, a corporate debt restructuring scheme, and a tax amnesty that writes off interest and penalty obligations accrued to end-September 2001.
    Nov. 6Standard & Poor’s lowers Argentina’s long-term sovereign rating from CC to SD (selective default).
    Nov. 23The central bank introduces an effective cap on bank deposits, by imposing a 100 percent liquidity requirement on deposits paying an interest rate more than 1 percentage point above average of all local banks.
    Nov. 26A Peronist senator, Ramon Puerta, is elected president of the Senate, becoming acting Vice-President of the Republic.
    Nov. 30The authorities announce completion of the local leg of the debt restructuring. Government bonds with a face value of $41 billion at the federal level and $10 billion at the provincial level are “voluntarily” exchanged.
    Dec. 1Facing a substantial run on deposits, the government introduces wide-ranging controls on banking and foreign exchange transactions, including a weekly 250 pesos cash withdrawal limit on sight accounts.
    Dec.10The central bank imposes a 98 percent reserve requirement on deposit increases after December 1, 2001, aimed at limiting flight to quality within the system.
    Dec. 13Phase one of the government debt exchange is completed.
    Dec. 19State of emergency is declared to stop protests against Economic Minister Cavallo’s economic policies. The lower house of Congress repeals the special legislative powers granted to Cavallo.
    Dec. 20President Fernando de la Rúa and Minister Cavallo resign after days of riots and protests that leave over 20 demonstrators dead. A banking holiday is declared for December 21, extended through December 26. Moody’s lowers Argentina ratings to Ca from Caa3.
    Dec. 23Rodríguez Saá is named interim President, announces the default on external debt, and calls presidential elections within 60 days.
    Dec. 30President Rodríguez Saá resigns after his emergency policies are rejected by the Peronist governors.
    2002
    Jan. 3Senator Eduardo Duhalde is sworn in as President with a mandate to conclude the remaining period of the de la Rúa presidency; President Duhalde announces the end of convertibility, and the introduction of a dual foreign exchange regime.
    Jan. 24Utility tariffs are frozen indefinitely.
    Jan. 30Emergency law curtailing creditors’ rights is approved by Congress (law becomes effective on February 14).
    Feb. 4The government decrees the unification of the exchange rate regime and the asymmetric pesoization of bank balance sheets (assets at 1 peso/U.S. dollar, and liabilities at 1.4 peso per dollar).
    Feb. 11The foreign exchange market opens for the first time under a unified regime; the peso depreciates to 1.8 pesos to the dollar.
    Feb. 27The federal government and the provincial governors reach agreement on a temporary revenue-sharing arrangement that abolishes the minimum floor on transfers to the provinces in exchange for the broadening of the coparticipation base to include the financial transactions tax, and better terms for their debt servicing. The provinces commit to reduce fiscal deficits by 60 percent in 2002 and to achieve balance in 2003.
    Mar. 5Export taxes of 10 percent and 5 percent are imposed on primary products and processed agricultural and industrial products, respectively.
    Mar. 8The pesoization of government debt under Argentine law is decreed.
    Mar. 13A voluntary bond swap (Swap I) is decreed authorizing the exchange of reprogrammed time deposits for government bonds. The decree also authorized issuance of bonds to banks in compensation for the asymmetric pesoization of their balance sheets.
    Mar. 25The peso reaches a peak of 4 pesos per dollar. To contain the depreciation of the currency, the authorities intervene heavily in the foreign exchange market ($800 million in March), tighten the access to central bank liquidity assistance (a matching dollar from the parent being now requested as a condition for assistance to foreign banks), and introduce a variety of exchange regulations affecting banks, foreign exchange bureaus, and exporters. Thirteen new regulations are issued on March 25 alone, bringing the total for the month of March to about 50.
    April 9Export taxes on agricultural primary products are increased to 20 to 23½ percent.
    April 19The central bank suspends for 30 days Scotiabank Quilmes. A bank holiday is declared until Congress approves a solution to the problem of judicial injunctions (amparos) releasing bank deposits. The authorities begin working on a plan (the so-called BONEX II plan) to convert reprogrammed time deposits into government bonds.
    April 20Economy Minister Jorge Remes Lenicov presents to congress the BONEX II plan; the draft law is rejected and Minister Remes Lenicov resigns.
    April 23President Duhalde reaches agreement with provincial governors on a 14-point Federal-Provincial Pact.
    April 25Congress approves the Ley Tapón to ease pressure from the amparos. The law modifies court procedures, and states that depositors can only access funds once the judicial process is over; in the meantime funds are deposited in an escrow account.
    April 26Roberto Lavagna, former ambassador to the European Union, is confirmed as the new Minister of Economy.
    May 3The central bank approves the capitalization and liquidity plan for Banco Galicia. Exceptions to price indexation for certain types of bank loans and residential leases are decreed. Exempted loans will be adjusted, beginning October 1, 2002, by a wage index (CVS).
    May 6The Federal Congress approves the February Federal-Provincial Pact.
    May 15Congress approves law that reverses the most harmful provisions of the January emergency law and makes limited improvements to the insolvency law.
    May 20The central bank intervenes in Crédit Agricole’s Argentine subsidiaries, Banco Bisel, Banco Suquia, and Banco de Entre Ríos. The banks will be administered by Banco de la Nación.
    May 30The Economic Subversion Law is repealed.
    May 31In order to tighten the control over the sale of export receipts, the central bank announces that dollar export revenues in excess of $1 million will have to be sold directly to the central bank.
    May 31Province of Buenos Aires and federal government sign full-fledged text of Bilateral Agreement. Agreement on the Annexes (quarterly fiscal targets and calendar for disbursement) is reached in June.
    June 1President Duhalde signs the Options Plan on reprogrammed deposits, a revised version of former Minister Remes’ BONEX II Plan, giving depositors the option to exchange deposits into bonds.
    June 12Senate approves draft law limiting foreign ownership in the media to 30 percent of capital.
    June 18The minimum level of export proceeds that should be surrendered to the central bank lowered from $1 million to $500,000.
    June 21Central bank President Mario Blejer resigns.
    June 25Central bank Vice-President Aldo Pignanelli appointed central bank president.
    June 26A second level court rules the Ley Tapón unconstitutional.
    June 26Two demonstrators shot dead by the police; worst riots since December 2001.
    July 2Representatives of trade unions and businesses agree to raise private sector wages by 100 pesos a month effective July 1, and the monthly minimum wage is raised from 250 pesos to 350 pesos.
    July 2President Duhalde moves the presidential election forward to March 2003, from September 2003.
    July 9In response to a class action suit lodged by the country’s ombudsman on behalf of all depositors, a federal court declares the deposit freeze and pesoization unconstitutional.
    July 19Banca Nazionale del Lavoro (BNL) announces that it will gradually withdraw from Argentina.
    July 24The government issues a decree suspending court-ordered withdrawals of frozen bank deposits for 120 business days.
    July 25The decree suspending deposit withdrawals obtained through court orders is declared partially unconstitutional by a federal judge.
    July 26Following a demand by the national ombudsman a judge rules unconstitutional the government decree suspending lawsuits on December’s bank curbs for 120 business days.
    July 29A panel of monetary policy experts makes public several proposals to resolve the country’s financial crisis, including a monetary policy anchor, an independent central bank, the ending of peso printing deficit-financing, and an end to the use of quasicurrencies by the provinces. The report calls for a floating exchange rate and urges Argentina to stop using international reserves to support the peso.
    Aug. 9Central bank director and superintendent of banks Felipe Murolo resigns.
    Aug. 15Congress approves a bill extending for 90 days (through mid-November 2002) the provision that suspends certain kinds of creditor-initiated nonbankruptcy law enforcement actions. Congress also approves a bill extending for 60 days (through end-September 2002) the application of price indexation to loans.
    Aug. 22The Supreme Court declares unconstitutional the 13 percent salary cut for federal government workers and pensioners, implemented from July 2001.
    Aug. 23A federal court declares the open primary elections (where all registered voters can participate) planned for November unconstitutional.
    Aug. 26The government postpones to December 15 (from end-November) the date set for the primaries for presidential elections in order to allow more time to rewrite voting rules.
    Aug. 26The government issues a resolution to allow the issuance of bank-compensation bonds for the asymmetric pesoization.
    Aug. 28A federal court establishes that parent banks should be fully responsible for the liabilities of subsidiaries in Argentina.
    Sept. 3The government introduces new exchange controls in an attempt to boost international reserves and defend the peso: (1) the limit for exporters’ foreign exchange surrender to the central bank is reduced from $500,000 to $200,000; (2) the minimum maturity of external debt contracted by private nonfinancial entities is set to 90 days; (3) exchange bureaus are required to deposit with the central bank foreign exchange holdings exceeding $1.5 million on a daily basis; and (4) the net dollar positions held by exchange dealers operating on behalf of the central bank are reduced by an average 40 percent.
    Sept. 5The federal administrative dispute chamber, an appellate court, rules that the decrees establishing the corralito and pesoization, were unconstitutional. The ruling applies to only one case but opens the door for further similar rulings.
    Sept. 9Further tightening of foreign exchange controls: prior authorization from the central bank for dollar purchases exceeding $100,000 for portfolio and other financial investments abroad, as well as for the purchase of foreign banknotes.
    Sept. 13The Federal Court of Appeals declares the corralito, pesoization, and the 120 days suspension of executions against the corralito, unconstitutional; the decision allows depositors to claim their deposits in court immediately. The 2003 budget is submitted to Congress.
    Sept. 17The government issues a decree that extends the negotiation period for utility tariffs for another 120 days with the possibility of a further 60 days extension.
    Sept. 20The government launches a second swap of bonds for frozen deposits and announces the easing of restrictions on frozen timedeposits of up to 7,000 pesos.
    Oct. 31The monthly cash withdrawal limit on the corralito is raised to 2,000 pesos from 1,200 pesos.
    Nov. 11After discussions with the government, the banks announce a voluntary 75-day stay on foreclosures.
    Nov. 14The government falls short of meeting an $809 million World Bank debt payment; only $79.2 million in interest is paid.
    Nov. 14President Duhalde signs a decree lowering the VAT rate by 2 percentage points to 19 percent for two months.
    Nov. 15A lower court suspends the public hearings designed to grant a tariff increase to the privatized utility companies.
    Nov. 18President Duhalde signs a 12-point agreement with provincial governors and some key legislators over the new election timetable and the government’s economic policies.
    Nov. 21The Senate approves President Duhalde’s plans for delaying the presidential election by a month to April. The first round of presidential elections is scheduled to be held on April 27, 2003, and will be followed by a second round on May 10, if necessary.
    Nov. 22The government announces that it will lift the remaining corralito restrictions on sight accounts effective December 2. Term deposits (the corralón) remain frozen.
    Nov. 22Minister Lavagna submits a draft decree to President Duhalde lifting the tariff rates on electricity and natural gas. On average, electricity rates will rise 9.0 percent and natural gas 7.2 percent.
    Nov. 27Executive decree issued, authorizing court-imposed stay on foreclosures for 30 business days, during which time mediation is required.
    Dec. 9The resignation of central bank President Pignanelli is accepted by President Duhalde.
    Dec. 10President Duhalde appoints Alfonso Prat Gay to be central bank president. Legislation eliminating the ability of the executive to grant tax amnesties becomes effective.
    Dec. 11A court order reverses the decreed increases in electricity and gas tariffs.

    During the 1990s, there were four IMF arrangements: an arrangement under the Extended Fund Facility approved on 3/31/92; a Stand-By Arrangement approved on 4/12/96; another Extended Arrangement, approved on 2/4/98; and another StandBy Arrangement, approved on 3/10/00. Stand-By Arrangements are short-term arrangements designed to address temporary balance of payments difficulties, while Extended Arrangements focus on balance of payments difficulties arising from longer-term structural problems.

    Lessons for crisis management, in particular, based on the experience in a number of countries during the past 10 years, are drawn in a more comprehensive fashion in Collyns and Kincaid (2003).

    Previous crises and their origins are reviewed in Ghosh and others (2002).

    While individual commentators differ in their emphasis on various factors, the view presented in the paper overlaps with many of the features stressed by Calvo (2002) and Mussa (2002).

    The calculations of the structural balance are sensitive to assumptions about potential output growth, which are inherently uncertain. While Table 1 assumes potential growth of close to 3½ percent during this period, the estimated cumulative structural deterioration would be higher (lower) by about 1¼ percentage point, if potential growth was assumed to be 1 percentage point lower (higher).

    From 1996 on, off-budget transactions by the provinces added another estimated 0.2 to 0.4 percentage points of GDP annually to the public debt ratio.

    IMF staff’s medium-term scenario in early 1998, for example, explicitly assumed a potential output growth rate of 5 percent.

    Labor productivity (measured as GDP per employed worker) grew by nearly 3 percent per year over the period 1990–98; this, combined with a steady growth in the working-age population of about 2 percent per year, yields the 5 percent growth of potential output.

    This pattern is consistent with theoretical models of exchange-rate based stabilizations. The rapid decline in inflation associated with such a stabilization generates a wealth effect that induces consumers to bring forward their purchases of durable goods. Once this stock adjustment has taken place, demand for durables declines until the next replacement cycle.

    The standard deviation of Argentina’s growth rate fell only slightly from 4½ percent in 1980–90 to 4¼ percent in 1991–98. This compares with a decline from 5 percent to 2¼ percent in Brazil and from 6¾ percent to 2¾ percent in Chile over the same period.

    The average maturity of the government’s medium- and long-term debt (measured as the ratio of total debt to annual amortization payments) exceeded 10 years even in 1999–2000 (compared with about six years for the United States) and was considerably higher in the mid-1990s, while short-term debt was less than 5 percent of total debt (30 percent in the United States).

    The pension reform, introducing a funded pillar, served to reduce future government liabilities, but implied revenue losses in the transition period of an estimated 1 to 2 percent of GDP a year.

    The comparison in Figure 2 is based on value added tax (VAT) revenue only. A comparison of the productivity of personal and corporate income taxes is hampered by different tax brackets and limited data availability. Nevertheless, a rough measure (using average and top rates) for a subgroup of countries confirms Argentina’s comparatively weak revenue collection. Symptomatic, also, are the costs of tax collection, which were about 2 to 2½ percent of revenues in Argentina, compared with about 1½ percent in Brazil and Mexico, ½ percent in Chile, and less than ½ percent in the United States.

    This argument is forcefully made in Hirschman (1985).

    It should be noted, however, that the perception of corruption is correlated with the economic situation: Argentina’s deteriorating corruption index (at least after 1998) may thus, in part, also reflect the deepening crisis.

    Yeats (1998); and Chudnovsky, Lopez, and Porta (1996).

    A reason for the lower liquidity risk associated with domestic borrowing is the wider range of collateral, such as real estate, that is acceptable to domestic, but not to foreign, lenders (see Caballero and Krishnamurthy, 2002).

    Throughout the second half of the 1990s close to 60 percent of banking-system assets and liabilities were denominated in dollars.

    In 2000, the new government reversed some elements of this law, authorizing dominance of collective agreements at the enterprise level over those at the sectoral level, and extending the trial period for subsidized labor contracts from one month to three months.

    During 1990–94, employment in the manufacturing sector fell by about 20 percent.

    Heckman and Pagés (2000); Calmfors and Driffill (1998); and Thomas (2002).

    Caution is required in making strong inferences about the magnitude of wage adjustment, however, as there are questions about the quality of wage data in Argentina. Galiani’s (2001) analysis of micro data from the labor force survey suggests that the average nominal wage in the Buenos Aires area declined by 14 percent between 1994 and 2000, which compares with a 4 percent decline on the basis of official numbers from the National Institute of Statistics.

    The results are based on a model developed in Ghosh, Gulde, and Wolf (2002).

    The absence of such restrictions also, in the short run, eased pressures on the currency board itself, by loosening the link between peso deposits and base money.

    Total capital inflows remained positive, albeit declining, until 2001. This mainly reflects large foreign direct investment projects that were already in the pipeline.

    Lending rates in Mexico increased from 22 to 35 percent (12 percentage points in real terms) while Chile’s rates rose from 17 percent to 24 percent (5 percentage points in real terms).

    Also, according to data collected by Burns on political crises across the world, Argentina averaged a major government crisis each year over the 1970–90 period compared to a worldwide average of one crisis every five years.

    The calibrated fiscal impulse (i.e., the structural fiscal adjustment), while sensitive to uncertain potential output growth assumptions, provides a more appropriate assessment of policies than developments in the actual balance, which were dominated by the economic downturn. The impulse estimates in Table 4 are based on potential output growth of about 2½ percent (see Appendix I) and would be some ¼ percentage point higher (i.e., a smaller withdrawal) or lower, respectively, for every 1 percentage point reduction or increase in assumed potential output growth.

    In fact, the design of the Argentine exchange rate regime allowed for greater leeway in altering monetary policy than would have been possible under a “pure” currency board arrangement (where changes in base money can occur only through movements of the central bank’s foreign exchange reserves). In Argentina, the central bank (BCRA) could engage in currency and bond swap operations as well as repos and reverse repos with banks. In addition, a discounting facility, whereby the BCRA rediscounted securities and commercial paper from banks at interest rates above the repo rate, served as a limited lender-of-last-resort function. Reflecting the leeway under Argentina’s currency board arrangement, the correlation (over the period 1993: Q1–2001: Q4) between net foreign assets of the central bank and reserve money was only 0.08 and the correlation between the changes in these variables was only 0.45 (instead of unity).

    This may be contrasted to the experience in East Asia, where the sustainability of public finances was much less of a concern, and where fiscal targets were rapidly loosened as it became clear that activity was going to be much weaker than originally projected. See Lane and others (1999).

    For instance, it was estimated that a 50 percent devaluation would make half of all loans nonperforming.

    Appendix II provides a list of the main policy measures undertaken in 2001–2002.

    In addition, several “competitiveness plans” were launched to increase profitability in the sectors most affected by the recession. These were estimated to cost ½ percent of GDP in revenues, but they proved largely ineffective, and complicated tax administration considerably. Most—though not all—were abandoned later in the year.

    The authorities also announced that the peso would be repegged to an equally weighted basket of the dollar and the euro, once the euro had reached parity with the dollar (which, however, did not take place prior to the collapse of the currency board arrangement). Indeed, this strategy would have likely worsened competitiveness problems, to the extent that the peso would have been partially repegged from a currency on a depreciating trend (the U.S. dollar) to one on an appreciating trend (the euro).

    In present value terms, using a discount rate of 5 percent per year (approximating the potential growth rate of nominal GDP), for instance, the operation entailed Argentina saving $12.6 billion debt service obligations in 2001–05 at the cost of $22.1 billion.

    It was estimated that a hypothetical 70 percent haircut on public debt would be sufficient to wipe out the entire capital of the banking system.

    On January 11, export surrender requirements were introduced and transfers of funds abroad were blocked unless they related to certified foreign trade transactions or were explicitly authorized by the central bank. On February 11, the dual exchange rate system was abolished and the market opened for the first time under a unified regime; the exchange rate depreciated to 1.8 pesos per U.S. dollar.

    The government eventually announced the issuance of compensation bonds amounting to about 9 billion.

    Program reviews were nevertheless completed, as performance criteria were either met on the basis of adjusters or waived.

    The new exceptional access framework requires, among other things, a rigorous analysis of debt sustainability and good prospects of the member regaining access to private capital markets within the time IMF resources would be outstanding. On prolonged use, the IMF’s Executive Board concluded that the IMF should apply consistently the existing policies on financing for countries with slow progress toward external viability, including that access for such countries should continue to be guided by the need to reduce their outstanding use of IMF resources over time.

    An extensive review of the IMF’s role in Argentina was prepared by the Independent Evaluation Office subsequent to this report, and was issued in 2004.

    By 2001, the economy is clearly in collapse and including 2001 in the estimation sample leads to a downward bias of potential output over the entire period.

    The figure shows the residual from an OLS regression of the logarithm of the consumer price index regressed on the logarithm of the import price index.

    The model estimated for Box 8 includes a term to capture low or negative inflation, on grounds that deflation may lower aggregate demand. This term is excluded here, since deflation is likely to affect aggregate demand but not potential output.

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