Volume 44, Number 172,
January-March 2013
The Role of Public Banking during
Financial Crises in Argentina and Uruguay
Wesley Marshall
Leading Up to the Financial Crisis

At the beginning of 2001, many actors doubted whether convertibility could last. Both the external public debt, already above 62% of gdp, as well as the fiscal deficit (non-primary) of more than 6.3% of gdp (imf, 2003: 9) were expanding at extremely worrisome rates. Moreover, the economy had been in full contraction since 1998. In 2001, Credit Default Swaps in Argentina signaled an imminent default (imf, 2002: 57). While many recognized the high costs of ending convertibility for the national economy, the banking system also had key vulnerabilities, including, in large part, contraction of the debt in dollars from diverse actors in the banking system.

Under convertibility, the quantity of foreign currency in the system (almost exclusively the dollar) depended on the willingness of international markets to input dollars into the national market. However, due to the inexorable break with convertibility, dollars were escaping the country at a more and more accelerated rate. As mentioned, the bcra could not issue dollars, and as such, was never able to act as a credible lender of last resort under convertibility. This inability to act was made much more evident with the high degree of dollarization in the system at the end of 2001; more than 86% of certificate deposits were in dollars (Damill, Salvatore and Simpson, 2003b: 64). In this way, the country’s economy and financial system depended more and more on the single actor able to maintain significant inputs of currency in this context: the imf.

The Outbreak of the 2001-2002 Banking Crisis

As Argentineans making bank deposits in 2001 faced great uncertainty, still with memories of recent moments when they had lost considerable sums of savings, there were three periods of accelerated withdrawals, in March, July and November 2001. During the first eleven months of the year, the banking system lost 22% of its deposits (Damill, Salvatore and Simpson, 2003b: 51). In this same time, it became clear that the branches and subsidiaries of foreign banks were not capitalized by headquarters. Beyond registering an 11% contraction in credit lines from abroad and a 24% reduction in negotiable obligations (Damill, Salvatore and Simpson, 2003a: 51), between January and September of 2001, foreign banks issued profits of 284 million dollars to their headquarters, a 61% increase over the same time period in 2000. Moreover, profits sent to the matrices up to September, represented 36.5% more than the utilities and dividends taken out of the country during the whole of 2000. According to sources fromPagina 12, such “[...] an increase in profits sent abroad, during a year that was even more critical and in a greater recession than the year before, can only be explained by the fact that foreign banks were already foreseeing the devaluation [...] and rushed to solidify profits that were not distributed yet to take the dollars and put them away for safekeeping in headquarters [...]” (Página12, 2002).

In response to the third and most significant withdrawal of deposits in November, on December 3 the government declared a partial freezing of deposits, known as “el corralito,” and also closed the foreign exchange market. In many ways, these actions were a historical watershed. On the one hand, announcing “el corralito,” accompanied by the closure of foreign exchange markets, indicated the effective end to convertibility, which would be finalized a month later with the devaluation of the peso to 1.4 dollars and the official declaration of the end of convertibility. On the other hand, “el corralito” marked the clear and indubitable start of the financial crisis. In a single move, this measure dried up banking liquidity and caused a crisis for the entire system of payments. Starting from that moment, foreign banks and the imf set in motion their dollarization plan (Marshall, 2008). Under these terms, the government would adopt the dollar as the official currency and the banking system would remain under full control of foreign banks. In return, the imf would open their lines of credit, which had been suspended, and foreign banks would undo their policy to repatriate dollars and keep credit lines shut off to the country. If the government did not accept these terms, the imf and foreign banks would keep their credit lines closed, and foreign banks would even pull out from the market altogether.

The Argentinean government did not accept the terms and began to implement a new strategy to center the economy around thepeso . In the first half of 2002, in the context of a severe financial crisis, there was a strong clash between those who wanted to dollarize the country and those who wanted to use thepeso . While those in favor of the peso applied mechanisms to strengthen this currency, the imf insisted on a floating exchange rate, provoking a speculative attack against thepeso, while at the same time, foreign banks were keeping their credit lines closed and the imf refused to extend new lines of credit to the country, despite the fact that debts were paid on time during the year. In April and May of 2002, the banks Scotiabank and Crédit Agricolé, respectively, abandoned their local entities and left the country, causing severe panic in the markets. In the face of this direct confrontation between a government and some of the most powerful financial conglomerates in the world, operating under the protection of the imf, many analysts projected definitive and permanent defeat for the country. According to Hans Tietmeyer, ex-president of Bundesbank, and hired by the imf to evaluate the economic future of the country, Argentina would be “condemned to insignificance, probably forever” (Rapetti, 2005: 21).

Despite this forecast, by the end of 2002, “el corralito” had been lifted and the national economy was on its way to growing at what would be high and sustained growth rates over the next five years. Public banking was one of the principal motors behind these positive results. As can be seen in Figures 1, 2 and 3, during the crisis period and exit, public banking not only registered a significant increase in deposits, but also had the smallest shrinking of credit lines by type of bank, and repositioned itself within the system.

Published in Mexico, 2012-2017 © D.R. Universidad Nacional Autónoma de México (UNAM).
PROBLEMAS DEL DESARROLLO. REVISTA LATINOAMERICANA DE ECONOMÍA, Volume 48, Number 191, October-December 2017 is a quarterly publication by the Universidad Nacional Autónoma de México, Ciudad Universitaria, Coyoacán, CP 04510, México, D.F. by Instituto de Investigaciones Económicas, Circuito Mario de la Cueva, Ciudad Universitaria, Coyoacán,
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