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Central-Bank ‘Distress’ and Hyperinflation in Argentina, 1989–90

Published online by Cambridge University Press:  05 February 2009

Paul Beckerman
Paul Beckerman
Affiliation:
Senior Economist is at the World Bank.
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Abstract

The essential explanation of Argentina's 1989 hyperinflations is that the stabilisation programmes immediately preceding them drove the public sector in particular, the central bank – into ‘debt distress.’ These stabilisation programmes sought to anchor prices on an appreciated exchange rate, sustained by tight monetary policies that maintained high interest rates. The problem was that the government and the central bank had heavy domestic-debt burdens, and their combined interest bill far exceeded their non-interest surplus. To finance the interest without creating money, the government and central bank had to add continually to the outstanding debt stock as they capitalised the interest due. The debt swelled, and interest rates were pressured upward. Heavy pressure against the exchange rate, devaluation and hyperinflation then ensued when the public-sector debt stock exceeded what financial markets could be persuaded to hold at reasonable interest rates.

Type
Articles
Information
Journal of Latin American Studies , Volume 27 , Issue 3 , October 1995 , pp. 663 - 682
Copyright
Copyright © Cambridge University Press 1995

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References

1 In February 1991, following yet another burst of high inflation, a new economic team headed by Domingo Cavallo took office. In April 1991, having taken additional fiscal-adjustment measures, it sharply reduced the inflation rate through its ‘Convertibility Law’, which fixed the exchange rate, introduced a new currency, and required the Central Bank fully to back its monetary liability with foreign exchange. These later events are beyond the scope of the present article.

2 Sargent, Thomas and Wallace, Neil, ‘Some Unpleasant Monetarist Arithmetic’, Federal Reserve Bank of Minneapolis Quarterly Review, Fall 1981, pp. 1–18Google Scholar.

3 Bomberger, William A. and Makinen, Gail, ‘Indexation, Inflationary Finance and Hyperinflation: the 1945–46 Hungarian Experience’, Journal of Political Economy, Vol. 88, 06 1980, pp. 550–60CrossRefGoogle Scholar; also, Bomberger, William A. and Makinen, Gail, ‘The Hungarian Hyperinflation and Stabilization of 1945–46’, Journal of Political Economy, Vol. 91, 10 1983, pp. 801–24CrossRefGoogle Scholar.

4 The financial press of Buenos Aires, particularly the Cronista Comercial and the Gazeta Mercantil, provided solid coverage of these events.

5 Authors whose analyses are broadly consistent with the present argument include Giorgio, Luis Alberto, ‘Crisis financieras, reestructuración bancaria e hiperinflación en la Argentina’, working paper, 12 1989Google Scholar; Calvo, Guillermo, ‘The Perils of Sterilization’, unpublished IMF Working Paper, 03 1990Google Scholar; and Rodríguez, Carlos A. and Almansi, Aquiles, ‘Reforma momtaria y financiera en hiperinflación’, Center for Macroeconomic Studies of Argentina (CEMA), Serie Documentos de Trabajo No. 67 (08 1989)Google Scholar. For somewhat different perspectives, see Heymann, Daniel, ‘From Sharp Disinflation to Hyper and Back: The Argentine Experience, 1985–1989’, Working Paper, United Nations Economic Commission for Latin America, 1989Google Scholar; and Kiguel, Miguel and Liviatan, Nissan, ‘Stopping Three Big Inflations (Argentina, Brazil and Peru)’, World Bank Working Paper, 1992Google Scholar.

6 For particularly useful discussions of the Austral Plan and subsequent events, see Dornbusch, Rudiger and Simonsen, Mario Henrique, ‘Inflation Stabilization with Income Policy Support’, working Paper of the National Bureau of Economic Research, 1987Google Scholar; Canavese, Alfredo J. and di Telia, Guido, ‘Inflation Stabilization or Hyperinflation Avoidance? The Case of the Austral Plan in Argentina, 1985–87’, in Bruno, Michael et al. (eds.), Inflation Stabilization: The Experience of Israel, Argentina, Brazil, Bolivia and Mexico (Cambridge, Mass., 1988), pp. 153–90Google Scholar; Kiguel, Miguel, ‘Ups and Downs in Inflation: Argentina since the Austral Plan’, World Bank Working Paper, 1989Google Scholar; Kiguel, Miguel and Liviatan, Nissan, ‘The Inflation-Stabilization Cycles in Argentina and Brazil’, World Bank Working Paper, 1989Google Scholar; and Kiguel, Miguel and Neumeyer, Pablo Andres, ‘Seignorage, Inflation Tax and the Demand for Money: The Case of Argentina’, World Bank Working Paper, 1989Google Scholar.

7 Even before the South Atlantic conflict, Argentine banks had been struggling for two years with a crisis brought about by overlending at high interest rates. See Baliño, Tomas J. T., ‘The Argentine Banking Crisis of 1980’, in Sundararajan, V. and Baliño, Tomas J. T., Banking Crises: Cases and Issues (International Monetary Fund: Washington, DC, 1991), pp. 58–112Google Scholar.

8 The Spanish expresssion was ‘depósitos indisponibles’. English-speaking analysts often translated the expression as ‘forced investments’.

9 Lucid descriptions of the characteristics of the Central Bank's interest bill and quasifiscal deficit are provided by Piekarz, Julio A., ‘Compensación de reservas de efectivo mínimo: La Cuenta de Regulación Monetaria, el resultado cuasi fiscal del Banco Central y la transformatión del sistema financiero argentino’, Ensayos Económicos, 09 1984Google Scholar; and Piekarz, Julio A., ‘El déficit cuasi fiscal del Banco Central’, paper presented in the Seminar on Central Bank Quasi-Fiscal Operations (Brasilia, 08 1987)Google Scholar, Center for Latin American Monetary Studies.

10 This schematic presentation is intended only for the present exposition, and does not really indicate literally how the Central Bank's and commercial banks' accounts were structured. One peculiarity of the Central Bank's accounting system was that it did not deduct accumulated losses from its net worth, but posted them instead to an asset account, the so-called Monetary Regulatory Account. In January 1990, in the ‘BONEX conversion’, this account was eliminated when the Government effectively recapitalised the Central Bank by providing it BONEX. See the discussion below.

11 Argentina's GDP undergoes a marked seasonal decline each first quarter as the Christmas season gives way to the southern hemisphere summer. In the years 1980–1989, 24.6, 24.9, 24.4, and 26.1 per cent of real GDP were produced respectively in the four quarters of each year. The average seasonal decline between the fourth and first quarters was accordingly 5.7 per cent.

12 For the purposes of its IMF programmes, Argentina defined the quasi-fiscal surplus in ‘operational’ terms, that is, incorporating the inflation losses on the Central Bank's austral assets and the inflation gain on its interest-bearing liabilities. It did not, however, incorporate the inflation gain on the monetary base.