MARKET COMMENT
Argentina In Crisis

By Maynard Paton (TMFMayn)
June 7, 2002

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England Beat Argentina Again!

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Had problems with your stock market investments over the past year or two? Then spare a thought for your Argentine counterpart. At the start of 2002, Argentina devalued its currency by 30%. It is the latest in a long line of economic crises.

This year's turmoil stems from Argentina's economic problems of the 1980s. The country's then 200% per month hyperinflation was stemmed in the early 1990s by the liberalising of trade, a reduction in red tape and the privatising of many state-owned businesses. The Argentine government also decided to peg the peso to the US dollar in 1991, a move that, for a time, introduced economic stability and attracted much foreign investment.

Although the early 1990s saw Argentina recover, the peso-dollar fix gradually proved cumbersome. As the decade wore on, the US economy powered ahead while Argentina's recovery began to run out of steam. In the end, Argentina's currency eventually bore little relation to its own economic conditions, with the government effectively having no control over its domestic interest rates. The collapse of the Brazilian real in 1999 was a case in point, with Argentine exporters left unable to compete with their cheaper neighbours. Reduced export takings helped push the country into recession, and with sovereign debts spiralling to $140b, the country defaulted on interest payments late last year.

In an effort to curtail the economic trouble, the Argentine peso was devalued at the start of 2002. The currency then traded freely for the first time in a decade and has since lost around 70% of its value. Before the devaluation, one peso would have been worth 69p. These days, they're worth around 20p.

Needless to say, the crisis has done little for the Argentine stock market. Since January, the Indice Bolsa General has dived 65% in sterling terms. And of course, banking shares have been leading the fall. UK investors would have seen their holdings in prominent banks such as Banco Rio De La Plata, Grupo Financiero Galicia, Banco Galicia Y Beunos Aires and BBVA Banco Frances effectively slump by over 80% since New Year's Day.