President Fernando de la Rúa Bruno - 1999-2001

Fernando de la Rúa Bruno, who took office in 1999, inherited a government that was almost bankrupt, because of corruption and overspending under the previous administration of President Carlos Menem. In his first term in the early 1990's, Mr. Menem had succeeded in ending hyperinfaltion and promoting growth through a currency convertibility plan, that pegged the peso at a one-to-one rate to the dollar. But by the time he left office in December, 1999, the country was in the midst of a recession and the peso was widely considered to be overvalued.

Mr. de la Rua was elected in October 1999, amid widespread optimism that he would lead the country out of its economic morass, and end waste and corruption that had depleted the Argentine treasury. But Mr. de la Rua did not know how to govern. They thought that the presidency, you know, is an office to be held, not a job to be done, and that's just not the way it is. President de la Rua saw himself as being president, he didn't see himself as exercising the presidency.

In late 1999 and early 2000, the economy was showing signs of growth. In December 1999, Fernando De la Rúa's government promptly enacted the first of three packages of tax increases, which took effect in January 2000. Economic indicators quickly turned negative again as the tax increase killed the budding economic recovery.

The De la Rúa government thought that reducing the budget deficit would instil confidence in government finances, thereby lowering interest rates and spurring economic growth. Among the options for reducing the deficit, cutting spending was politically quite difficult; the government doubted that cutting tax rates would spur enough growth in the short term to offset lost revenues; it thought markets would be unwilling to finance higher debt; and it did not wish to abandon the convertibility system and simply print money. That left only one option: increasing tax rates.

On March 18, 2001, ministers of the Frepaso political party resigned from president De la Rúa’s coalition cabinet in protest over proposed cuts in spending. The resignations marked the start of the true crisis phase of Argentina’s economic problems. The resignations weakened president De la Rúa’s base of support in the Argentine Congress.

De la Rua tried to implement various economic plans, but none succeeded in bringing about an economic recovery. The government’s failure to take effective measures to end the recession created a crisis of confidence in government debt, because a shrinking economy meant a shrinking base of tax revenue from which to pay the debt. Argentina’s federal government had been paying anywhere from 3 to 9 percentage points more than the U.S. Treasury to borrow. After the monetary policy blunders of April 2001, the premium jumped to almost 13 percentage points.

In July 2001, when rating agencies reduced the credit rating of Argentina’s government debt, it rose above 16 percentage points, and by the end of October it exceeded 20 percentage points. Such high rates indicated many investors feared a default. The government was in a “debt trap”: at the interest rates it faced for borrowing, the debt would quickly grow so fast as to exceed the capacity of the government and the Argentine economy to repay it.

The difficulty the government was having in refinancing its debt led to fear that it would freeze bank deposits, as it had done in 1982 and 1989. During those freezes, the government had in effect confiscated part of the savings of bank depositors to finance itself and pay some foreign debt. After heavy withdrawals of deposits from banks on Friday, November 30, Cavallo announced a freeze of deposits on December 1. The deposit freeze brought much private-sector activity to a halt, because under the rules of the freeze, businesses and individuals could not use their deposits to pay anybody except other depositors at the same bank.

The estimate of monthly economic activity calculated by Argentina’s national statistical institute suffered a year-over-year fall of 15.5 percent, the biggest since the series began in 1993. The economy plunged from what still might arguably have been termed a very bad recession into a true depression.

The situation continued to deteriorate until December 2001, when looting erupted at supermarkets in various cities including Buenos Aires. Mr. De la Rua declared a state of siege to quell rioting in which at least 30 died, but the violence continued - and only tapered off after he resigned. Life slowly returned to normal in Buenos Aires following the protests and rioting that forced President de la Rua to step down. Mr. De la Rua, who spoke to reporters after submitting his resignation letter, called for a smooth and orderly constitutional transition. He said he will let history judge his presidency. "I did what was necessary and what I thought was best for the country, in which the dire state of the economy did not permit many options," he said.

Argentina's Congress held a special session 21 December 2001 to officially accept the resignation of President Fernando de la Rua, and designate Senate head Federico Ramon Puerta as provisional President. Mr. Puerta was expected to hold office only briefly, until Congress could convene and determine the future course of the country.

Mr. Puerta, a 50-year-old career politician, only held the office for 48 hours. Under the Constitution, his job was to convene a special session of the Senate and Chamber of Deputies to choose an interim President.

The new government would have to deal with the same problems, and there was talk among many Peronist party legislators that the new government should convert its debt into pesos, and then proceed with an orderly devaluation. Many Argentines may accept this, but it was not clear how such a plan - if implemented - would be received by the international financial community. In the meantime, Argentina's central bank declared a bank holiday, telling financial institutions they can only open for limited transactions to pay salaries and pensions.