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32 Int'l L. News 1 (2003)

handle is hein.journals/inrnlwnw32 and id is 1 raw text is: VOL. 32 NO. I [AL WWW.ABAN ET.ORG/INT LAW The Argentine Meltdown and Contracts Going Forward By Miguel Angel De Dios and Marcelo E. Bombau L ast year Argentina faced one of the deepest political and economic crises in its history. The default on sovereign foreign debt, the resigna- tion of its elected government, and considerable economic turmoil all produced emergency legislation that altered long-standing business rules. The emergency legislation represented: (a) Devaluation of the Argentine currency and a rescheduling and limitation of withdrawals and of bank deposits that diluted personal savings, (b) Interference with private contracts, (c) Establishment of an asymmetric pesification of obligations denominated in foreign currencies, which severely injured most creditor-debtor relations and the banking system, and (d) Severe setbacks to economic certainty and mar- ket-oriented reforms, including the Convertibility Law that had pegged the Argentine peso to the U.S. dollar. Political and Economic Background During the 1990s, the Convertibility Law provided for a fixed exchange rate of one Argentine peso to one U.S. dollar. The Argentine Central Bank was obligated to exchange upon request each Argentine peso received for a U.S. dollar. The U.S. dollar reserves at the central bank accounted for almost the entire aggregate local currency circulating in the market. The Convertibility Law provided predictability to the exchange market and eradicated the illness of inflation. However, the overval- uation of the Argentine currency affected the competi- tiveness of the Argentine economy Argentina's Gross Domestic Product (GDP) grew an average of 6 percent per year from 1991 to 1998. The government financed an unrestrained growth of the budget deficit through major privatizations and inter- national borrowing. This strategy could not last long. After the Mexican and similar financial crises, access to international financing was impaired and, since 1998, the economy fell into an unprecedented recession, unem- ployment rates increased to double digits, and poverty indicators jumped drastically These events led economic analysts to predict throughout 2001 that Argentina would have to devalu- ate its currency or default in its financial obligations. Former President De la Rua called back as Minister of continued on page 8

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