Corralito
Encyclopedia
Corralito was the informal name for the economic measures taken in Argentina
at the end of 2001 by Minister of Economy Domingo Cavallo
in order to stop a bank run
, and which were fully in force for one year. The corralito almost completely froze bank accounts and forbade withdrawals from U.S. dollar
-denominated accounts.
The Spanish
word corralito is the diminutive
form of corral, which means "corral, animal pen, enclosure"; the diminutive is used in the sense of "small enclosure" and also "a child's playpen". This expressive name alludes to the restrictions imposed by the measure.
: heavily indebted, with an economy in complete stagnation (an almost three-year-long recession
), and the exchange rate
was fixed at one U. S. dollar
per Argentine peso
by law, which made export
s uncompetitive and effectively deprived the state of having an independent monetary policy. Many Argentines, but most especially companies, fearing an economic crash and possibly a devaluation
, were transforming pesos to dollars and withdrawing them from the banks in large amounts, usually transferring them to foreign accounts (capital flight
).
On 1 December 2001, in order to stop this draining from destroying the banking system, the government froze all bank accounts, initially for 90 days. Only a small amount of cash was allowed for withdrawal on a weekly basis (initially 250 Argentine peso
s, then 300), and only from accounts denominated in pesos. No withdrawals were allowed from accounts denominated in U.S. dollars, unless the owner agreed to convert the funds into pesos. Operations using credit card
s, debit card
s, cheque
s and other means of payment could be conducted normally, but the lack of cash availability caused numerous problems for the general public and for businesses.
The corralito caused an immediate backfire on the government. Even more people started trying to withdraw their money from the banks, and many ended up in court fighting for their right to have their funds (and being granted that right on occasion).
The main reason for ending up in court was that, after the corralito, and after Economy Minister Cavallo resigned, the new government led by Eduardo Duhalde
and his Economy Minister
Roberto Lavagna
converted those funds nominated in US Dollars, into Argentine Pesos at a 1 Peso = 1 US Dollar exchange rate, while the exchange rate was liberalized (immediately going to 4 Pesos = 1 US Dollar).
The same was done with debtors, so many private enterprises and also the Province of Buenos Aires were favoured by this measure as they managed to decrease their debts. Nine years later, several people have not yet been able to recover their savings because of the pace of Justice in Argentina. However, debtors were able to purchase properties and other items by paying their debts at the 1 to 1 exchange rate.
At the time, the average Argentine did not employ the banking system for daily uses; many did not have a personal bank account, and dealt only with cash. Debit cards were not popular and many businesses did not have the equipment to accept them. Thus the cash restrictions only exacerbated the recession and angered the public. President Fernando de la Rúa
was forced to resign on 20 December 2001 after violent riots
, but the restrictions of the corralito were not lifted at the time.
, and turned into a corralón ("big corral"). The corralón differed from the corralito in that most deposits were forcibly exchanged for a series of bond
s denominated in pesos. The dollar-denominated accounts were automatically exchanged for pesos and peso bonds at a predetermined rate. The real necessity of such decision was questioned by several observers at the time, and some suggested this move benefited some large companies which were insolvent (or nearly so) whose owners had sent their dollars abroad before the corralito; these owners were thus able to repay their companies' now devalued debts by converting much fewer dollars than it would have taken previously
The peso was first devalued (from 1.0 to 1.4 pesos/dollar) and then floated
, thereby quickly depreciating
to a maximum rate of nearly 4 pesos per dollar. Argentina's economy then gradually began a recovery from its abysmal state, spurred by exports that benefited from the heightened exchange rate, and by the declaration of default
on most of its debt, which left the government with more money available to expand the economy.
It is generally agreed that the banks had a share of the blame for the situation that led to the corralito. In mid-2001, it was probably clear to bank owners and high-ranking officials that Argentina's banking system was going to crash, and some in fact may have spurred this outcome by letting their highest deposit holders know this news. These, mostly large companies, quickly moved their deposits abroad. Meanwhile, they continued to recommend their middle-class customers to enter deposits.
It is also believed that in the end the corralito ended up being good business for some international banks since they negotiated with the Argentine government to receive compensation bonds for the "missing" money, which in a large proportion had never really left their banks, only moved from one branch to another.
Most banks stayed in the country during the crisis, withstanding a severe damage to their reputation as well as (in certain cases) physical attacks. Others fled as soon as problems arose (for example, Scotiabank
's Argentine branch, Scotiabank Quilmes).
announced the liberation of deposits for about 23.7 billion pesos (though not of 17.3 billion pesos in formerly dollar-denominated long-term accounts). The measure was coupled with exchange market controls, by which no person or business was allowed to buy more than 100,000 dollars; this was done to prevent the possible effects of the sudden availability of pesos.
Argentina
Argentina , officially the Argentine Republic , is the second largest country in South America by land area, after Brazil. It is constituted as a federation of 23 provinces and an autonomous city, Buenos Aires...
at the end of 2001 by Minister of Economy Domingo Cavallo
Domingo Cavallo
Domingo Felipe "Mingo" Cavallo is an Argentine economist and politician. He has a long history of public service and is known for implementing the Convertibilidad plan, which fixed the dollar-peso exchange rate at 1:1 between 1991 and 2001, which brought the Argentine inflation rate down from over...
in order to stop a bank run
Bank run
A bank run occurs when a large number of bank customers withdraw their deposits because they believe the bank is, or might become, insolvent...
, and which were fully in force for one year. The corralito almost completely froze bank accounts and forbade withdrawals from U.S. dollar
United States dollar
The United States dollar , also referred to as the American dollar, is the official currency of the United States of America. It is divided into 100 smaller units called cents or pennies....
-denominated accounts.
The Spanish
Spanish language
Spanish , also known as Castilian , is a Romance language in the Ibero-Romance group that evolved from several languages and dialects in central-northern Iberia around the 9th century and gradually spread with the expansion of the Kingdom of Castile into central and southern Iberia during the...
word corralito is the diminutive
Diminutive
In language structure, a diminutive, or diminutive form , is a formation of a word used to convey a slight degree of the root meaning, smallness of the object or quality named, encapsulation, intimacy, or endearment...
form of corral, which means "corral, animal pen, enclosure"; the diminutive is used in the sense of "small enclosure" and also "a child's playpen". This expressive name alludes to the restrictions imposed by the measure.
Background and initial measures
In 2001, Argentina was in the midst of a crisisArgentine economic crisis (1999-2002)
The Argentine economic crisis was a financial situation, tied to poilitical unrest, that affected Argentina's economy during the late 1990s and early 2000s...
: heavily indebted, with an economy in complete stagnation (an almost three-year-long recession
Recession
In economics, a recession is a business cycle contraction, a general slowdown in economic activity. During recessions, many macroeconomic indicators vary in a similar way...
), and the exchange rate
Exchange rate
In finance, an exchange rate between two currencies is the rate at which one currency will be exchanged for another. It is also regarded as the value of one country’s currency in terms of another currency...
was fixed at one U. S. dollar
United States dollar
The United States dollar , also referred to as the American dollar, is the official currency of the United States of America. It is divided into 100 smaller units called cents or pennies....
per Argentine peso
Argentine peso
The peso is the currency of Argentina, identified by the symbol $ preceding the amount in the same way as many countries using dollar currencies. It is subdivided into 100 centavos. Its ISO 4217 code is ARS...
by law, which made export
Export
The term export is derived from the conceptual meaning as to ship the goods and services out of the port of a country. The seller of such goods and services is referred to as an "exporter" who is based in the country of export whereas the overseas based buyer is referred to as an "importer"...
s uncompetitive and effectively deprived the state of having an independent monetary policy. Many Argentines, but most especially companies, fearing an economic crash and possibly a devaluation
Devaluation
Devaluation is a reduction in the value of a currency with respect to those goods, services or other monetary units with which that currency can be exchanged....
, were transforming pesos to dollars and withdrawing them from the banks in large amounts, usually transferring them to foreign accounts (capital flight
Capital flight
Capital flight, in economics, occurs when assets and/or money rapidly flow out of a country, due to an economic event and that disturbs investors and causes them to lower their valuation of the assets in that country, or otherwise to lose confidence in its economic...
).
On 1 December 2001, in order to stop this draining from destroying the banking system, the government froze all bank accounts, initially for 90 days. Only a small amount of cash was allowed for withdrawal on a weekly basis (initially 250 Argentine peso
Argentine peso
The peso is the currency of Argentina, identified by the symbol $ preceding the amount in the same way as many countries using dollar currencies. It is subdivided into 100 centavos. Its ISO 4217 code is ARS...
s, then 300), and only from accounts denominated in pesos. No withdrawals were allowed from accounts denominated in U.S. dollars, unless the owner agreed to convert the funds into pesos. Operations using credit card
Credit card
A credit card is a small plastic card issued to users as a system of payment. It allows its holder to buy goods and services based on the holder's promise to pay for these goods and services...
s, debit card
Debit card
A debit card is a plastic card that provides the cardholder electronic access to his or her bank account/s at a financial institution...
s, cheque
Cheque
A cheque is a document/instrument See the negotiable cow—itself a fictional story—for discussions of cheques written on unusual surfaces. that orders a payment of money from a bank account...
s and other means of payment could be conducted normally, but the lack of cash availability caused numerous problems for the general public and for businesses.
Immediate effects
The main reason for ending up in court was that, after the corralito, and after Economy Minister Cavallo resigned, the new government led by Eduardo Duhalde
Eduardo Duhalde
-External links:...
and his Economy Minister
Minister of Economy of Argentina
The Minister of Economy is the head of the Ministry of Economy and Production of Argentina, concerned with finance and monetary matters. The position within the Government of Argentina is analogous to the finance ministers of some countries and the United States Treasury Secretary...
Roberto Lavagna
Roberto Lavagna
Roberto Lavagna is an Argentine economist and politician, and was the former Minister of Economy and Production of Argentina from April 27, 2002, to November 28, 2005.-Career:...
converted those funds nominated in US Dollars, into Argentine Pesos at a 1 Peso = 1 US Dollar exchange rate, while the exchange rate was liberalized (immediately going to 4 Pesos = 1 US Dollar).
The same was done with debtors, so many private enterprises and also the Province of Buenos Aires were favoured by this measure as they managed to decrease their debts. Nine years later, several people have not yet been able to recover their savings because of the pace of Justice in Argentina. However, debtors were able to purchase properties and other items by paying their debts at the 1 to 1 exchange rate.
At the time, the average Argentine did not employ the banking system for daily uses; many did not have a personal bank account, and dealt only with cash. Debit cards were not popular and many businesses did not have the equipment to accept them. Thus the cash restrictions only exacerbated the recession and angered the public. President Fernando de la Rúa
Fernando de la Rúa
Fernando de la Rúa is an Argentine politician. He was president of the country from December 10, 1999 to December 21, 2001 for the Alliance for Work, Justice and Education ....
was forced to resign on 20 December 2001 after violent riots
December 2001 riots (Argentina)
The December 2001 uprising was a period of civil unrest and rioting in Argentina, which took place during December 2001, with the most violent incidents taking place on December 19 and December 20 in the capital, Buenos Aires, Rosario and other large cities around the country.- Background :The...
, but the restrictions of the corralito were not lifted at the time.
Corralón
Argentina's situation worsened for several months. The corralito was hardened during the interim rule of President Eduardo DuhaldeEduardo Duhalde
-External links:...
, and turned into a corralón ("big corral"). The corralón differed from the corralito in that most deposits were forcibly exchanged for a series of bond
Bond (finance)
In finance, a bond is a debt security, in which the authorized issuer owes the holders a debt and, depending on the terms of the bond, is obliged to pay interest to use and/or to repay the principal at a later date, termed maturity...
s denominated in pesos. The dollar-denominated accounts were automatically exchanged for pesos and peso bonds at a predetermined rate. The real necessity of such decision was questioned by several observers at the time, and some suggested this move benefited some large companies which were insolvent (or nearly so) whose owners had sent their dollars abroad before the corralito; these owners were thus able to repay their companies' now devalued debts by converting much fewer dollars than it would have taken previously
The peso was first devalued (from 1.0 to 1.4 pesos/dollar) and then floated
Floating exchange rate
A floating exchange rate or fluctuating exchange rate is a type of exchange rate regime wherein a currency's value is allowed to fluctuate according to the foreign exchange market. A currency that uses a floating exchange rate is known as a floating currency....
, thereby quickly depreciating
Depreciation (currency)
Currency depreciation is the loss of value of a country's currency with respect to one or more foreign reference currencies, typically in a floating exchange rate system. It is most often used for the unofficial increase of the exchange rate due to market forces, though sometimes it appears...
to a maximum rate of nearly 4 pesos per dollar. Argentina's economy then gradually began a recovery from its abysmal state, spurred by exports that benefited from the heightened exchange rate, and by the declaration of default
Default (finance)
In finance, default occurs when a debtor has not met his or her legal obligations according to the debt contract, e.g. has not made a scheduled payment, or has violated a loan covenant of the debt contract. A default is the failure to pay back a loan. Default may occur if the debtor is either...
on most of its debt, which left the government with more money available to expand the economy.
The banks and their role in the crisis
It is also believed that in the end the corralito ended up being good business for some international banks since they negotiated with the Argentine government to receive compensation bonds for the "missing" money, which in a large proportion had never really left their banks, only moved from one branch to another.
Most banks stayed in the country during the crisis, withstanding a severe damage to their reputation as well as (in certain cases) physical attacks. Others fled as soon as problems arose (for example, Scotiabank
Scotiabank
The Bank of Nova Scotia , commonly known as Scotiabank , is the third largest bank in Canada by deposits and market capitalization. It serves some 18.6 million customers in more than 50 countries around the world and offers a broad range of products and services including personal, commercial,...
's Argentine branch, Scotiabank Quilmes).
The end of the corralito
The corralito officially ended on 2 December 2002, when Minister of Economy Roberto LavagnaRoberto Lavagna
Roberto Lavagna is an Argentine economist and politician, and was the former Minister of Economy and Production of Argentina from April 27, 2002, to November 28, 2005.-Career:...
announced the liberation of deposits for about 23.7 billion pesos (though not of 17.3 billion pesos in formerly dollar-denominated long-term accounts). The measure was coupled with exchange market controls, by which no person or business was allowed to buy more than 100,000 dollars; this was done to prevent the possible effects of the sudden availability of pesos.