When Argentinians Lost 75% of Their Wealth Overnight — The Corralito

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Recessions are a constant fear of citizens across the globe — But in 2001, these fears became reality within the beautiful nation of Argentina. Overnight, millions of citizens watched helplessly as their government closed the banks and stole 75% of the wealth held within them. Learn some new vocabulary while reading about a disastrous economic policy with our Corralito English lesson.

What happened?

In the December of 2001, a colossal national debt forced the Argentinian government to take drastic measures to save themselves and their investments.

At the time, the government of Argentina was in a ludicrous amount of debt to foreign investors, who had speculated that the powerful nation would become the richest in South America. In fact, the debt accounted for more than 1/7th of all borrowed money in the 3rd world at the time, because investor confidence in the Argentina’s growth was so high.

While it was certainly possible for Argentina to grow into its shoes as predicted, it wasn’t the current situation, as their economy had been shrinking for several years. Because of this stagnation, the government was unable to pay off the debts it owed, which caused an event known as a “debt default”.

When this debt default occurred, interest rates on foreign loans immediately increased — investors wanted to receive their money quickly, before a collapse. Citizens saw this spike in interest rates, and knew it could only mean bad news. Almost everyone with cash in a savings account flocked to the banks to quickly withdraw their money. Thus began an event known as a “bank run“.

A bank run causes chaos

“Bank runs” occur when a large majority of citizens go to the bank to withdraw money at the same time due to fear of a worsening economy. Since banks don’t actually have the money to give all of their customers an immediate withdrawal, the banks will freeze all transactions until the panic dies down.

To end the bank run, the government enacted a law nicknamed the Corralito. Under this new policy, Argentinians could only withdraw a maximum of 250 dollars per week, which was later increased to 300 dollars per week — just enough to pay for basic amenities like rent and food. The nickname Corralito, which translates in English to “Childs playpen”, comes from the belief of many Argentinians that their government was treating them like children, by not letting them use the money they rightfully earned.

This policy was intended to help banks distribute money in a fairer way. By limiting withdrawals, banks could give small amounts of money to every customer, instead of large amounts of money to only a few customers. Citizens were unhappy with the restrictive policy, but it was about to become a whole lot worse.

The forced currency exchange

As this was going on, the government quietly exchanged all US dollars in Argentine bank accounts with pesos, the national currency. This was because the foreign debt needed to be paid off in USD, and buying USD from foreign sources would be difficult during a debt default(since nobody trusted the peso).

If you were an Argentinian with a bank account in 2001, every US dollar you had was swappedwith an Argentine Peso. And since it was common habit to store your wealth in USD at the time, this exchange affected a large majority of citizens. At this point, “the corralito was renamed corralón as people couldn’t withdraw $250 dollars per week not because of a new limit but because they no longer had any dollars”.

The forced swap from USD to Pesos wasn’t inherently negative, since the currencies exchanged at a 1:1 rate — but, Argentina had a long history with inflation, and this would be no exception.

Inflation strikes the Argentine economy

During this time, the government had been continuously printing money to help kickstart their economy and to make foreign debt payments easier. Inflation remained low because of a policy that kept the exchange rate from Pesos to USD at an amount of 1:1. But when the Corralito occurred, this policy was scrapped, and the peso had to be reevaluated for a new exchange rate.

About two months after the forced currency swap from USD to Pesos, the Argentine Peso lost 75% of its value — meaning, the new exchange rate was 1 USD : 4 Pesos. Immediately, every person with money in the bank or Pesos at home lost 75% of their wealth.

Life savings were wiped out, businesses went under, and poverty reached 50%. It was a chaotic disaster for the middle and lower classes. Citizens rioted against the intolerable living conditions, leading to the now-famous Cacerolazo, a protest in which Argentinians across the nation banged their pots and pans together to create loud noises. These protests occasionally escalated into violence as citizens attacked the banks and foreign companies, blaming them for causing the economic situation.

In short, it was a terrible time to be economically involved with Argentina. There weren’t many options for growth, and the days of traveling to foreign lands for a vacation seemed long gone. This would continue to be the case for several more years until 2005, when the economy returned to its pre-depression levels.

Who profited from the Corralito?

As with any economic or political disaster, someone is making a profit. So, who managed to sneak a few bucks out of Argentina in the midst of their national crisis?

Unsurprisingly, the banks are some of the only businesses who came out on top of the Argentine depression. Several banks managed to negotiate large cash settlements with the government, claiming that significant amounts of money had been stolen during the riots. In reality, much of this money was simply transferred to a different branch, but this was not revealed until many years later.

The long term effects on Argentina

As this depression occurred, new presidents came and out of the system at a rapid rate. Argentinians continuously elected politicians who promised to fix the situation, and forced those who failed to resign. Eventually, a man by the name of Nestor Kirchner took office and began to stabilize the economy, leading to Argentina’s recovery as a global exporter of soy and meat.

The economic depression meant that Argentina could offer cheap exports and competitive prices for their products, which played a significant role in bringing their economy back up. By the year 2005, the nation was able to pay off much of their foreign debts while also lowering the rates of poverty and joblessness.

Today, Argentina continues its recovery after a low point in 2020, which coincided with the beginning of the COVID pandemic. Though Argentina still has significant progress to make, we can all hope that it’s citizens will never again experience a loss of wealth like the Corralito.

Corralito English lesson comprehension quiz

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