as for argentina financial crisis,what are the signals that should be
perceived by banking industry about this crisis

There is much to be learned by banks from the Argentina financial
crisis of 2002.  Although pegging a country's currency to the United
States dollar appears to be a great solution to hyperinflation, it can
have unforeseen consequences that can result in even worse crisis in
the future if other economic reforms do not occur.  In 1991, Argentina
established a currency board to maintain the peso at the same value of
the United States dollar.  Having been faced with an inflation rate of
5000% annually resulting from excessive government spending and
creation of money, the country's president sought to maintain the peso
at the same value as the United States dollar and limited the amount
of currency in circulation to the quantity of dollars in the
possession of the Argentine central bank.  To save itself from
hyperinflation, Argentina abdicated its monetary autonomy.  And, it
was a successful effort from that perspective.

Unfortunately, efforts to reduce government spending and privatize the
economy were not particularly successful at fostering economic growth
over a prolonged period.  Considerable wealth left the country for
investment abroad, while government spending continued to run amok
despite the new currency controls.  In particular, regional
governments were especially resistant to reducing expenditures. 
Significant dollar-denominated foreign debt accumulated from
government deficit spending.

With the country being completely dependent upon the performance of
the United States economy and the value of the United States dollar to
establish its foreign exchange rates, an increase in the dollar's
value and oil prices caused the peso's value to rise without any valid
economic reason for doing so except for the peg.  At the same time,
Argentina's major trading partners, especially Brazil, devalued their
currency to improve the competitiveness of their exports.  The
tremendous swing in exchange rates caused Argentine exports to stop
almost entirely, causing a recession.  Argentina could import goods
cheaply because of its overvalued currency, which put additional
pressure on domestic production. The decline in economic activity
reduced the government's tax revenues, which made it more difficult to
pay interest on the foreign debt.  The trade imbalance also prevented
the country from earning the foreign exchange it needed for interest
payments on its debt, forcing the country to borrow more and more
money.  By late 2001, the foreign debt, most of which was the
responsibility of the central and provincial governments, had reached
50% of Gross Domestic Product.  Furthermore, $30 billion was due in
2002.

As the government was finally forced to reduce its spending so that it
could make its debt payments, the economy was even more adversely
affected.  This caused a further decline in tax revenues, which caused
additional declines in spending.  A death spiral set in, with the
economy declining precipitously while the ability of the government to
pay its foreign debt continued to decrease.  As foreign pressure from
creditors, including the International Monetary Fund, for more
austerity in return for additional loans made the lives of ordinary
citizens even more difficult as government spending declined, the
government was replaced by the citizens and the new government elected
to devalue the currency and default on its foreign debt.  This
precipitated Argentina's financial crisis of 2002, when Argentina
became unable to continue borrowing to make interest payments on its
debt.

In retrospect, there were many signs that there would be yet another
Argentine financial crisis.  The failure of pro market reforms to
bring government spending under control was a clear indicator that
disaster would eventually occur.  The drastic trade imbalance that
emerged as Brazil devalued its currency while the value of the peso
rose, making it impossible for Argentina to service its foreign debt
without additional dollar-denominated loans, was another warning sign.
 Finally, the failure of draconian measures to revive the economy and
win public support essentially guaranteed that Argentina would default
and produce a financial crisis.

The fallout from the crisis of 2002 persists.  Even though Argentina's
economy has made considerable progress after a deep recession
following the default, the country is still trying to force foreign
bankers to accept a 75% loss on their Argentine bonds.  The severe
loss to investors Argentina is proposing is hampering its economy by
making it difficult to attract foreign investment.  Banks are
considerably more wary about making new investments after the sizable
losses they are being asked to take on their earlier ones.  In fact,
there remains considerable risk that Argentina may default again.

Sincerely,

Wonko

Sources:

"Argentina's Fall: Lessons from the Latest Financial Crisis" by Martin
Feldstein, Foreign Affairs (March/April 2002)
http://www.foreignaffairs.org/20020301facomment7968/martin-feldstein/argentina-s-fall-lessons-from-the-latest-financial-crisis.html

"Those Who Ruined Argentina" by Laurent Joffrin, World Press Review
(March 2002) http://www.worldpress.org/americas/0302observateur.htm

"Argentina's Provincial Profligates" by Joshua Goodman, BusinessWeek
(international edition) (January 29, 2001)
http://www.businessweek.com/archives/2001/b3717153.arc.htm

"The Panic Has Subsided--but Not the Debt" by Joshua Goodman with Rich
Miller, BusinessWeek (international edition) (November 27, 2000)
http://www.businessweek.com/archives/2000/b3709207.arc.htm

"Argentina: Bad Numbers and Bribery, Too" by James C. Cooper &
Kathleen Madigan, BusinessWeek (November 20, 2000)
http://www.businessweek.com/archives/2000/b3708115.arc.htm

"Would You Lend Money to Argentina?" by Joshua Goodman, BusinessWeek
(international edition) (September 18, 2000)
http://www.businessweek.com/archives/2000/b3699315.arc.htm

"Don't Cry for Argentina" edited by Patricia O'Connell, BusinessWeek
(June 4, 2004) http://www.businessweek.com/bwdaily/dnflash/jun2004/nf2004064_5242_db008.htm

"Bond Investors Still Angry At Argentina" edited by Rose Brady,
BusinessWeek (June 14, 2004)
http://www.businessweek.com/@@lMqzIoUQjgJhDg0A/magazine/content/04_24/b3887060_mz015.htm

"Argentina: Investors Need A Little Reassuring" by Joshua Goodman,
BusinessWeek (July 5, 2004)
http://www.businessweek.com/@@9lzFUoUQjQJhDg0A/magazine/content/04_27/b3890035_mz010.htm

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Request for Answer Clarification by linzhongyue-ga on 05 Feb 2005 17:43 PST

Thank you for your effort. Now i want to clarify on this
problem:banking industry always,before other industry, can get many
warning signals that indicate the financial crisis is approaching
,what are this kind of signals banking industry perceived in this
argentina case?

thank you

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Clarification of Answer by wonko-ga on 07 Feb 2005 10:48 PST

The banks should have perceived the signals that I located in my
research, particularly because they would be directly affected.  The
significant currency flows out of the country by the wealthy would
have been noticeable by banks very early because they would have been
the means of such transferals.  Banks should have also noticed the
adverse impact of the overvalued currency on the economy as export
oriented companies experienced financial distress while import
oriented companies boomed.  Demand for loans and inability to service
loans would have been indicative of this phenomena.

Furthermore, any lender should become concerned when a debtor can only
make interest payments by taking on more debt, and no consideration is
ever given to paying off principal.  Similarly, the government's
ongoing borrowing to fund its deficit spending would also have
involved banks, making them aware of it at an early stage.

In conclusion, banks should have been aware of the same factors
increasing the risk of default as other participants in the market for
Argentine bonds, but they should have observed the presence of some of
these factors earlier because of their exposure to currency flows
within the country.

Sincerely,

Wonko

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Request for Answer Clarification by linzhongyue-ga on 15 Feb 2005 05:30 PST

thank you for your efforts,then based on the warnings,what the foreign
bank could do to alleviate the financial crisis?
thank you

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Request for Answer Clarification by linzhongyue-ga on 16 Feb 2005 06:19 PST

Could you please provide me some real Angentina examples such as some
historical data about the exchange rate of overvalued peso,the data to
prove the adverse impact of the currency and how much the government
ongoing borrow to fund its deficit? and any data and facts that can
prove the warning signals real existed in Argentina case?

Sorry to bother you and many thanks

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Clarification of Answer by wonko-ga on 17 Feb 2005 15:22 PST

I do not believe there is much the foreign banks could have done to
have avoided the financial crisis based on the warnings except to have
stopped loaning money to Argentina earlier so that their losses would
not have been as large.  Perhaps less availability of loans would have
forced the government to implement less severe austerity measures
sooner that the populace would have accepted, which would have allowed
the existing debt to be serviced without issuing additional debt.

Please let me know if you still need more information beyond that so
helpfully provided by byuengineer.

Sincerely,

Wonko

I was lived in Argentina and worked daily with them from june of 2000
until june of 2003.  I know what was happening with the lower class
during that time period because I was with them, talking to them,
every day.  I believe that everything presented in the answer is
correct.  I learned a few new things from the post because I had not
heard about much of the international aspects of the crisis, I only
knew about the internal aspects of the crisis.  There are a few things
that I think are relevent that I would like to share.

First, the history.  
I know most of this just from talking to people, so my facts aren't
perfect, but I think they're pretty good.  The answer talked a lot
about the excessive government spending in Argentina, but did not
explain what that spending was on.  In the 50's or so Argentina was
economically very powerfull.  This is because at the time the
government was a tightly run military regime.  This regime ran
Argentina very efficiently, and very strictly.  One result from this
was that Argentina's economy not only did well, but was able to save
up a lot of money.  Another result was that the way they ran things
created a very large poor class that wasn't happy with their situation
at all.  As historically happens in these situations the regime was
overthrown.

It was replaced with Peron.  This is where you have to be carefull
because the topic of the peronists is a hot political debate.  Some
people absolutely loved them and some people absolutely hated them. 
But, from all of the different things I heard, there are a few things
I think everyone should agree on.  The government run under the
perons, especially eva was very different.  Eva had grown up in
poverty herself and so had a good understanding of them.  She took the
vast savings the military regime had accumulated and began to spend
them.  She used them to create jobs and help bring the lower class out
of poverty.  She built houses for the poor, she paid their bills, etc.
 The result was a very large number of municipal jobs that in many
cases were not necessary, but gave the lower class the opportunity to
earn money and almost leave poverty.  This got people into the habit
of expecting a municipal job to be there for them.  They expect that
the government will give them land if they need it, which they do, and
they expect the government to provide them a house if they are
homeless.

Next, in about the 70's, there was another military overthrow.  I
don't know much about this time period because they were extremely
hard times that people didn't talk about much.  People lived in daily
fear.  Financially, this regime did not do as well as the first one.

in the 80's that government was booted and the next big player was
Menem.  (I may have mispelled his name).  The people by this time were
used to their municipal jobs.  It was how they lived.  It was a given
thing that was always there.  It was sending the country quickly into
debt.  This was the time that Argentina got their loan from the IMF,
pegged the peso to the dollar and privatized their oil, fishing,
telephone, etc. industries.  This created a quick influx of money, but
did not fix the probem.  People still depend on the government for
free housing, free medical, municipal jobs, etc.  In addition, as I
said earlier these jobs only almost get people out of poverty.  They
generally just have enough money to scrape by and thus do not use the
bank at all.  In fact most that I encountered would feel saver hiding
any extra money under their matress than saving it in the bank.  The
loan just plunged them further into debt, pegging the peso to the
dollar was probably the best of their ideas, privatizing everything
was bad news because the result was the US controling their oil
industry, Spain controlling much of the telophone and fishing, with
China, Korea, and some others in the mix as well.

Do you get the picture of a country hopelessly sinking into more and
more debt yet?

around december 2002 when the payment was due, they ran out of money. 
People kept working but did not get paid.  Many did not have money to
eat.  As a result there were nationwide riots and grocery store
lootings.  That's when they starting booting presidents until one
unpegged the dollar, and started printing more money.  In about two
days the exchange rate went from 1:1 to 2:1.  One thing that was not
mentioned above is that Argentina started printing out a new type of
currency called Lecop that is basically a self-loan.  It cannot be
used anywhere, mostly just grocery stores, and the government has
promised to remove it from circulation by a certain time in the
future.  Things stabalized a bit for a few months until there was a
large speculation incedent where people who could started to buy U.S.
dollars, so that the value of the peso would drop and they could make
a quick profit.  it went from 2:1 to about 4:1 that week, and hasn't
been changing too drastically since.  not like that anyway.

So, the point.  

The bank problems were not just created by government decisions.  They
were also fueled by public demands, and a generally weak banking
system due to civic distrust.  When they froze all of the bank
accounts to stop a run during the crisis, the results were riots
because the public thought they were trying to steal their money.  I
saw a bank get completely destroyed with my own eyes.  I don't think
the U.S. will have problems like that because so many of us use and
trust banks.  I think that if president Bush had to do major cutbacks
in order to save the economy we would grumble and complain, but enough
of us would see that it was necessary that he would not get thrown out
of office.  In other words, a country's economic health is much more
than exchange rates and inflation.  It is integrally connected to the
education and support of the citizens of that country.

I hope that was long enough :o)  I care deeply for the people of
Argentina and can't talk about them enough.

P.S. I would occasionally deal with upper class people, and they knew
it was coming months, even years in advance.

thank you so much for your information.