Throughout the existence of the current financial system, we have encountered periods of crisis in which governments have had to take legal measures to control the country's economy; without such legislation, the economy would be seriously affected. One of the practices created during one of these periods of crisis is the corralito , but what is it?
A corralito , broadly speaking, is a government-imposed restriction that limits people's access to cash in fixed-term deposit accounts, checking accounts, and savings accounts. But when was it implemented? What purpose did it serve? Below, we'll answer some of the most important questions to understand the financial corralito.
Background of a financial playpen
On December 1, 2001, the radical government of President Fernando de la Rúa implemented a bank freeze that lasted almost a year. This took place in the Latin American country of Argentina. This measure was considered completely radical by the people, and as a result, President de la Rúa was forced to resign, which in turn led the country into a state of social and political dissolution and instability ; a crisis that lasted for several years.
The objective of this measure was explained as wanting to prevent the outflow of cash from the banking system ; in this way, banks would not suffer a decapitalization, which would undoubtedly lead to a banking panic crisis, which could cause the banking system to collapse completely.
Although that measure was ultimately adopted, several other options were mentioned that could have been implemented to prevent the banks from becoming undercapitalized . One of these was proposed by the Minister of Economy, Domingo Cavallo, who suggested that encouraging greater use of electronic payment methods would result in a more active economy and greater access to the movement of funds. This measure would have prevented government tax evasion and, at the same time, increased public confidence in the banking system, leading to larger deposits.
The term "corralito" was coined in 2001 by economics journalist Antonio Laje. This occurred while he was writing an economics column on Daniel Hadad's program. This event was significant in the unfolding events of that time, as it highlighted the government's substantial restrictions on the most basic freedoms of banking system users, including the ability to access their own money at any time, which provoked widespread discontent.
How did it happen in the playpen?
This began to happen when withdrawals from pension funds increased dramatically ; by November of that year, withdrawals had exceeded 67 billion. This figure provided the government with the basis for implementing the corralito (bank account freeze). But what did it consist of?
Specifically, this event consisted of a series of prohibitions, prohibitions that were focused on the activities of two groups of people, firstly, we find the prohibitions for the public and secondly we find the prohibitions for banking entities, let's see what each of them consists of.
Regarding the restrictions for the public, users were prohibited from making withdrawals exceeding 25 pesos or 250 dollars per week. This limit applied to all accounts in the owner's name, so it didn't matter which bank they used; they could only access 250 dollars per week.
The second prohibition was on making transfers abroad . This applied only to regular users, as these transactions were permitted for those related to foreign trade, as well as payments for expenses or withdrawals made once abroad. This was intended to prevent the national bank from running out of funds with which to operate.
Now, let's talk about the prohibitions for financial institutions. First, they were not allowed to conduct active operations in pesos, and they were also prohibited from carrying out transactions in foreign currencies. Furthermore, these institutions were not allowed to engage in arbitrage, either directly or indirectly, except in cases where transactions were converted to dollars, provided the debtor consented to the conversion.
Another of the prohibitions is that interest rates that were higher than what the deposits were equivalent to, whether in pesos or dollars, could not be offered. At this point it is also important to mention that the operations that were in force could be converted into a foreign currency, as long as the convertibility law was not taken into account. 23.928, thus implying that the transactions were controllable in a much easier way.
The last of the prohibitions applicable to financial institutions is the one that prevents them from charging any commission for currency conversions, provided the transactions are carried out through accounts held with financial institutions. This resulted in significant losses for financial institutions, demonstrating that the only ones dissatisfied with the consequences of this decision were not the users, but the financial institutions themselves were also severely affected by the implementation of the capital controls.
Objectives of the financial corralito
While the main objective of this measure has already been outlined, let's analyze in more detail how the events were planned to unfold. The first point to consider is that the aim was to prevent a run on deposits in the banking system . This run was the result of an event in which users lost confidence in the banking system. Should such a capital flight occur, it would fuel speculation about a possible abandonment of convertibility, a situation that would be highly detrimental to the banking system and the financial system in general.
So taking into account this information and these speculations, then the decision is made to execute a very desperate play, the corralito, by means of which it was planned to avoid said massive withdrawal of funds.
Another objective was to maintain a flow of cash so that the economy wouldn't grind to a halt due to people lacking access to their money. The idea was to keep cash flowing within the banking system through the use of debit cards. Given these government goals, not only was free access to users' funds prohibited , but many were also forced to acquire debit cards to access those funds. While they couldn't access cash, they could still purchase goods through bank transactions.
So the goal the government was pursuing was to keep the banking system stable , and as mentioned in previous paragraphs this was just one of several possible options that could be considered in order to keep the flow of money running within banking institutions.
Consequences of the playpen
One of the main consequences of the corralito (bank account freeze) was that it was a sudden decision, leaving no time for those involved to adapt. As a result of this abrupt change in the system, the country's monetary liquidity was severely damaged, as much of the economic activity was disrupted by the lack of liquidity.
As a result, both commerce and credit came to a standstill, causing the economy to stagnate significantly. This was partly due to the fact that a large percentage of the population relies on the informal economy for their livelihood , and since very few people had enough cash to make everyday purchases, it severely impacted the lifestyles of both customers and vendors within that system.
The most serious effect was carried out in the neighboring country of Uruguay, and is that the population of Argentina had the idea of ​​being able to withdraw their funds in the banks of the neighboring country, however, this event caused a crisis in 2002. bank of Uruguay, one of the most notorious in its history, and caused by the Argentine government.