The '''BONEX Plan''' was a forced conversion of bank time deposits to Treasury bonds performed by the Argentine government in January 1990.<ref name=":0">{{Cite journal|last=Beckerman|first=Paul|date=1995|title=Central-Bank 'Distress' and Hyperinflation in Argentina, 1989-90|journal=Journal of Latin American Studies|volume=27|issue=3|pages=663–682|doi=10.1017/S0022216X00011640|jstor=158487|s2cid=146796580 |issn=0022-216X|doi-access=free}}</ref>
It was put in place following a 3079,5% hyperinflation in 1989,<ref>{{Cite web|date=12 October 2012|title=La inflación, según el paso de las décadas|trans-title=Inflation, as decades pass by|url=https://www.utdt.edu/ver_nota_prensa.php?id_nota_prensa=7670&id_item_menu=6|access-date=2020-09-21|website=Torcuato di Tella University|language=es}}</ref> as heterodox stabilization programs failed.<ref name=":2">{{Cite book|last=Edwards|first=Sebastian|url=http://documents1.worldbank.org/curated/en/639531468743177547/pdf/multi0page.pdf|title=Crisis and reform in Latin America : from despair to hope|publisher=Oxford University Press|year=1995|isbn=0-19-521105-7|location=Oxford|oclc=32133144|via=World Bank}}</ref> US$3 billion worth of the public's deposits were converted to "Bonex 89" bonds to be repaid in 1999.<ref name=":1">{{Cite web|last=do Rosario|first=Jorgelina|date=11 December 2009|title=A 20 años del Plan Bonex|trans-title=20 years since the Bonex Plan|url=https://www.cronista.com/impresageneral/A-20-anos-del-Plan-Bonex-20091211-0032.html|access-date=2020-09-21|website=El Cronista|language=es-ES}}</ref> It amounted to a partial default from the Central Bank and Treasury to commercial banks, who in turn partially defaulted into their depositors.<ref name=":0" />
It was caused by the government's political inability to undertake rigorous fiscal reforms, and a monetary sterilization policy which generated a major 'quasi fiscal' deficit to the Central Bank, further fueling a long-standing high inflation rate.<ref>{{Cite journal|last1=Basu|first1=Ritu|last2=Druck|first2=Pablo|last3=Marston|first3=David|date=2004-08-01|title=Bank Consolidation and Performance: The Argentine Experience|url=https://papers.ssrn.com/abstract=878974|journal=IMF Working Paper 04/149|language=en|location=Rochester, NY|publisher=International Monetary Fund|ssrn=878974}}</ref><ref name=":0" /> Its high debt made the Central Bank lost most of its capacity to carry out independent monetary policy.
A freezing of deposits was also undertaken in neighbor country Brazil at the time, during the Plano Collor.<ref name=":3">{{Cite journal|last1=Ayala Salcedo|first1=Roberto|last2=Ruiz Guaricela|first2=Maria Del Pilar|date=2009-02-18|title=El efecto del congelamiento de depósitos sobre el sector real y monetarío de la economía ecuatoriana en el período de marzo de 1999 a marzo de 2000|trans-title=Effects of the deposits froze on the real and monetary sectors of Ecuadorian economy during the March 1999 - March 2000 period|url=http://www.dspace.espol.edu.ec/handle/123456789/374|language=es|publisher=Escuela Superior Politecnica del Litoral}}</ref>
== Background ==
In 1985, then-president Raúl Alfonsín created the Austral Plan, a shock plan to reduce inflation which replaced the Peso argentino currency with the Austral, on a 1000:1 rate.<ref name="miles">{{cite web|author=Iván Ruiz and Luján Scarpinelli|date=June 15, 2010|title=El austral, la moneda que se contaba en cientos de miles|trans-title=The Austral, the currency that was counted in hundreds of thousands|url=http://www.lanacion.com.ar/1275264-el-austral-la-moneda-que-se-contaba-en-cientos-de-miles|accessdate=September 9, 2015|publisher=La Nación|language=es}}</ref><ref>{{Cite web|date=1985|title=Alfonsín and Sourrouille presenting the Austral Plan|url=https://www.youtube.com/watch?v=oZ4HAJJu_5g|website=YouTube|publisher=Argentine Broadcasting Historic Archive (Archivo Histórico RTA)|format=video}}</ref><ref name=":2" /> Initially successful, lowering inflation from a 350% in the first half of 1985 to slightly more than 20% in the second half,<ref name=":2" /> it led to Alfonsín winning the 1985 midterm elections. However, as the main price anchors of the program were relaxed,<ref>{{Cite journal|last1=Choueiri|first1=Nada|last2=Kaminsky|first2=Graciela Laura|date=1999|title=Has the Nature of Crises Changed? A Quarter Century of Currency Crises in Argentina|url=https://www.imf.org/en/Publications/WP/Issues/2016/12/30/Has-the-Nature-of-Crises-Changed-A-Quarter-Century-of-Currency-Crises-in-Argentina-3314|journal=IMF Working Papers|publisher=International Monetary Fund|volume=99|issue=152|pages=1|doi=10.5089/9781451857078.001|s2cid=154121108|issn=1018-5941|doi-access=free}}</ref> inflation began to rise again, contributing to the government defeat in the 1987 midterm elections. This opposition's (Justicialist Party) legislative strength would make any public expenditure cuts or tax increases required difficult.<ref name=":0" />
A big motor of the rising inflation rate was the Central Bank's own 'quasi fiscal' deficit. During the 1980s, the institution had been absorbing money by issuing interest-bearing debt. As interest rates were liberalized in October 1987 to maintain commercial banks' profitability, the Central Bank's efforts to absorb money increased its own interest bill, making borrowing requirements the main source of money creation. The Bank then slipped into distress, left with no choice but to monetize first the interest on its debt, and then the principal, fueling hyperinflation and decapitalizing the Central Bank, as its liabilities grew faster than its liquid-asset backing.<ref name=":0" /> This has been described as a fast-motion version of the 'unpleasant monetarist arithmetic' outlined by Sargent and Wallace.<ref name=":0" /><ref>{{Cite journal|last=Sargent|first=Thomas J.|date=September 1981|title=Some Unpleasant Monetarist Arithmetic|journal=Quarterly Review|publisher=Federal Reserve Bank of Minneapolis|volume=5|issue=3|doi=10.21034/qr.531|issn=0271-5287|doi-access=free}}</ref>
In 1988, a new economic plan, the ''Primavera'' Plan, was approved by Alfonsín to stabilize the Argentine economy, which had been suffering a high inflation rate for years now. It was tried from February 1989 to July 1989, but failed.<ref name=":0" /> As the economy went off control, Alfonsín —whose party had lost the Presidency in the snap May elections to the Justicialist Carlos Menem — had to turn power five months in advance of the constitutional transition date, amid riots.<ref name=":4">{{Cite book|last=Rodríguez|first=Carlos Alfredo|url=https://ucema.edu.ar/publicaciones/download/documentos/105.pdf|title=Ensayo sobre el plan de convertibilidad|publisher=University of CEMA|year=1995|isbn=987-99363-8-8|location=Buenos Aires|language=es|trans-title=Essay on the convertibility plan|oclc=36108602}}</ref> This political uncertainty also contributed to hyperinflation, which rose 197% in June 1989.<ref name=":4" />
The country now had a balance of payments deficit, a budget deficit, a big state debt (in an international context of rising interest rates), and rapidly decreasing Central Bank reserves, as it tried to contain the currency depreciation. {| class="wikitable" style="margin-left: auto; margin-right: auto; border: none;" |+1989-1990 Economy of Argentina ! !1989 !1990 |- |Public Sector Balance (as a percentage of GDP) <ref name=":2" /> |<nowiki>-21.8%</nowiki> | -3.3% |- |''Primary Result'' <ref>{{Cite web|date=December 2004|title=SECTOR PÚBLICO ARGENTINO- CUENTA A.I.F (1961-2004)|url=https://www.minhacienda.gob.ar/onp/documentos/series/Serie1961-2004.pdf|website=Ministry of Economy (Argentina)|language=es-AR}}</ref> | -3.66% | -3.08% |- |Annual Inflation Rate <ref name=":2" /> |4,923.6% |1,343.9% |} The Menem administration established a new stabilization plan, called ''Bunge & Born Plan'' (also known as BB Plan), as several members of the economic cabinet were former Bunge & Born executives.<ref name=":0" /> The new Peronist government had a working legislative majority that helped it pass emergency legislation, authorizing public companies privatizations and tax reforms.<ref>{{Cite journal|last=Llanos|first=Mariana|date=October 1998|title=El presidente, el Congreso y la política de privatizaciones en la Argentina (1989-1997)|trans-title=The President, Congress, and the privatization policies in Argentina (1989-1997)|url=https://www.liderazgos-sxxi.com.ar/bibliografia/El-presidente-el-Congreso-y-la-politica-de-privatizaciones-en-la-Argentina-1989-1997.pdf|journal=Desarrollo Económico|language=es-AR|publisher=Instituto de Desarrollo Económico y Social|volume=38|issue=151|pages=743–770|doi=10.2307/3467162|jstor=3467162}}</ref><ref>{{Cite web|title=Composición de la Honorable Cámara de Diputados de la Nación|trans-title=Composition of the Honorable Argentine Chamber of Deputies|url=https://www.diputados.gov.ar/export/hcdn/secparl/dgral_info_parlamentaria/dip/archivos/IE_103_Composicion_HCDN.pdf|website=Información Parlamentaria, Congreso de la Nación Argentina|publisher=Congress of Argentina|access-date=2020-09-23|archive-date=2021-04-19|archive-url=https://web.archive.org/web/20210419163851/https://www.diputados.gov.ar/export/hcdn/secparl/dgral_info_parlamentaria/dip/archivos/IE_103_Composicion_HCDN.pdf|url-status=dead}}</ref> A stand-by line was negotiated with the IMF.<ref name=":0" /> The plan worked, lowering inflation to a single-digit monthly rate, until December 1989, when a second hiperinflationary episode emerged'''.'''
As interest rates skyrocketed, reaching a 400% annual rate for 30-day time deposits in 1989, the public saved only the minimum cash they required for living and created deposits (which could be set for a minimum 7-day period, instead of the nowadays 30-day minimum) with their remaining income, to protect themselves from inflation. Banks then on-lent deposits to the Treasury and Central Bank at high yields, cutting lending to productive sectors.<ref name=":0" /> However, these high interest rates increased the public sector borrowing requirement.<ref name=":4" /> Public debt interest was financed by further borrowing, which resulted again in further interest rate increases to induce the economy to hold the growing debt stocks.<ref name=":0" /> In 1989, the M1 money supply had risen by a 4,101.4%.<ref name=":3" /> This was a consequence of the lagging exchange rate depreciation and high interest rate on deposits, which generated enormous interest flows that were capitalized into the deposit stocks.<ref name=":0" />
At this time, ATMs were not common in Argentina, and wages were usually paid in cash. Price and wage ''de facto'' indexation was common practice, enhancing the effects of any inflationary shock.<ref name=":0" /> Fearing further devaluations, withdrawal demand increased, worsening commercial banks' illiquidity.
By October 1989, a new premium with the parallel foreign exchange market emerged, Central Bank tightening policy failed to eliminate the premium, and taxes were raised to increase non-interest surplus. The M4 broad money stock grew from US$2.9 billion in June 1989 to 7.5 billion in November 1989, parallel premium kept raising, forcing a new devaluation of the Austral, from 655 to 1000₳ per dollar.<ref name=":0" /> A new run on the Argentine currency took place in December 1989. This ended the ''Bunge & Born Plan'', forcing Minister of Economy Néstor Rapanelli to resign.<ref name=":4" /> A new floating exchange rate system was put in place, and price controls were lifted. This caused a vicious cycle of depreciation, surging prices, and soaring interest rates. The IMF stand-by programme was interrupted during the December 1989 hyperinflation.<ref name=":0" /> By the end of 1989, the official floating exchange rate had reached 1,800₳ per dollar, with the parallel rate reaching 4,000₳ per dollar.<ref name=":0" /> {| class="wikitable" style="margin-left: auto; margin-right: auto; border: none;" |+1989-1990 Monthly Inflation Rates ! rowspan="2" | !1989 ! colspan="3" |1990 |- !December !January !February !March |- |Inflation Rate <ref name=":4" /> |40% |79% |61% |95% |}
== Development and deployment == To halt a new hyperinflation, the Ministry of Economy —now headed by Antonio Erman González— forced the conversion of time deposits into ''BONEX 89'' treasury bonds (Spanish: ''BONos EXteriores'', External Bonds), to be repaid in 1999.<ref name=":0" /><ref name=":1" /> It was approved by presidential decree,<ref>{{Cite web|last1=Menem|first1=Carlos Saúl|author-link=Carlos Menem|last2=González|first2=Antonio E.|author-link2=Antonio Erman González|date=3 January 1990|title=Decreto 36/90 - Decreto de necesidad y urgencia sobre reintegro de depósitos bancarios en bonos externos|trans-title=36/90 Decree - Urgency and Need Decree on bank deposit refund in external bonds|url=http://servicios.infoleg.gob.ar/infolegInternet/anexos/0-4999/3050/norma.htm|website=SAIJ|language=es-AR}}</ref><ref>{{Cite web|last1=Menem|first1=Carlos Saúl|author-link=Carlos Menem|last2=González|first2=Antonio E.|author-link2=Antonio Erman González|date=29 March 1990|title=Decreto 593/90|url=http://servicios.infoleg.gob.ar/infolegInternet/anexos/0-4999/3050/norma.htm|website=InfoLeg|language=es-AR}}</ref> and announced on a press conference on December 28.<ref>{{Cite web|date=1989|title=Erman Gonzalez on BONEX Plan|url=https://www.youtube.com/watch?v=uA0pkMUec0o|website=YouTube|format=video}}</ref> The Treasury would issue BONEX bonds to the Central Bank (around US$3 billion),<ref name=":0" /> who would then pay off banks' inaccessible deposits with BONEX, and the commercial banks would then pay the depositors.<ref name=":0" /> Only 1 million ₳ (about US$500) per account would be given back in cash to the public, following several days of bank holiday, with the remaining funds being converted to bonds.<ref>{{Cite news|date=24 January 2000|title=Desventuras de un ahorrista|language=es-AR|trans-title=A saver's misadventures|work=Clarín|url=https://www.clarin.com/economia/desventuras-ahorrista_0_HydmbCoeCte.html}}</ref><ref>{{Cite journal|last=Beckerman|first=Paul|date=1992-05-31|title=Public sector"debt distress"in Argentina, 1988-89|url=http://documents1.worldbank.org/curated/en/537781468741907868/pdf/multi-page.pdf|journal=Policy Research Working Paper|language=en|publisher=World Bank}}</ref> Additional amounts could be exempted from the conversion, only if the depositor could prove that the funds were to be used for tax or payroll payments.<ref name=":0" />
M2 money supply tumbled down from 18% of GDP in 1986 to 3.1% after the conversion.<ref name=":4" /> Time deposits were temporary disallowed, and the Treasury converted most of its own outstanding domestic debt into BONEX.<ref name=":0" /> The refinancing of public debt made possible lowering the 'quasi fiscal' deficit.<ref name=":4" /> This sudden drop in liquidity lowered inflation, and even produced a few days of deflation.<ref name=":0" />
The BONEX 89 bonds started trading under par, a discount price 50% under its face value.<ref name=":1" /> The public initiated lawsuits to the Argentine State and the Central Bank, questioning the constitutionality of the forced conversion, but in December 1990 the Supreme Court —on the ''Peralta, Luis Arcenio y otro c/Estado Nacional'' case''—'' validated the presidential decrees, stating the measures were a proper response to a severe social risk situation.<ref>{{Cite book|url=https://sj.csjn.gov.ar/sj/suplementos.do?method=ver&data=dnu|title=Decretos de necesidad y urgencia|work=Secretaria de Jurisprudencia|publisher=Supreme Court of Argentina|year=2010|isbn=978-987-1625-09-3|location=Buenos Aires|pages=18–52|language=es-AR|trans-title=Urgency and Need Decrees|format=PDF}}</ref>
In March 1990, the government announced new fiscal measures: It stopped the export refunds benefit, halted all public invitations to tender and government purchases, as well as reducing the administrative structure of the government.<ref name=":0" /><ref name=":1" />
Inflation revived to the ends of January 1990, amid rumors of dollarization. Government raised public-service prices, and increased taxes during February 1990. Exchange rate went from 1,865₳ per dollar at the end of January to 5,965₳ at the end of February.<ref name=":0" />
A new fiscal programme was announced on 4 March 1990, including: a raise on taxes, a tightening in public expenditure, and a reduction in public employment, and the suspension of payments owed to government contractors.<ref name=":0" /> Following this announcement, pressure on the exchange rate eased and inflation dropped, but remained on two digits levels.<ref name=":0" /> The IMF stand-by programme was then restarted.
== Aftermath == In February 1991, a new run against the Argentine currency took place, triggering a big devaluation and fueling the comeback of inflation.<ref name=":4" /> Minister Erman González resigned and was replaced by Domingo Cavallo. In March 1991, the Convertibility plan started, pegging the Austral (and then the Argentine Peso) to the US Dollar. Public debt was refinanced with the Brady Plan.<ref name=":4" />
As the Argentine economy grew, the BONEX bonds price gradually recovered.<ref name=":0" />
== See also == {{Portal|Argentina|Economy|Money}} * Austral plan * Rodrigazo
== References == <references /> {{Carlos Menem}}{{Economy of Argentina}}
Category:1990s in economic history Category:1990 in Argentina Category:Economic history of Argentina Category:Inflation in Argentina Category:Presidency of Carlos Menem