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Learning from Argentina's crisis

  • Economics


Learning from Argentina’s Crisis Since December 2001, Argentina has suspended payments on its external debt, restricted bank de- posit withdrawals, and abandoned a currency board arrangement that had pegged the peso to the U.S. dollar since 1991.Argentina faces inflation of over 70% this year and an economic contraction that rivals the U.S.’s Great Depression.These devel- opments have surprised many observers because for most of the 1990s Argentina was considered a model of successful economic policy. Indeed, many thought that the instability that had characterized the Argentine economy for much of its history was a thing of the past. Could Argentina’s crisis have been anticipated and avoided? This Economic Letter observes that the recent events in Argentina were not entirely unpredictable, as they were associated with rapid increases in pub- lic and external debt that cast doubt on the sustain- ability of borrowing. Conditions that accentuated vulnerability to crises are also highlighted. Prelude For most of the 1990s, Argentina was seen as a model of successful policymaking. By pegging its exchange rate to the dollar under a currency board type arrangement in 1991,Argentina ended hyper- inflation, reducing inflation rates to single-digit levels.The banking sector in Argentina, traditionally weak, was strengthened considerably, in part because of an increase in foreign bank entry.A 1998 World Bank financial sector review rated Argentina second only to Singapore among emerging markets in the quality of its bank supervision (Perry and Serven 2002). Greater economic stability attracted foreign investment inflows, contributing to an acceleration in economic growth; indeed, even as lenders with- drew their financing in East Asia in 1997, capital inflows continued to Argentina. Things began to turn sour in 1999.The collapse of the Brazilian currency led to sharp declines in export revenues, and economic growth was neg- ative for three years in a row. Nevertheless, with some brief excepti

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