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Was Argentina s financial collapse of 2001 Inevitable: What did we know and when did we know it?

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Author Info

  • Hughes Hallet, Andrew

    ()
    (School of Public Policy, George Mason University)

Abstract

In the 1990s, Argentina was in transition from a high inflation, indebted, financially unstable economy towards a low inflation economy with a stable currency, via a de facto currency union with the US. But in 2001 Argentina's financial system collapsed with a public sector default, capital flight and a currency devaluation. The result was vanishing financial markets, no access to capital, and severe losses in output and employment.Was this predictable in advance, and if so when? By analysing the dynamics of debt accumulation we find that it was. Argentine debt had been unsustainable since 1993. Tracking the fiscal deficits of the time reveals that the lack of growth plus price deflation was the source of the problem. No amount of fiscal restraint would have been able to contain the crisis. In fact fiscal consolidations under low or negative growth are more likely to produce larger deficits or growing debt burdens.Likewise a balanced budget rule,to restrain central or provincial government spending, cannot work in such conditions unless separate measures are taken to increase growth at the same time. But if the currency remains pegged to a slow growth economy, or to an appreciating currency, that option will inevitably be ruled out.

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Bibliographic Info

Article provided by Capco Institute in its journal Journal of Financial Transformation.

Volume (Year): 19 (2007)
Issue (Month): ()
Pages: 129-140

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Handle: RePEc:ris:jofitr:0924

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Keywords: currency board; currency risk; default risk premia; fiscal consolidation;

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