Public sector"debt distress"in Argentina, 1988-89

Under the August 1988"Primavera"Plan and the July 1989"Bunge y Born"Plan stabilization programs, the Argentine authorities sought to anchor the price level through an appreciated real exchange rate, which they sustained through policies that maintained high domestic interest rates. The public sector's domestic debt was substantial, however, and the high interest rates drove the public sector's interest bill considerably above its non-interest surplus. The public sector could therefore cover its interest bill only by taking on additional debt. Because the interest bill was so large, domestic debt grew rapidly. Hyperinflation resulted when the outstanding debt became larger than domestic financial markets could be persuaded to hold. The Central Bank played a focal role in these processes. It issued interest-bearing debt in the forms of remunerated bank reserves,"inaccesible deposits,"and Central Bank bills, to absorb money. The interest bill on these liabilities generated mounting"quasi-fiscal"borrowing requirements, which the Central Bank financed through additional debt issues. This debt was held mainly by commercial banks who financed themselves through high-yielding short-term deposits. Hyperinflationary pressure developed when depositors, perceiving that the Central Bank's debt accumulation was becoming excessive, withdrew and moved rapidly into foreign exchange, engendering heavy devaluation pressure.