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




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.

Suggested Citation

  • Hughes Hallet, Andrew, 2007. "Was Argentina s financial collapse of 2001 Inevitable: What did we know and when did we know it?," Journal of Financial Transformation, Capco Institute, vol. 19, pages 129-140.
  • Handle: RePEc:ris:jofitr:0924

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    More about this item


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

    JEL classification:

    • E42 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Monetary Sytsems; Standards; Regimes; Government and the Monetary System
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • F33 - International Economics - - International Finance - - - International Monetary Arrangements and Institutions


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