Argentina: Trying to Make Sense of the Financial Tango

The paper discusses and revisits some of the most popular stories behind the 2001 financial crisis in Argentina, i.e. the prolonged overvaluation of the peso owing to the Currency Board arrangement, the lack of fiscal adjustment, and the negative external environment which triggered a “sudden stop” of capital inflows. In doing so, the paper surveys and attempts to make sense of the contradictory theories and explanations surrounding these different stories. It also tries to shed some light on one possible missing link, that is the growth performance during the Convertibiity period. Finally, the paper discusses some important policy issues pertaining to the effects of global financial integration, such as capital account opening, exchange rate policies, alternatives to debt financing and the role of the international financial institutions. The central message is that the very nature of the Argentine crisis was not fundamentally different from the pattern of inconsistent macroeconomic policies which triggered many of the speculative attacks against the Peso in the 1970s and the 1980s. Although the problem was for once not monetary, the time inconsistency problem of the exchange rate policy followed between 1991 and 2001, together with the lack of nationally coherent fiscal and development policies, led to a classic debt solvency trap. From this perspective, the 2001 default does not provide for a new “type” of crisis, although crisis management. This being said, the real sector of the economy during the 1990s is certainly one of the most overlooked elements in the crisis, and certainly led to overoptimistic expectations about the capacity of the Argentine economy to rebound.