Argentina's Pathway Through Financial Crisis

26 Pages Posted: 15 Feb 2006  

Brad Setser

Roubini Global Economics, LLC; University College London

Anna Gelpern

Georgetown University Law Center

Date Written: September 12, 2005

Abstract

Political support for Argentina's currency board rested on distributing the early gains from ending hyper-inflation and the spending made possible with access to external credit. When these gains were exhausted and external shocks left the peso overvalued, neither Argentina's political system nor its economy could adjust. The needed adjustment went well beyond simple fiscal tightening: it required deciding who would incur the financial losses associated with the deep contraction needed to correct a real over-valuation in a heavily indebted economy. By 2000, Argentina faced the prospect of further economic contraction, a banking crisis and an external sovereign debt crisis. Even if none of the three crises was avoidable, preemptive action might have made one or more of them less severe. Yet preemption was a political orphan - no political constituency in Argentina argued to bring some pain forward for a chance of less pain down the road, and the IMF and G-7 preferred continued financing to the political risk of supporting a new macroeconomic strategy.

Suggested Citation

Setser, Brad and Gelpern, Anna, Argentina's Pathway Through Financial Crisis (September 12, 2005). Rutgers School of Law-Newark Research Papers No. 016; GEG Working Paper No. 2004/02. Available at SSRN: https://ssrn.com/abstract=884225 or http://dx.doi.org/10.2139/ssrn.884225

Brad Setser

Roubini Global Economics, LLC ( email )

131 Varick Street, Suite 1005
New York, NY 10013
United States

University College London ( email )

Gower Street
London
United Kingdom

Anna Gelpern (Contact Author)

Georgetown University Law Center ( email )

600 New Jersey Avenue, NW
Washington, DC 20001
United States

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