## Overview

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**Canonical URL:** [Overview](https://www.imf.org/-/media/websites/imf/imported-publications/external/pubs/nft/op/236/_op236.pdf)

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### Key outcomes of the crisis
- Output fell by about 20 percent over three years.
- The Argentine peso, previously pegged at par with the U.S. dollar, reached lows of 3.90 pesos per U.S. dollar (in June 2002).
- The government defaulted on its debt.
- The banking system was largely paralyzed.
- Inflation reignited after deflationary period; recovery began in early 2003 but a long road to sustained growth and stability remained.

### Principal vulnerabilities identified
- Public sector debt dynamics became the critical fragility and were made explosive by a prolonged economic slump and difficulties in rolling over debt.
- Structural weaknesses were left unaddressed during the 1990s in:
  - Fiscal institutions
  - Labor markets
  - External trade
- The currency board regime constrained policy responses:
  - Initially helped achieve disinflation.
  - Evolved from a confidence-enhancer to a confidence-damager as policy shifted from “money-dominant” to “fiscal-dominant.”
  - Prevented money-financed fiscal deficits and limited monetary policy flexibility during the slump.
- Asymmetric pesoization and indexation of bank balance sheets raised balance-sheet vulnerabilities and increased the cost of exiting the fixed exchange-rate regime.

### Phases of the crisis (paper’s framework)
- Boom Years and Buildup of Vulnerabilities: 1992–98
  - Buildup of public debt and failure to tackle structural weaknesses despite IMF-supported programs.
- Downturn and Deepening Depression: 1998–2000
  - Onset of a prolonged depression beginning mid-1998; contributing factors included domestic political uncertainties, contagion from the 1998 Russian crisis, and Brazil’s 1999 crisis and devaluation.
  - Currency board limited ability to prevent monetary tightening; public debt dynamics ruled out loosening fiscal policy.
- Crisis: 2001
  - A slow-motion unfolding with a series of increasingly desperate and often counterproductive steps to arrest debt dynamics.
- Aftermath: 2002–early 2003
  - Default on government debt and collapse of the currency board; measures taken in 2002 often made resolution more difficult; recovery began in early 2003.

### Role of the IMF and programmatic context
- Argentina engaged in a succession of IMF-supported programs in the 1990s:
  - An arrangement under the Extended Fund Facility approved on 3/31/92
  - A Stand-By Arrangement approved on 4/12/96
  - Another Extended Arrangement approved on 2/4/98
  - Another Stand-By Arrangement approved on 3/10/00
- Despite reasonable program performance, vulnerabilities accumulated and the crisis still occurred, making Argentina a salient case study for crisis prevention and management.

### Comparisons and distinguishing features
- Unlike many traditional balance-of-payments crises:
  - The crisis was not driven by large money-financed deficits and high inflation.
  - There was significant price deflation in the run-up.
  - The banking system appeared sound by traditional measures until the default and asymmetric pesoization.
- Similarities with other crises:
  - Fragility in balance sheets combined with inability to mount effective policy responses, including insufficient political support and resolve.
  - Public debt dynamics and doubts about the exchange rate peg were central—parallels with Brazil’s 1999 experience, although differences in the nature of the peg and timing of exit led to different outcomes.

### Core analytical conclusions
- The interaction between fiscal policy and the currency board arrangement played the central role in transforming Argentina from apparent star performer to crisis country.
- Once inflation stabilized at low levels, the rationale for maintaining a fixed exchange rate was weak given Argentina’s structural characteristics.
- In a slump with sizable foreign-currency-denominated public debt, the currency board created a policy dilemma:
  - Authorities were constrained to pursue contractionary monetary policy amid recession.
  - Balance-sheet vulnerabilities raised the cost of exiting the fixed exchange-rate regime and undermined confidence.
- The crisis illustrates how a fixed exchange-rate regime can force adjustment through deflation and unemployment when other adjustment channels (e.g., nominal devaluation) are precluded.

### Intended focus of the paper
- Examine origins and evolution of Argentina’s crisis up to early 2002.
- Draw lessons for:
  - Crisis prevention
  - Crisis management
  - Design of IMF-supported programs
- Emphasize economic forces leading to the crisis and general policy lessons for countries and the IMF.

*Source: _op236*

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_Source: https://www.imf.org/-/media/websites/imf/imported-publications/external/pubs/nft/op/236/_op236.pdf_