Learning from argentina’s greatest fiscal crisis

The case of the Argentinian fiscal crisis provides an opportunity to consider the potentially grave consequences of sustained trade and fiscal deficits. Argentina had pegged the value of its currency at an artificially high level, leading to constant international trade deficits. In addition government spending grew substantially but was not matched with corresponding increases in revenue, resulting in sustained fiscal deficits. Crisis erupted in 2002 as GDP fell by 20% and inflation reached 70%. 54% of the population fell into poverty. Currency devaluation, renegotiation of debt, and emergency fiscal measures were undertaken to stabilize the situation. The Argentinian experience shows that substantial trade and fiscal deficits are not ultimately sustainable, and that potentially painful measures must be taken to correct them before economic crisis results.