Argentina has experienced a severe recession for almost the past three years. The recession is due to the combined effect of tighter financing conditions, trade loss, election-related uncertainties, external shocks such as the crises in Asia, Russia, Mexico, and Brazil, as well as numerous other factors. Argentina first experienced a major debt crisis in the 1980's when growth of real output stagnated, financial markets collapsed, prices rose as currency depreciated, and capital fled the country to safer markets. After serious hyperinflation reaching average rates of 2,600 percent in 1989 and 1990, Argentina developed the Convertibility Law of 1991, which pegged the peso to the U.S. dollar. In the short run it helped Argentina because the falling U.S. dollar made it more competitive in European markets and reduced inflation to single digits within three years allowing the economy to grow. .
Throughout the boom years of the mid- 1990's, the federal government's fiscal position deteriorated as they ran deficits. Argentina's weak fiscal policy and mounting overvaluation creating relatively high inflation, a stronger dollar, insufficient domestic flexibility, and lack of sources of adjustment to maintain competitiveness lead to a second recession. The absence of fiscal policies and the fear that other policies were not strong enough to support the convertibility plan lead to the collapse of the currency board, a plummeting exchange rate, and ballooning debt. By the end of 2001 the debt-to-GDP ratio stood at 130 percent. Real GDP was down more than 15percent in the first quarter of 2002 compared to a year earlier. Consumer prices are increasing by 30 percent and wholesale prices by almost 100 percent in the first six months of the year. Liquidity assistance to banks has dramatically expanded the monetary base. Despite a current account surplus, intervention to reduce pressure on the peso and inflation is depleting official reserves.
