IN 1991 Argentina pegged its peso to the US dollar at the rate of one-to-one to combat hyperinflation. By decreeing the peso to be worth a dollar the Argentine government not only restored confidence in the currency but was now able to borrow huge amounts in dollars from creditors confident that the constitutionally guaranteed currency peg would protect their investment from inflation or devaluation.
All through the 1990s Argentina’s populist president Carlos Menem allowed the foreign debt to balloon as his government borrowed in dollars to finance reckless public spending, much of it destined to keep restless provincial governors in line.
Economists advocating a more flexible exchange rate and warning that a currency peg without fiscal discipline was a recipe for disaster were ignored by Menem while the IMF touted Argentina as a model for regional economic liberalisation.
By the late 1990s Washington’s strong dollar policy made Argentine exports deeply uncompetitive, leading to the deindustrialisation of huge swathes of the economy and rising unemployment.
Despite the warning signs Argentines, traditionally suspicious of their own long abused peso, remained grimly attached to the dollar peg and politicians knew that not to defend it was tantamount to political suicide. Only a traumatic crisis could shake Argentina loose from its disastrous 10-year experiment with dollarisation.