Argentina could become a test case for an idea being floated by the International Monetary Fund and the World Bank to set up an international bankruptcy court to cope with financial crashes as an alternative to bail-outs.
The stark reality Argentina now faces is that it is being left to sink or swim by the world's international institutions, partly because of its unfulfilled fiscal promises, and partly because world financiers believe a debt default will not be globally contagious.
The crisis in Buenos Aires was sparked when the IMF told the Argentine government on December 5th that it would not allow the once-prosperous Latin American country to withdraw a further $1.3 billion from a $22 billion IMF loan package because of chronic overspending.
"The feeling at the IMF is that it was throwing good money after bad," said a Fund source in Washington. "There is a feeling too that it is time to make an example." The Argentine economy has been crushed by $132 billion in public debt, much of it held by institutional investors abroad. European institutions hold an estimated $11 billion worth of debt, and a further $12 billion is believed to be held in private European accounts.
Wall Street analysts said that the Buenos Aires government would not be able to raise enough cash through taxes and domestic savings to avoid a default or a devaluation of the dollar-pegged peso early in the new year.
IMF officials are leaving the door open for a new Argentine finance minister to renew negotiations on the stalled loan package on the basis of a sustained and workable economic plan.
"We stand ready to work with the Argentine authorities, and to work with and assist the new government as they assume their responsibilities," said Mr Thomas Dawson, the IMF's director of external relations.
"Our aim has been to help the Argentines develop on their own a programme that can be sustained both economically and politically, and that remains our goal."
Financial markets had factored in the Argentinian crisis to the point where there was no sign of contagion spreading to neighbouring countries as the situation worsened, he said.
The failure of two IMF rescue packages for Argentina this year gives ammunition to critics of IMF bailouts, such as the US Treasury Secretary, Mr Paul O'Neill, whose agreement is needed for major fund decisions. The idea of international bankruptcy proceedings as an alternative to bail-outs was aired recently by Ms Anne Krueger, the number two at the IMF. This would accept the inevitability of a default and prevent the need for huge tax increases which would only put off the inevitable.
A bankruptcy would require international banks to accept a partial cancellation of debt. However it poses problems as repayments programmes would have to be binding on countries which might be unwilling to cede sovereignty.