They say that this year it has been colder in Argentina than it has been in the Arctic Circle. Perhaps it is because of the article that the Congressional Budget Office (CBO) recently authored. One thing is for sure, the CBO is used by both parties to make points as the argument allows. No matter which party you may lean towards, the CBO’s points on Argentina are worth reminding us of the need to be more fiscally responsible.
Argentina
Argentina’s experience offers an example of the very serious
consequences that can arise from a fiscal crisis.
Although interest rates on Argentina’s debt had been
comparable for many years with those on debt of other
countries in emerging markets, Argentina’s fortunes
changed quickly when it found itself suffering from a significant
recession in 2000 and 2001. During the first half
of 2001, with government debt equal to about 50 percent
of the country’s GDP, investors became increasingly worried
about Argentina’s fiscal situation—in part because of
the country’s earlier defaults on its debt. As a result, investors
demanded premiums for holding government debt
that increased interest rates by more than 5 percentage
points.7 A few months later, as it became clear that
Argentina was not able to afford (or willing to make) the
interest payments on its debt, interest rates jumped again
to levels so high that the government was effectively
unable to borrow. Subsequently, Argentina ceased paying
its creditors, and ever since it has been unable to raise
funds in international markets. Argentina’s fiscal crisis
accentuated its underlying economic problems, and from
2001 to 2002, the country’s GDP dropped by nearly
11 percent.