The following editorial appeared in today's Washington Post:
The political crisis that has engulfed Argentina - with riots leading to the resignation of the economy minister and then, Thursday, of the president - puts in jeopardy everything the country has accomplished since the end of military rule in 1983.
Against expectations, Argentina had created a constitutional democracy and vanquished hyperinflation; it undertook, but recently failed to see through, brave free-market reforms. Now the departure of President Fernando de la Rua leaves a vacuum that could be filled by the ghosts of Argentina's history. Market reform could be replaced by economic populism. And unless the country's political class pulls together to avert a constitutional crisis, the military may be tempted to return to politics.
The task now for Argentina's leaders is to come to the defense of the nation's democracy, while recognizing that the recent course of economic policy needs responsible adjustment.
In the weeks leading up to the crisis, the government recklessly refused to grapple with the recession by embracing either of the two remedies available: an explicit default on the country's unpayable debt or a devaluation of its currency. Instead, the de la Rua administration maintained that it could muddle through by forcing ever more austerity on a public that already had suffered plenty. The riots of the past few days, which have led to the deaths of some 20 people, show how wrong that view was. It is up to whatever government now emerges to make a clear break.
This won't be easy. During the debt crisis of the 1980s, Latin governments could meet with creditor banks and negotiate cuts in what they would pay. Today Argentina's debt is mostly in the form of bonds, not bank loans, and bond holders are too numerous to gather in one room. A debt default may therefore trigger lawsuits from creditors demanding their money back in full. And yet it is absolutely necessary. There is no way Argentina's economy can recover until its debt burden is reduced.
Currency devaluation is also difficult. In 1991 Argentina tied its currency to the dollar to conquer hyperinflation, and encouraged Argentines to borrow in dollars as well. These dollar debts will be hard to pay if the peso is devalued, which means that the Argentine banks that lent the money could be in trouble. And yet devaluation, like debt default, is probably unavoidable.
The dollar peg has removed two tools that countries use to deal with economic slowdowns devaluation and lower interest rates. This might not matter if Argentina had healthy public finances and could fight recession with fiscal stimulus. But Argentina's public sector is chronically indebted. Because that seems unlikely to change, the country needs to abandon its peg to the dollar.
Debt default and devaluation are both big challenges, but they offer a way to convince Argentina's disaffected public that the four-year-long recession has a chance of ending. It is important, however, that the country resist pressure to throw out other aspects of its economic program - by renationalizing privatized industries or reversing trade liberalization. Argentina now needs above all to preserve its democracy and free-market outlook. The alternatives offer only worsened misery.