It is important to ask what are Argentina's prospects. Despite all the optimism since Cavallo presented his plan, the situation in Argentina remains complicated. The economy is in a prolonged recession. And the country does not have an exchange rate regime that is fit to deal with such shocks. Recession in Argentina is caused by loss of competitiveness and high real interest rates, as it was the case when growth almost disappeared and unemployment increased between 95 and 98 in Brazil.
Recession reduces tax revenues.
Falling tax revenues combined with high real interest rates make the service of Argentina's public debt unsustainable. As a result, Argentina does not have much choice. In contrast with Brazil's experience in 1999, to devalue and float is not a solution for Argentina because the economy is so immensely dollarized. And to dollarize is irrelevant, as it would not change relative prices. Cavallo promises to achieve the real devaluation through tax reforms and import tariffs, taking the economy back to the import substitution policies of the 1950s.