directly from the treasury or from their provincial banks-or by obtaining emergency grants from the federal government. As a result, provincial debt expanded dramatically, totaling $17.3 billion by mid-1996, more than two-thirds of which had been run up since 1991. They used mainly three sources. First, they ran up arrears to suppliers and personnel. Second, after exhausting the tolerance for delayed payment, they resorted to forced lending, paying staff and suppliers with bonds. These bonds could be converted to cash at a discount at provincial banks and then used to pay taxes. These two kinds of forced lending accounted for more than half of the debt incurred in the first year and a half of the crisis. Third, despite their financial difficulties, the provinces were able to continue borrowing from private banks, pledging their coparticipation transfers as guarantee. The federal government was a party to this arrangement in that Banco de la Naci6n would deduct the debt service from federal tax receipts and transfer only the remainder to the provinces. Even after the Tequila crisis, the government adhered to this practice. This sharply reduced net transfers to provinces with high levels of bank debt, taking as much as one-third of coparticipation to pay creditors.

The extent of adjustment differed among provinces. Buenos Aires province adjusted the least of the major provinces. In part, this is because it had less need to adjust. While Buenos Aires province began the post-convertibility period with an overall deficit of 10 percent of revenues, subsequent increases in expenditures, although large, were less than the 83 percent real increase in revenues between 1991 and 1994. The province increased non-interest recurrent expenditures by "only" 50 percent in real terms. (Capital spending quadrupled, however, and interest costs increased more than fivefold, raising total

**Table 5. Provincial Debt in Argentina, 1996-97**

|(as of No|vember 199|8)||
|---|---|---|---|
||_1995_|_1996_|_1997_|
|_TotalProvincial Debt_|15,393|17,292|16,249|
|ofwhich:|||4,3|
|Banks (1)||_5,771_|_4,82_|
|National governmnent<br>(2)||768|473|
|International organizations||1,525|1,997|
|Provincial Bonds|1,124|2,248|3,640|
|"Consolidated debt" (3)||5,142|5,582|

(1) Including private and provincial banks. Bank debt and thus total declined from 1996 to 1997 largely because BA Province renegotiated some of its debt with its provincial bank.

(2) Loans to provinces under BOTE 10 and BOCEP.

(3) Debt contracted with federal fiduciary fund to finance privatization of cornmercial banks and bonds issued to suppliers and other debtors in lieu of payment and bonds issued to refinance such debt.

_Source:_ For 1996, Ministerio de Economia IEFE; For 1997, Republic of Argentina, _Informe econ6mico regional,_ December 1997. November 1998 spending 71 percent.) The province also benefited from the creation of the Fondo Conurbano in 1992, and without **it,** revenues would have increased more slowly than expenditures. The province achieved an overall surplus in 1992. The balance began to decline in subsequent years, reaching a negative 4 percent of current revenues in 1994.

To finance this deficit, the province relied on two forms of borrowing. The first consisted of socalled debt consolidation bonds-forced loans from suppliers and staff. Although these had nominal maturities of 16 years, thes ha nma d maturit i ar they could be used to pay provincial taxes and therefore had considerably shorter maturities in practice. The second consisted of medium-term (three-year) Eurobonds. The first Eurobond was issued (for $100 million) in July 1994.

The Tequila crisis caused a 3 percent real drop in the province's revenues. The province responded by reducing capital expenditures. This adjustment was sufficient to maintain the overall deficit at its 1994 level. Further adjustment was not forthcoming, however. Although revenues rebounded 23 percent in real terms between 1995 and 1997, expenditures increased 36 percent (largely because of higher subsidies and more capital works). As a result, the overall deficit increased and gross new borrowing averaged $400 million annually over the 1995-97 period. As of June 1997, the stock of debt consolidation bonds had 18