34 From December 19<sup>th</sup> through 30<sup>th</sup> , 2001, Argentina suffered an institutional coup that resulted in the subsequent resignations of President Fernando De la Rua and Provisional President Adolfo Rodríguez Saa. The aims behind the institutional coup were Argentina defaulting on its debts and abandoning “convertibility” ... Those who pressed for this institutional breakdown thought that by defaulting on the debts and moving away from convertibility, the heavily indebted private sector would eventually have its financial problems solved: if Argentina “pesified” its economy – that is, forcing the conversion of all dollar contracts into peso contracts and then devaluing the peso – a huge amount of resources would be automatically transferred from creditors to debtors. This presumption may have been the main source of financial and media backing for the coup.<sup>27</sup> In sum, under these circumstances of political collapse in which the president not only lacked support of his own party but, if Cavallo is accurate, faced their demand for his resignation, it is no wonder that default and devaluation occurred at end2001. Given the vulnerabilities outlined above, it is correspondingly no surprise that the result was depression, the third D, in 2002. Argentina’s default placed it squarely in the camp of other major emerging market sovereign defaults in recent years, in that the recent default cases have prototypically been cases of political unravelling (Indonesia, where Suharto was forced out of office – although there the defaults were in the private sector and not by the government; Russia, where Yeltsin had lost control and debt was not successfully restructured until Putin was in power; and Ecuador, where the president was forced out of office by a junta comprising military and indigenous leaders). In sharp contrast, where there has been orderly continuity of government, even in an election period, key emerging market economies facing financial crises have been able to overcome them without default, notably including Korea in late 1997 and Brazil in 2002. These experiences strongly suggest the usefulness of the PSME framework for understanding defaults in general and Argentina’s 3D economic collapse in particular.

Powell (2002) has provided statistical support for the PSME model. He applies vector autoregression (VAR) analysis to test among four competing hypothesized causes of the crisis: fiscal unsustainability, current account unsustainability, political risk, and multiple equilibria. His variables are the EMBI spread, fiscal revenue, bank deposits, imports, and an index of political risk. He finds that higher political risk leads to lower deposits and lower fiscal revenue, and that lower deposits in turn lead to a higher EMBI spread, providing support for the political-shock multiple-equilibrium model. He also finds that lower imports boost rather than reduce the spread, suggesting that creditors were more concerned about growth than about the current account deficit. He concludes (p. 37) that:

> 27 Cavallo (2002).   Cavallo goes on to say that the leaders of the institutional coup were the leaders of the Radical Party.  Their tactics were to boycott the 2002 budget bill, then to demand the resignation of the cabinet, and then to demand the resignation of the president.  He also indicates that key leaders of the Radical Party had pressured de la Rua and Cavallo to default on the government’s debt or abandon convertibility as early as March 2001.