prominently, fueled aggregate demand and boosted GDP growth to a brisk average of 6.4 percent per annum during 1991-1998 (9.1 pe:rcent during 1991-1994), well above the Latin American average of 3.7 percent in 1991-1998 (4.3 percent in 1991-1994).

The sustainability of convertibility's early successes was transitorily but severely questioned during the Mexican (Tequila) crisis of 1995. The Tequila contagion led to a major run on the Argentine peso and bank deposits. Deposits fell by almost 20 percent in a span of few weeks, nearly bringing down the financial system and convertibility with it. This crisis marked a turning point in financial sector policy. The authorities responded by affirming convertibility, while recognizing that its viability required a particularly resilient financial system given the limits imposed by the currency board on the central bank to act as lender of last resort. They launched a series of ambitious financial sector reforms to give effect to this conviction, as illustrated in Appendix Table 1.

The results were impressive according to any standard.! The banking system consolidated and became internationalized, while many public banks were privatized (see Table 1). By the end of the 1990s, a resilient banking system was the crown jewel of convertibility-induced reform. Convertibility did not lead to strong fiscal institutions,<sup>9</sup> but few doubted that it had led to a shock-resistant banking sector.

The banking system was arguably in a. very solid position before the Brazilian devaluation of January 1999, and was still reasonably healthy through the end of 2000, despite the post-1998 continued economic contraction. In effect, comrnon indicators of financial health, shown in Table 2, depict a well capitalized, strongly provisioned, and highly liquid banking system through the year 2000, although a system experiencing losses and increasingly burdened by bad loans after 1998. '

> The Tequila aftermath affirmed convertibility as a central piece in the social

> contract, with post-1994 reforms creating a banking system that, though costly, appeared convertibility-compatible in most respects. Towards the end of the decade, the financial system's prudential buffers were sufficient to withstand sizeable liquidity and solvency shocks-including a flight of about one-third of'the deposits as well as further significant

**8** So much that by 1998 Argentina ranked second (after Singapore, tied with Hong Kong, and ahead of Chile) in terms of the quality of its regulatory environrnent, according to the CAMEILOT rating system developed by the World Bank. This system combined separate rankings for capital requirements (C); loan loss provisioning requirements and definition of past-due loans (A); management (M), defined by the extent of high-quality foreign bank presence; liquidity requirements (L); operating environment (0) as measured by rankings with respect to property rights, creditor rights, and enforcement; and transparency (T), as measured by whether banks are rated by international risk rating agencies and by an index on corruption. Argentina ranked first for C (tied with Singapore), fourth for A, third for M, fourth for L, seventh for 0, and second for T. For details see World Bank (1998), pp. 39-61 and Appendix A.

9 See Gavin and Perotti (1997) and Tornell and Velasco (2000).

**'0** Profits turned negative already in 1998 and became deeply negative during 1999-2000 partly because of the need to constitute provisions in the face of rising bad loans. NPLs rose to 11.6 percent of total loans in 2000, from 10.5 percent the year earlier (Table 2).

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