of private sector resources to inflate the “headline” amount of the program, and given the language of the “shield.” _The Convertibility Crisis of 2001_ There was a temporary recovery in market sentiment in January and February of 2001 (e.g., sovereign spreads declined), but signs of economic recovery flagged. The Minister of Economy resigned in March, followed by a replacement who tried to implement a sharp fiscal adjustment including public sector pay cuts, but he was forced to resign after two weeks. Domingo Cavallo, the father of the Convertibility Plan, entered as Minister of Economy.

One of the measures introduced was a financial transactions tax, as a quick means of generating increased revenue to improve the fiscal balance. The revenues also were not shared with the provinces. A number of other measures affected the definition of the convertibility plan itself. A “convergence factor” was introduced (ratified by Congress in June) that would compensate exporters and tax importers based on the difference between the values of the dollar and the euro (then worth around 0.85 euros per dollar). It was also announced that a correction to the Convertibility Plan (later ratified in June) would adjust the parity of the peso to be an average of the value of the dollar and the euro, once the euro eventually depreciated to more than 1 euro per dollar. It should be noted that the former could be interpreted as a recognition that the currency was in fact over-valued. The latter measure could be interpreted as the admission that there were design flaws in the original Convertibility Law. Argentina did engage in more trade with Europe than the United States, so it was openly discussed that the currency board should always have been pegged to a different selection of currencies, one that reflected more closely the pattern of trade. (In other words, something closer to the nominal effective exchange rate should have been pegged.) That obviously begged the question of the inclusion of the Brazilian Real – especially since its introduction in 1994, subsequent stabilization, and the growing trade flows within the Mercosur customs union. From a credibility perspective, these developments must have raised questions among investors. Sovereign spreads continued to rise throughout the second quarter of the year.

In terms of the political economy of the reforms and institutional conflict, other concerns were raised. The Central Bank President at the time, Pedro Pou, was opposed to the new measures which implied changing the charter of the Central Bank. He was then removed from office, under charges of either involvement in, or neglecting to prevent, money laundering that allegedly occurred at an intervened private bank. Whether the charges were fair or not, the timing of the removal was interpreted by markets to imply a concentration of power in the Ministry of Economy and the violation of independence of the central bank in managing monetary policy (Powell, 2002).

Another key development was the negotiation of a voluntary debt swap with private creditors (local banks and pension funds) in June. The swap would extend the term of debt coming due over the subsequent years, allowing for some financial breathing room. The amount swapped was US$29.5 billion. The implicit interest rate on the operation was more than 17 percent per year.<sup>23</sup> In other words, the transaction validated the extraordinarily high yields prevailing on

> 23 IMF (2003).

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