necessary nor sufficient for changing fiscal outcomes. The IMF (2013) has found that fiscal councils can discipline macroeconomic forecasts from being overly optimistic in budget processes, especially if those councils have a high degree of independence and media impact. During the 1990s, Argentina never embarked on fiscal rules or strong fiscal institutions that conform to successful examples studied in the literature. That said, fiscal deficits were never particularly large in comparative context (more on this later). At the same time, a case could have been made for more fiscal savings during the boom years.

The cumulative flows of fiscal outcomes accumulate into public debt, or more precisely, net public debt when there are significant public sector assets. Credibility of the government’s ability to pay debt is not just a function of the size of that debt – relative to GDP or fiscal revenue— but also the interest rate on that debt and the expected growth rate of GDP and/or revenues. The economy had recovered strongly from the spillover effects of the Mexican crisis in 1995. Over the period 1997-1999, a series of external shocks negatively impacted economic growth in Argentina: the Asian and Russian financial crises in 1997 and 1998 drove up borrowing costs for emerging markets like Argentina, and Argentina’s Mercosur trading partner, Brazil, suffered a sharp recession and strong depreciation of its currency. The Asian crisis also had a negative effect on Argentina’s terms of trade. As growth slowed and then turned negative in 1999, markets began to reassess whether Argentine debt dynamics were sustainable. The Fiscal Solvency Law of 1999 (mentioned above) attempted to establish a credible path of fiscal adjustment. The credibility of the path, however, naturally depended upon the evolution of economic growth and market interest rates on Argentine debt. The latter had already been shown to be highly volatile during the series of emerging market debt distress over the preceding period.

On the political front, the Peronist Party ( _Partido Justicialista_ ) was split between rival candidates, while the Radical Party formed an Alliance ( _Alianza_ ) with the FREPASO party and successfully won the presidential election in 1999, with President Fernando de la Rúa taking office at the end of the year. The _Alianza_ secured a majority in the lower house of Congress, while the Peronists maintained a majority in the Senate.

# _Attempts to forestall a crisis_

The Argentine economy suffered a recession in 1999 with GDP contracting almost 3 1⁄2 percent. The poor performance continued into 2000 with a small contraction of less than 1 percent. The general government fiscal deficit hovered around 4 percent of GDP in 1999 and 2000. General government gross debt rose from 30 percent of GDP in 1997 to 38 percent at the end of 2000.<sup>16</sup> Total external debt had risen from 36 percent of GDP in 1997 to 44 percent of GDP in 2000 (nearly 400 percent of exports).<sup>17</sup> Country sovereign risk ranged from 500 to 860 basis points during the year 2000.

In early 2000, the government secured passage of a tax reform that lowered the exemption threshold on the income tax and lowered deductions for higher income individuals. <mark>The tax package included: rate increases on income, excises, fuels, and personal wealth taxes; a broadening</mark>

> 16 Data from IMF-WEO database.

> 17 Data from World Development Indicators .

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