Argentina

Q: Why is Argentina in a recession? A: Because everyone expects the value of the peso to decline, everyone is charging Argentinian borrowers high real interest rates to compensate for the likely future decline in the value of the peso. Higher real interest rates mean low investment, and low investment generates recession and high unemployment. Q: Why does everyone expect the value of the peso to decline? A: The peso is overvalued--that is, the current …

…the peso to, say, half its current value would thus double the peso value of their debts and send them into bankruptcy. High interest rates are bad and discourage investment. Near-universal bankruptcy is even worse and discourages investment even more. Were it not for the dollar-denominated debts in Argentina, devaluation might well cure the recession--that was what Britain did successfully in 1992, after all, when it abandoned its commitment to the western European Exchange Rate Mechanism