The Argentine economy, hit hard by Mexico's currency collapse in 1994-5, staged an export- and investment-led recovery—only to be buffeted by further external troubles, including the emerging-market malaise of 1997-8, Brazil's devaluation in January 1999, a strong dollar (to which the peso is pegged) and low prices for farm exports. Fernando de la Rua took office as president in December 1999 and tightened fiscal policy, hoping to win back investors' confidence. But tax hikes pushed the recovering economy into a deflationary trap.

Worn thin by political infighting, investors' nerves snapped in November 2000 and bond rates soared. The IMF stepped in with an aid package. In spring 2001 Mr de la Rua reshuffled his cabinet, bringing back Domingo Cavallo as economy minister. The arrival of Mr Cavallo—who bought himself time by refinancing the government's debt—initially cheered investors. But his unorthodox policies have not worked. One innovation, in effect a floating exchange rate for foreign trade, sent bond prices tumbling. Visions of an Argentine default have scared financial markets worldwide (if not the Bush administration). But a negotiated debt default, together with exchange-rate adjustments, may be necessary.