The adoption of convertibility scheme in Argentina a decade ago was a legitimate effortto re-establish a viable financial and monetary system in a country that had lostconfidence in its authorities' ability to manage the currency. Of all the possiblealternatives, however, it offered the least margin for those authorities to manoeuvre.Argentina was the only country to make this choice: no other Latin American country in thegrips of hyperinflation adopted a similar system.

The new approach worked well for a while. In particular, it produced a rapid recoveryearly in the 1990s that included re-monetization and the reconstruction of the financialsystem. Faced with severe external shocks, however, the lack of flexibility generated themost extreme economic cycle anywhere in Latin America. With the radical change in capitalflows toward emerging countries triggered by the Asian crisis, this over-valuation turnedinto a structural crisis. Since the "exit costs" for the convertible system wereexplicit and high (in fact, in the eyes of its defenders, this was its main virtue) theauthorities clung to the system and it collapsed, as it had in the past, amidst chaos andthe massive withdrawal of deposits from the financial system.

This experience leaves us with three fundamental lessons. The first and main one isthat faced with an unstable world, this system was no substitute for solid discretionalmanagement on the part of the authorities. This, in other words, is the only way to build"credibility". The second is the repeated lesson that, sooner or later,overvaluing the exchange rate will inevitably lead to a crisis. The third is that theseproblems are further deepened by the severity of the financial cycles that developingeconomies face today, as markets euphoric about "reform successes" suddenlyswing into a "flight toward quality" that in turn leads to the massivewithdrawal of external financing. An international financial system that generates criseswith the frequency of the current system is deficient and must be reformed.

Alternative explanations do of course continue to exist. One of these suggests thatprices and wages weren't flexible enough. In practice they were, although onlymodestly so. It must be remembered, however, that in the era of the gold standard it wasdiscovered that flexibility was no panacea, and, prior to that, that it tends to makecrises worse because the balances outstanding on debts aren't flexible and thereforetheir real impact rises quickly when deflation is present. The other explanation is thatthere was a lack of fiscal austerity. This is partly true, but it is also true that thefiscal crisis was to a large degree endogenous: the contraction in productive activity,through its impact on tax revenue and higher country risk margins and therefore the highercost of the public debt, generated a vicious circle in which cuts to primary spending werenever enough to offset the deficit's tendency to rise.

The explicit abandonment of convertibility has not yet fulfilled the most pessimisticforecasts: there has been no explosion in the exchange rate or inflation. But the factthat it further intensified the contraction in the economy, which began during the secondhalf of 2001 and worsened in December with the paralysis of the payment system, iscritical. A recovery in productive activity and a better distribution of the proprietarycosts and benefits of devaluation are essential not only to manage the social impacts ofthe crisis, but also to achieve the virtuous circle that contributes to sustainable publicaccounting and financial system recovery. International support for this is essential. Theinternational community, private and multilateral, was no stranger to the crisis: nor canit afford to dissociate itself from the solution.