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Challenges to Fiscal Adjustment in Latin America

The Cases of Argentina, Brazil, Chile and Mexico

image of Challenges to Fiscal Adjustment in Latin America

This volume discusses progress made to date in Argentina, Brazil, Chile and Mexico in putting their finances in order and points out the challenges ahead. It provides an overview of trends and highlights the diversity of fiscal adjustment processes in Latin American countries. It also describes the financial market perspective and role of sovereign debt ratings.

The chapter on Argentina debunks the view that fiscal management in the 1990s was irresponsible, arguing instead that the financial crisis was caused by a confluence of costly pension reforms, Brady debt restructuring and the recognition of fiscal “skeletons” in the closet. The chapter on Brazil makes a case for a more entrenched culture of fiscal austerity to make the current achievements sustainable. The Chile chapter describes the role of political cohesiveness following the return of democracy in driving the economy to fiscal rectitude. Finally, the chapter on Mexico discusses different scenarios for debt dynamics and the country’s efforts to contain expenditure pressures.

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Argentina's Fiscal Policy in the 1990s

A Tale of Skeletons and Sudden Stops

This chapter discusses fiscal adjustment in Argentina. It argues that the deterioration of the public debt dynamics prior to the 2001 crisis was due predominantly to the costs borne by the budget associated with the pension reform implemented in the early 1990s, the refinancing at market rates of the debt that had been restructured at concessionary rates under the Brady deal in 1992, and the recognition of previously unrecorded liabilities (fiscal “skeletons”). Instead of being perceived by the markets as instrumental in improving Argentina’s fiscal accounts over the long term, despite its associated short-term costs, pension reform is argued to have contributed to the deterioration of investors’ perception of debt sustainability in an environment of macroeconomic volatility and financial crises in other emerging market economies.

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