Editing Debt of developing countries (section)

==Debt as a mechanism in economic crisis==
An example of debt playing a role in economic crisis was the [[1998–2002 Argentine great depression]]. During the 1980s, Argentina, like many Latin American economies, experienced [[hyperinflation]]. As a part of the process put in place to bring inflation under control, a [[fixed exchange rate]] was put into place between [[Argentina]]'s new currency and the [[US dollar]]. This guaranteed that inflation would not restart, since for every new unit of currency issued by the Argentine Central Bank, the Central Bank had to hold a US dollar against this – therefore in order to print more Argentine currency, the government required additional US dollars. Before this currency regime was in place, if the government had needed money to finance a [[Government budget deficit|budget deficit]], it could simply print more money (thus creating [[inflation]]). Under the new system, if the government spent more than it earned through taxation in a given year, it needed to cover the gap with US dollars, rather than by simply printing more money. The only way the government could get these US dollars to finance the gap was through higher tax of exporters' earnings or through borrowing the needed US dollars. A fixed exchange rate was incompatible with a structural (i.e., recurrent) budget deficit, as the government needed to borrow more US Dollars every year to finance its budget deficit, eventually leading to an unsustainable amount of US dollar debt.

Argentina's debt grew continuously during the 1990s, increasing to above US$120 billion. As a structural budget deficit continued, the government kept borrowing more, creditors continued to lend money, while the IMF suggested less state spending to stop the government's ongoing need to keep borrowing more and more. As the debt pile grew, it became increasingly clear the government's structural budget deficit was not compatible with a low inflation fixed exchange rate – either the government had to start earning as much as it spent, or it had to start (inflationary) printing of money (and thus abandoning the fixed exchange rate as it would not be able to borrow the needed amounts of US dollars to keep the exchange rate stable). Investors started to speculate that the government would never stop spending more than it earned, and so there was only one option for the government – inflation and the abandonment of the fixed exchange rate. In a similar fashion to [[Black Wednesday]], investors began to sell the Argentine currency, betting it would become worthless against the US dollar when the inevitable inflation started. This became a self-fulfilling prophecy, quickly leading to the government's US dollar reserves being exhausted. The crisis led to [[December 2001 riots (Argentina)|riots in December 2001]]. In 2002, a default on about $93 billion of the debt was declared. Investment fled the country, and capital flow towards Argentina ceased almost completely.

The Argentine government met severe challenges trying to refinance the debt. Some creditors denounced the default as sheer robbery. [[Vulture fund]]s who had acquired debt bonds during the crisis, at very low prices, asked to be repaid immediately. For four years, Argentina was effectively shut out of the international financial markets.

Argentina finally got a deal by which 77% of the defaulted bonds were exchanged by others, of a much lower nominal value and at longer terms. The exchange was not accepted by the rest of the private debt holders, who continue to challenge the government to repay them a greater percentage of the money which they originally loaned. The holdouts have formed groups such as [[American Task Force Argentina]] to lobby the Argentine government, in addition to seeking redress by attempting to seize Argentine foreign reserves.

In 2016, Argentina cancelled its debt with the holdout creditors, which received returns in the order of the hundreds of percentage points.

===The determinants of external debt crises in developing countries===
Some of the major risk factors which increase the probability of the external debt crises in developing countries include high level of inflation, relatively large share of short term debt in external debt, denomination of the debt in foreign currency, decrease of the terms of trade over time, unsustainable total debt service relative to GNI, high income inequality, and high share of agriculture in GDP. At the same time, holding foreign exchange reserves is a strong protective measure against an external debt crisis.<ref>[https://ssrn.com/abstract=3042887 "Determinants of External-Debt Crises.  A Probit Model.", Magomedova, Medeya, 2017.]
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