Argentina’s Convertibility Law created a currency-board style system that fixed the peso to the U.S. dollar at one-to-one. The goal was to stop high inflation by limiting money creation and strengthening confidence in the currency. This fixed-rate framework set the stage for the later crisis when reserves and public finances came under pressure.
To stop a bank run and slowing loss of deposits, the government restricted cash withdrawals and some transfers, a policy widely known as the “corralito.” The restrictions aimed to keep deposits inside the banking system, but they also blocked many households and firms from accessing money. This intensified public anger and weakened political stability.
As recession deepened and confidence fell, Argentina’s relationship with the IMF deteriorated. On December 5, 2001, the IMF announced it would suspend financial support, citing failure to meet fiscal targets. The decision worsened market fears about liquidity and the government’s ability to maintain the fixed exchange rate.
Large-scale protests and riots peaked on December 19–20, 2001, fueled by the economic downturn and the corralito’s limits on access to savings. The government declared a state of siege, but unrest continued. President Fernando de la Rúa resigned on December 20, deepening the national political crisis.
In the aftermath of the political breakdown, Argentina stopped paying on much of its sovereign debt. The default was historically large for the time and reshaped Argentina’s access to international capital markets. It also increased pressure to change the exchange-rate regime because debt and bank balance sheets were deeply exposed to the dollar peg.
On January 6, 2002, Argentina enacted Law 25,561, declaring a public emergency and authorizing major changes in foreign-exchange rules. The law gave the executive branch broad powers to reorganize the financial system and reshape the exchange-rate framework. It was a legal turning point that enabled the end of convertibility.
Regulations implementing the emergency law established a new official exchange rate of 1.40 pesos per U.S. dollar. This broke the one-to-one parity and signaled a move away from strict convertibility. The change immediately altered prices and contracts across the economy because many obligations had been set assuming the fixed rate.
To limit the immediate damage from the devaluation, Argentina converted (“pesified”) many dollar-denominated contracts under domestic law into pesos at regulated rates. This included converting certain debts at one-to-one and many deposits at 1.40, creating large losses and disputes over fairness. The measure reduced the economy’s dollar exposure but also triggered legal challenges and long-lasting trust problems in banking.
On February 8, 2002, Decree 260/2002 established a single and free-floating foreign exchange market, requiring FX transactions to pass through the official market and allowing the rate to be set by market agreement. This marked a decisive shift from a fixed peg toward a floating exchange rate system. It also changed how the central bank and regulators managed capital flows and exchange operations.
After a year of restrictions and growing frustration, the government formally ended the corralito on December 2, 2002, announcing steps to release reprogrammed deposits. This reduced one of the most visible crisis controls and helped normalize transactions. However, trust in banks remained weak, and many disputes over converted deposits and contracts continued.
As the peso depreciated and import prices rose, inflation jumped sharply in 2002. By December 2002, the year-over-year CPI increase was about 40.9%, reflecting the pass-through from the exchange-rate shock into domestic prices. This inflation spike reshaped wage negotiations, poverty levels, and the political debate over how to manage the new monetary system.
In 2003, Argentina’s policy framework emphasized recovery while operating without the old peg. An IMF Letter of Intent described expectations of renewed growth supported by the real depreciation of the peso and a gradual recovery in demand, while targeting lower inflation. This period linked the new floating-rate system to a broader stabilization plan and set the groundwork for later debt restructuring.
After years in default, Argentina completed a major bond exchange in 2005, offering new securities for old defaulted debt. The exchange closed in late February 2005 and was settled on June 2, 2005 after legal delays, with participation reported around 76%. This restructuring helped reduce near-term debt pressures and supported the post-convertibility policy regime built around a managed float and tighter control over financing needs.
Argentina: Abandoning Convertibility and the Peso Float (2001-2005)