The government has also said that the dual exchange rate would be abandoned once a new system can be agreed with the IMF. A free-float is inevitable (and would be favoured by the IMF) with little in the central bank's reserves to prevent a massive overshooting. This in itself is enough to raise concern of hyperinflation. Moreover, the Budget currently being presented to Congress anticipates the printing of 3.5bn pesos to compensate banks and finance the budget deficit. Banks will also be able to issue certificates to account holders, effectively creating a new form of money. Finally, lifting deposit controls will lead to a sharp increase in the supply of pesos. The threat is that a free-float and a spiraling money supply will lead to a collapse in the value of the peso, both at home and abroad. The financial system faces a high risk of bankruptcy.

Thus far the markets have taken this risk fairly calmly, perhaps because bad news from Argentina has yet to trigger any major contagion elsewhere. Other Latin American countries, notably Brazil, have been cushioned by superior economic and political conditions. Argentine markets have also been closed until Wednesday. Nonetheless, a long-overdue (and desirable) devaluation is one thing, financial meltdown would be another. At the very least, expect countries with poor fundamentals, notably Venezuela, to see their currencies weaken significantly further.

The markets will also worry about the impact on Spanish banks, and the euro may suffer again. In fact this concern is overdone. The markets have focused on old BLS data, which captured U.S. banks' cross-border business only. On this basis their exposure to Argentina was $ 10.2bn at the end of June, well behind $ 17.7bn for Spanish banks. However, under new methodology, which includes all loans done within the country in both foreign currencies and in the peso, U.S. banks' 'contractual claims' to Argentine-based borrowers stood at $ 23.1 billion as of September 30, 2001. Spanish banks exposure was just under $ 20bn. Either way these are big sums of money, but the euro no longer looks as vulnerable - especially if US equities continue to fall.