When provinces borrow in dollars: Argentina’s lessons for federal debt governance
Summarising their recent article in Regional & Federal Studies, Alcides Bazza and Juan Pablo Tedesco examine why Argentine provinces have repeatedly faced debt restructuring, arguing that the central problem lies in the currency composition of subnational debt. While provinces collect most revenues in Argentine pesos, many have borrowed in US dollars, creating a currency mismatch that becomes acute during devaluations. Drawing on Argentina’s restructuring episodes in 2001-2002 and 2020-2023, the authors argue that foreign-currency exposure made provincial debt burdens brittler, even where borrowing supported legitimate infrastructure or development goals. The Argentine case suggests that debt governance frameworks should look beyond deficits and aggregate debt ratios, incorporating safeguards for foreign-currency borrowing, exchange-rate stress testing, clearer approval rules and more transparent restructuring procedures.
Subnational governments are borrowing more. Provinces, states, regions and municipalities increasingly turn to capital markets to finance infrastructure, public services and long-term development needs. This can be a useful tool: borrowing allows governments to spread the cost of investment over time and match today’s projects with tomorrow’s beneficiaries. But it also creates risks, especially when subnational governments borrow in a currency they do not control.
This problem is particularly relevant in emerging economies. Over the last two decades, subnational borrowing has become a more important source of finance, partly because decentralised governments are responsible for costly infrastructure and public service provision. Yet debt distress at the subnational level has not been equally widespread. Argentina stands out as an important exception. Its provinces experienced two major waves of debt restructuring: first during the 2001–2002 crisis, and again between 2020 and 2023. This raises a central question: why did Argentine provinces repeatedly restructure their debts?
A common answer would focus on fiscal discipline. From this perspective, debt distress is mainly the result of persistent deficits, excessive spending, weak fiscal autonomy or dependence on national transfers. These factors are important for understanding subnational public finance. However, the Argentine case suggests that they do not tell the whole story. The key issue is not only how much provinces borrow, but also in which currency they borrow.
Most Argentine provinces collect the bulk of their revenues in pesos. Their tax bases, federal transfers and ordinary budgetary resources are largely denominated in domestic currency. However, in different periods, many provinces borrowed in foreign currency, especially in US dollars. This created a currency mismatch: revenues were in pesos, but liabilities and debt service obligations were in dollars.
The problem becomes clear during a devaluation. If the peso loses value against the dollar, the local-currency value of dollar-denominated debt rises immediately. The same happens with interest and principal payments. Even if a province’s spending decisions or primary balance have not changed, its debt burden can deteriorate sharply because of a macroeconomic shock over which it has no control.
In Argentina, this mechanism was visible in both restructuring episodes. During the late 1990s and early 2000s, provincial debt increased in a context of growing fiscal and macroeconomic fragility. This was the period of convertibility: a monetary regime introduced in the early 1990s that legally fixed the Argentine peso at parity with the US dollar, at a one-to-one exchange rate. The regime ended with the 2002 devaluation. Once the peso was devalued, provinces with dollar-denominated liabilities faced a sudden deterioration in their repayment capacity.
A second cycle began after Argentina regained access to international markets in 2016. Several provinces issued international bonds, often to finance infrastructure and public investment projects. This borrowing was not necessarily irresponsible in its immediate purpose: many operations were linked to roads, energy projects or public works. However, the renewed reliance on foreign-currency debt left provincial budgets exposed to exchange-rate instability. This cycle was followed by another wave of provincial debt restructurings between 2020 and 2023.
Argentina is therefore a critical case because its provinces faced debt distress under different institutional and macroeconomic contexts. The first episode took place under a bureaucratic-administrative debt control system established by the national government. The second occurred under a different regulatory framework, based on fiscal rules and debt sustainability indicators. Despite these differences, the same underlying vulnerability remained: provinces were exposed to foreign-currency liabilities while lacking the policy tools needed to manage exchange-rate risk.
This is an important distinction. National governments control monetary and exchange-rate policy. Provinces do not. When a country faces external shocks, reserve shortages or a loss of monetary credibility, subnational governments cannot stabilise the exchange rate, issue foreign currency or independently manage national macroeconomic policy. Yet they may still bear the consequences of these failures through their debt obligations. For this reason, foreign-currency borrowing should be understood as a problem of intergovernmental coordination, not only as a matter of provincial fiscal behaviour.
The empirical evidence points strongly in this direction. Across different model specifications, provinces with greater exposure to foreign-currency debt were more likely to restructure. Local-currency debt also shows a positive association with restructuring risk, but its effect is weaker. Other variables commonly highlighted in the fiscal federalism literature—such as the primary balance, the legal status of provincial banks or fiscal autonomy—show less stable effects.
This does not mean that fiscal discipline is irrelevant. Provinces with weaker fiscal positions may face greater difficulty in absorbing shocks. But the Argentine evidence suggests that fiscal indicators alone are insufficient. A province with a relatively manageable fiscal position can become vulnerable if a large share of its debt is denominated in foreign currency and the exchange rate moves abruptly.
The case also complicates standard assumptions about federal transfers. In some models, greater reliance on national transfers is associated with weaker fiscal discipline, because provinces may expect the national government to absorb part of the cost of their decisions. Yet in Argentina, federal transfers may also have played a stabilising role during periods of stress. This suggests that intergovernmental transfers can sometimes cushion provincial budgets rather than simply encourage irresponsible borrowing.
The same nuance applies to royalties. In Argentina, provinces have constitutional authority over natural resources located in their territories. This gives them the power to collect non-tax revenues linked to concessions for the exploitation of natural resources, especially hydrocarbons and mining. Since these resources are often exportable commodities priced in international markets, royalty revenues may partially reduce the currency mismatch faced by provinces with foreign-currency debt. However, this protection is not automatic. Commodity prices are volatile, and royalty revenues may not be sufficient to offset the fiscal effects of a major devaluation.
These findings have direct implications for the design of subnational borrowing rules. Fiscal frameworks often focus on aggregate indicators, such as deficit limits, total debt ratios or debt service thresholds. These indicators are useful, but they may miss the most important source of vulnerability in unstable macroeconomic environments: the currency composition of debt.
A more comprehensive framework should distinguish between debt in domestic currency and debt in foreign currency. It should also include safeguards for exchange-rate risk. These could involve limits on foreign-currency borrowing, stronger approval requirements, transparency standards, or mechanisms that require provinces to show how they would manage repayment under adverse exchange-rate scenarios.
Argentina’s experience also shows the importance of clearer restructuring procedures. When subnational governments face debt distress, uncertainty increases costs for provinces, creditors and the national government. Predefined protocols, official registries, clear activation criteria and standardised negotiation guidelines could reduce delays and improve transparency.
The challenge, therefore, is not simply to impose more discipline. Subnational governments need financing for infrastructure and development, and excessive restrictions can limit investment. But allowing foreign-currency borrowing without adequate safeguards can expose provinces to risks they cannot manage.
Argentina’s provincial debt crises show that subnational restructurings are not only local fiscal events. They are also symptoms of deeper coordination problems within federal systems. When provinces borrow in dollars but live in pesos, debt sustainability depends not only on provincial budgets, but on the stability of the federation’s macroeconomic foundations.
---
Alcides Bazza is a researcher at the National University of the Litoral and the Institute of Humanities and Social Sciences of the Litoral, Santa Fe, Argentina. His research focuses on public finance, fiscal federalism, subnational debt and intergovernmental fiscal relations.
Juan Pablo Tedesca is a researcher and university lecturer at the National University of the Litoral and the National University of Entre Ríos, Argentina. His research areas include fiscal federalism, subnational debt, intergovernmental fiscal relations, quantitative methods applied to the analysis of public finance, and political economy.
---
Note: this blog represents the views of the author, and not those of Regional & Federal Studies, the Centre on Constitutional Change, or the University of Edinburgh. It summarises this article from Regional & Federal Studies.
Image credit: Loco085, CC BY 2.5 via Wikimedia Commons
