Argentina seems to be slipping into its third major economic contraction in less than two decades. (Actually, this may be the fourth.) Leticia Arroyo asks: what happened the last two times?
You can blame Mexico (not Canada, sadly) for the 1994 contraction. Investors dumped their Argentine holdings in response to the mess in Mexico and as a result Argentine interest rates spiked and economic activity fell. Argentina pegged its peso to the dollar at the time. The peg survived the contraction, but recovery was slow and halting.
The 2001-02 collapse was a different animal.
It is harder to assign blame than one might think. Argentina's internal and external accounts didn't look that bad in 1999 or 2000 or 2001. (They didn't look that good either, but nothing to justify the scale of the calamity that followed.) Investors, foreign and domestic, started to worry about a devaluation, charging the Argentine government higher and higher interest rates every time it had to refinance. Why did they start worrying? I am honestly not sure.
That said, what was clear by 2001 was that the currency peg had become too restrictive, but the government had no clear plan to transition out of it. Fully dollarize, in order to end speculation of a future devaluation? Devalue early? Devalue, then dollarize? The government punted. People became more and more convinced that there would be a devaluation. Speculation became widespread, and I mean crazily widespread, unimaginably widespread: nobody wanted to accept pesos that could lose two-thirds of their value at any moment, and nobody wanted to spend dollars that might jump by two-thirds in local terms at any moment. Call it hedging, call it speculation, call it crazy, but do the math: by the time December 2001 rolled around, huge chunks of the Argentine economy had been reduced to barter.
This sort of thing seems like a real fear in several Eastern European countries right now.