While societal decline can be a long, slow process, it can unravel rapidly. The tipping point is when the outside world loses confidence in a nation's core institutions, such as its legal system or central bank. This triggers a sudden flight of capital, talent, and investment, drastically accelerating the collapse.

Unprecedented US financial support, likened to Draghi's "whatever it takes," has successfully created a circuit breaker for Argentina's negative market feedback loop. However, this support only addresses financial symptoms (FX and credit risk) and cannot solve the underlying political uncertainty about the government's ability to implement reforms.

The recent $20 billion U.S. Treasury support for Argentina was not a reactive bailout for a failing program. It was a pre-planned "big bazooka" to counter a politically-motivated speculative attack on the peso ahead of midterm elections, making it prohibitively expensive to bet against the country's stability.

Knowing they would perform well in Buenos Aires, the Peronist party strategically held an early local election. They correctly anticipated President Milei would over-promise on his party's performance, creating a negative market reaction when he under-delivered, thereby executing a "perfectly executed attack" on his program's stability.

When a government's deficit spending forces it to borrow new money simply to cover the interest on existing debt, it enters a self-perpetuating "debt death spiral." This weakens the nation's financial position until it either defaults or is forced to make brutal, unpopular cuts, risking internal turmoil.

While overall EM credit spreads are near post-GFC tights, making value scarce, Argentina stands out. Following positive legislative election results, its sovereign debt has rallied significantly but remains wide compared to its own history and peer countries, suggesting substantial room for further performance in an otherwise expensive market.

Despite compressed spreads and improved market access, credit markets are not complacent. Pricing for the most vulnerable emerging market sovereigns still implies a significant 17% near-term and 40% five-year probability of default. This is well above historical averages, signaling lingering investor caution and skepticism about long-term stability.

Unlike countries with no recent memory of economic collapse, nations like Greece, Spain, and Italy—and potentially now Argentina—that have endured hyperinflation are more likely to elect reformist governments. The population internalizes the cost of fiscal irresponsibility and votes to avoid repeating the disaster.

Professor Alberto Caballo uses Argentina's experience to show that when citizens lose trust in official statistics, they tend to believe negative data but dismiss any positive reports as lies. This creates an economic environment where pessimism is entrenched and hard to reverse.