Final answer:
Argentina's 90s current account deficits were primarily due to an overvalued real exchange rate, leading to a wider trade imbalance. This issue was intensified by financial contagion from the East Asian crises, and a global economic shift contributed to a reduction in the deficit by 2009. Government budget deficits and financial capital flows linked to trade imbalances also played a role in economic crises.
Step-by-step explanation:
The primary cause of Argentina's growing current account deficits in the 90s was an overvalued real exchange rate. This overvaluation made imports cheaper and exports more expensive in foreign markets, contributing to higher import volumes and lower export receipts, which ultimately widened the current account deficit. Financial contagion from the East Asian crises exacerbated this situation by causing a loss of investor confidence and capital outflows, which pressured the Argentine economy further. By 2009, the global financial environment had shifted, leading to lower inflation rates and increased unemployment, which subdued consumer and business demand for imports, thereby reducing the current account deficit.
The imbalances between trade in goods and services and the flows of international financial capital are interconnected. Large trade deficits can become troubling when funded by short-term capital inflows, which are vulnerable to sudden stops and reversals. When investors become pessimistic, capital flows out, and the economy might face a recession, as seen in the Asian Financial Crisis and subsequently in Russia and Argentina. Additionally, significant government budget deficits may set the stage for financial crisis by leading to trade deficits and currency appreciation, which can undermine investor confidence at a certain point.