Even by Argentina's standards, the performance of Eduardo Duhalde's administration has been awful. As the peso plummets and the economy implodes, hyperinflation looms.

This time, Argentina has managed to go from disaster to disaster in just over a decade. After this experience, Ricardo Caballero and Rudiger Dornbusch have argued (FT, March 8, 2002) that the country must give up much of its economic sovereignty for an extended period. Alas, salvation will not come from outside. The International Monetary Fund is too compliant and weak, while the rest of the world does not care enough to save Argentina from itself.

Salvation can come only from within. Yet it seems inconceivable that it will come from Mr Duhalde. The decision to devalue and redenominate assets and liabilities into pesos could, I believed, be justified, in Argentina's desperate circumstances, as a stage towards a disciplined, floating exchange rate regime. Yet this shift was bound to damage confidence. It was essential to make it in as well-thought-out a manner as possible.

Instead, the government forced a "pesofication" of bank deposits and liabilities at different exchange rates, which amounted to outright theft of bank capital; it seized the dollar reserves of banks; it changed the bankruptcy law to undermine the position of creditors; it has used an absurd law on economic subversion to pursue the victims of its own malfeasance; and it has introduced new taxes and regulations in a dizzyingly unpredictable manner.

Argentina is on the edge of an abyss. The peso has sunk from one-to-the-dollar to three-to-the-dollar. From deflation, the country has moved into inflation, with a rise of 4 per cent in the consumer price index for March. The consensus forecast is for inflation at more than 60 per cent from December 2001 to December 2002 and for an 11 per cent decline in gross domestic product this year. The fiscal revenue position is deteriorating. Given the resistance to cuts in public spending, the public's unwillingness to pay taxes and the government's loss of creditworthiness, the monetary printing press is almost all that remains.

It is still possible for the country to pull itself out of its downward spiral. But it must first muster self-discipline. Last week, there were glimmerings of light.

When Jorge Remes Lenicov, the previous economy minister, attended the spring meetings of the IMF and World Bank, he discovered strong support for the IMF's position from the Group of Seven leading high-income countries. On his return, he found that Congress was unwilling to back his plan to convert peso time deposits into bonds. He resigned.

Then, somewhat surprisingly, the provincial governors and the president agreed to a 14-point plan that apparently includes what the IMF wants. The prospect of being hanged has concentrated the minds even of Argentine politicians. If so, Roberto Lavagna, the new economy minister, may have more success than his predecessor. Yet he does face huge obstacles.

One is the political situation of the country, not least the obdurate folly of the president. At one point, Mr Duhalde even talked of pegging the exchange rate and abandoning talks with the IMF. The former is a way of throwing away the foreign exchange reserves, while the latter would ensure that the austerity he is trying to avoid would be exceeded by the hardships he would be forced to impose.

Another obstacle is the intractability of the task. First, the Argentine authorities must impose fiscal discipline across the federal government and the provinces. It was, as Michael Mussa, former head of the IMF's research department, argues, fiscal indiscipline that brought the country down, as so often before.* It would be unnecessary to impose limits on provincial deficits if the federal government could credibly guarantee not to bail them out. It cannot do so. So limits must be imposed. If necessary, spending should be limited to the money available, month by month.

Second, the Argentines must, as the IMF has insisted, reform the bankruptcy code to enable creditors to recover assets and eliminate the law on economic subversion.

Third, the government must also plan to reopen the banks. Policy on this must, in turn, be related to the choice of monetary regime. The best system for a country with Argentina's economic characteristics is a disciplined float. But floating is for grown-ups. The behaviour of its politicians has provided convincing evidence that they are irresponsible children. Dollarisation may be the least bad option, as Kurt Schuler, who works on the staff of the Joint Economic Committee of the US Congress, argues.**

With foreign exchange reserves of about Dollars 12bn (Pounds 8bn) against a monetary base estimated by Mr Schuler at 25bn pesos, dollarisation would be quite comfortable at the current exchange rate. Since Argentines hold large quantities of dollar notes, the economy might be liquefied quite quickly if confidence were restored. The logical counterpart would be to free the banks to decide what to do about their depositors. This choice could sensibly be made under an autonomous monetary regime as well.

If Argentina came up with a credible plan, it would deserve international support. But the IMF has already lent Dollars 14bn, about 520 per cent of quota, compared with a normal limit of 300 per cent. Mr Mussa suggests net new lending of Dollars 2.5bn (over and above refinancing of existing loans) from the IMF and up to the same amount from the World Bank and Inter-American Development Bank in support of a tough programme. The country is also obtaining substantial benefits - Dollars 8bn-Dollars 12bn a year - from failing to service its debts. But it must make a good-faith effort to come to terms with its creditors.

The question is whether Argentina will be able to rescue itself before a hyperinflationary meltdown. Little in recent performance indicates that the worst will be avoided. But if the authorities implemented a coherent plan and received international support, an export-led recovery could start as early as next year. Argentina must decide whether it wants to belong to the modern world, or not. It is, in the end, as simple - and as difficult - as that.

* Argentina and the Fund: from Triumph to Tragedy, Washington DC, Institute for International Economics, March 2002, www.iie.com ** Fixing Argentina, Washington DC, Cato Institute April 2002, www.cato.org martin.wolf@ft.com

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