LAST week's recommended bank short trades did exceptionally well, even though the post-Microsoft tech stock relief rally since Thursday led me to cover positions slightly above their target levels. For instance, Citicorp dropped down to 47 and closed at 48.75 even though the Dow had a 400 point run up since its Wednesday low.

The Goldman Sachs (GS) and Lehman (LEH) short trades were winners too, with GS falling as low as 80 and LEH down to 68 before the Big Board came alive. The strategic rationale for my short trades on Wall Street banks was reinforced by events in Argentina because it is clear that we could well see the most traumatic sovereign default in the international capital markets since Russia went belly up in 1998.

If Argentina defaults or devalues, which could happen as early as next week, all bets are off on Wall Street. You could make a ton of money if you play the Argentine crisis right in the stock, bond and currencies market. Alternatively, if you do nothing or misread the drama being played out in Buenos Aires, your assets could get sandbagged in the financial markets.

Current events in Argentina strike a responsive chord in me because, a decade ago, I used to travel to Buenos Aires working on Argentina Euroloans and Brady debt while working for Chase Manhattan Bank. Argentina was an easy country for a young financier with an interest in Third World debt securitisation to fall in love with. This was 1991-92 and Argentina was the land of Diego Maradona, Gabriela Sabatini, George Luis Borges - and Domingo Cavallo, the brilliant Harvard economist, I idolised as the Lord Keynes of the 1990's.

Cavallo was the architect of one of the most successful economic stabilisation plans in modern times, brining down Argentina inflation from 10000 per cent to a peso/dollar currency peg that led to financial fireworks across Latin America in 1992-93. A decade later, Cavallo is again in the hot seat as Argentina Finance Minister. But this time around, Cavallo will not win. The endgame for Argentina will happen next week and trigger off a crash in the global stock markets.

All indicators suggest that Argentina will default on its $130 billion dollar debt. Two-third of its debt is owed to its own citizens and a run on dollar deposits in Argentine banks has now begun. The Argentine President rules a weak coalition that will never be able to get through the Draconian cuts in pensions, budgets and salaries from the Peronist governors. There is palpable panic in the emerging bond markets, where Argie debt is one-fifth of the index.

The Argentina FRB's 2005, the benchmark sovereign issue, collapsed on Friday to 64 cents or a 35 per cent yield. Moody's and SP have downgraded Argentina debt six notches below investment grade. International bankers sold $30 billion in Argentina bonds six weeks ago, money that will go down the drain in the pampas! Naturally, since the bankers earned $150 million in fees, every Wall Street bank stock analyst thought that Argentine debt swap was just honky-dory. But did not Yeltsin growl 'nyet' when asked if he would devalue in August 1998. Read your Machiavelli. Put not your trust in Third World politicians or Wall Street analysts. Argentina needs another $9 billion to avoid default, money the IMF cannot pay up.

With a financial disaster looming in the horizon, can the US Treasury and the White House put together the Argentine Humpty Dumpty again? Remember, both George Bush and Paul O'Neil virulently opposed the IMF bailouts of Mexico, South Korea and Russia in the 1990's. With all due respect, O'Neil simply does not have the intellectual brilliance of Robert Rubin and Larry Summers. Rubin was a risk arbitrage legend on Wall Street, a Goldman Sachs chairman. Summers was the youngest economics professor to get tenure in Harvard history, the wunderkind of the World Bank. O'Neil? A nice solid Republican ex-CEO but a neophyte in international finance. His boss George W. seems world class thick too. Can dumb and dumber be trusted to orchestrate the fallout from an Argentina default with the finesse that Clinton/ Rubin managed the Mexican peso devaluation in 1994-95? I doubt it and, with the stakes so high, the markets could easily panic and the chain reaction spread across the globe. After all, who knew four years ago that the Thai baht crisis would trigger a global financial panic? Wall Street is downplaying the risks of an Argentina default and its contagion effect on emerging markets. Bad idea. Nasdaq and the Dow were fool's gold last week. But why were T-bill yield plunging? Why were currencies from the Polish zloty to the Brazil real besieged? Why was the yen soaring on crosses as diverse as the Korean won and the Chilean peso? Why was the T-bill/Eurodollar spread flashing a systemic financial risk SOS? Why did Citibank, JP Morgan and Bank of America corporate debt trade as high as a 150 basis point spread over Treasuries? Something nasty is brewing in Buenos Aires and it is myopic to conclude that just because the Queen was at Ascot and Microsoft Windows is selling well, all will be well in the stock market.

If Argentina defaults, the stock waves will jolt the global financial village. Yes, 500 point drops in the Dow, another 500 points on NASDAQ. Treasury bond yields will plunge from their current 5.6 per cent to 5.0, making T-bond options a fabulously attractive leveraged bet for a 100 per cent profit trade. The dollar will sink against the euro, yen and, most dramatically, the Swiss franc. Oil futures will go down. Recognise this financial scenario? The classic deflation trade I have been pitching for the past month.

Apart from Citicorp, who are then obvious bank shorts? ABN-Amro, whose Brazilian Banco Real has $10 billion in assets. Fleet Bank Boston, which derives 10 per cent of profits from Latin America. Spain's Banco Santander and Bilbao Viczaya, both whose ADR's can be shorted. Even J.P. Morgan Chase, with $2 billion in Argentine exposure. For JPM, earnings come out on Wednesday and are not going to be pretty in private equity, investment banking or trading.

Argentina default could be the transmission mechanism for a global recession because, unlike during the 1998 Russian crisis, US, Japan and Eurozone are all in a slowdown. Besides, the spillover effect in Brazil could be a shock to US exports. Risk aversion premiums would skyrocket in emerging markets as liquidity bid and ask spreads widen across the financial asset spectrum. Commodities prices will sink. A late 2001 global economic rebound will seem a pipedream. With the NASDAQ 100 at 65 times forward earnings, tech is still absurdly expensive - and tech is among the sector's most correlated to global growth as 45 per centof tech profits are non-US. So if Buenos Aires catches pneumonia, Silicon Valley will not escape with a mere cold. I believe the game is up for Argentina and next week will be the climax for my deflation trade. The author is vice-president-research & strategy, Damac Invest Co. LLC