This paper focuses on the relevance of budget deficits on monetary instability, just at a moment when commitment to the SGP could mean problems for some European economies. Our framework is the time when the Spanish peseta belonged to EMS. First, we use a Markov Switching Model to try to identify the different speculative periods which the peseta underwent. Then, we show the significance of budget deficit on the instability of this currency through a model with time varying transition probabilities.

Key words: monetary turbulences, budget deficit, Markov-Switching model, time varying transition probabilities.
JEL Classification: F31, H62.