Let us start with a little bit of history about Paraguay.
Paraguay has had a rough history. Upon declaring itself independent on May 14, 1811, it became the most prosperous country in South America at that time. Three dictatorships came and during that time the country had no external debt and there was free education for everyone. Also, the government provided large amounts of land that it rented to farmers. During the third government came the War of the Triple Alliance (1865-70), a war that killed the two-thirds of the male population and devastated the countryside. Not only did Paraguay lose a lot of territory but this war also halted the country economically.
The War of the Triple Alliance was fought between Paraguay and the alliance of Brazil, Argentina and Uruguay. Britain was also getting nervous at the thought of a powerful empire that could threaten its interests in South America. In 1863 there was a coup in Uruguay and the defeated government was allied to Paraguay. Paraguay (led by Francisco Solano Lopez) wanted to intervene. Brazil was helping the coup leaders, so war was declared on Brazil. But to be able to fight and help their allies in Uruguay, Paraguayan forces would need to cross through Argentina, which denied them. War was declared against Argentina. The coup in Uruguay triumphed, and the new Uruguayan government declared war against Paraguay. The allies created the Triple Alliance pact and received much economic help from the British (in terms of loans).
Sources:
Long article on war:
http://www.onwar.com/aced/data/tango/triple1864.htm
Long article on war:
http://countrystudies.us/paraguay/11.htm
CIA facts on Paraguay:
https://www.cia.gov/library/publications/the-world-factbook/geos/pa.html
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