As Javier Milei grapples with a severe economic crisis in Argentina ahead of crucial midterm elections, he has turned to the United States for assistance. The libertarian president, facing a potential run on the peso, has found an ally in the Trump administration, keen to bolster a likeminded political figure in Latin America. Treasury Secretary Scott Bessent has led a series of unexpected maneuvers aimed at propping up the Argentine currency and stabilizing Milei’s beleaguered government. “We do not want another failed state in Latin America, and a strong, stable Argentina as a good neighbour is explicitly in the strategic interest of the United States,” Bessent stated on X.
Milei’s administration entered a state of turmoil following a significant defeat in local elections in Buenos Aires province, home to nearly 40% of the Argentine population. This loss raised questions about public support for his free market policies. A subsequent rush to exchange pesos for dollars drained the government’s already limited foreign currency reserves, leading to fears that a forced devaluation might be imminent. Such a drastic measure could jeopardize Argentina’s macroeconomic stability just weeks before the October 26 elections, where Milei aims to strengthen his minority presence in congress to further his economic agenda.
In response to this crisis, the US Treasury has taken the unusual step of directly intervening in the foreign exchange market to support the peso and is providing financial assistance to the Argentine government. Since October 9, Washington has made three direct purchases of pesos amounting to approximately $400 million, although these transactions remain unconfirmed by either government. Additionally, Argentina’s central bank announced a $20 billion “exchange rate stabilization” agreement with the US Treasury. This arrangement could enable further dollar liquidity support from the US to the cash-strapped Argentinian economy.
Looking ahead, Bessent revealed plans to coordinate a $20 billion loan package sourced from private banks and sovereign wealth funds, intended to assist Argentina in managing its debt obligations. Nevertheless, details surrounding this initiative and the degree of US government involvement remain hazy. There is concern among experts about the lack of transparency, with some suggesting that the big numbers being discussed may be aimed at creating the perception of stability to ease the political climate in Argentina prior to the elections.
The initial US support has tempered some of Argentina’s market upheaval, as evidenced by a reduction in the yield spread on Argentine debt, which previously had soared to 14.6 percentage points above comparable US Treasuries. The spread has since narrowed to 10.5 percentage points, with investors apparently viewing US backing as a means to mitigate default risk. However, this intervention has not completely stalled the run on the peso, which recently hit a record low of 1,489 per dollar.
Local investors express skepticism about Milei’s ability to maintain the peso’s value post-elections, leading many to shift their savings into US dollars, a trend highlighted by broker GMA Capital’s Nery Persichini. Adding to the uncertainty, Trump recently hinted that US support for Argentina would dwindle if Milei loses in the upcoming elections. This statement raises questions about the conditional nature of American assistance, as Bessent later indicated that ongoing US support hinged on Milei’s commitment to “robust policies.”
The potential fallout from the midterm elections remains a significant concern. Should Milei’s party, La Libertad Avanza, perform poorly, particularly if they garner less than 30% of the vote compared to the leftist Peronists, pressure on the peso is likely to intensify, necessitating a devaluation. In such a scenario, investors are doubtful about Milei’s ability to implement necessary reforms to stabilize Argentina’s struggling economy.
Even a successful electoral outcome for Milei may not shield him from the pressing need to devalue the peso or adopt a more flexible currency regime to rebuild hard currency reserves. Experts suggest that the current exchange rate system is nearing its breaking point and will not withstand efforts to artificially sustain a strong peso with US funds.
For the US, involvement in Argentina carries inherent risks, including potential financial losses from currency purchases and the prospect of being committed to a long-term financial relationship that may complicate its own fiscal priorities. Additionally, this intervention has sparked unease among some segments of the American electorate, who view it as inconsistent with the administration’s America First policy ethos.
