Just under half a year ago, US Treasury Secretary Scott Bessent was in Buenos Aires, praising President Javier Milei for his efforts in reviving Argentina from the edge. Milei, a libertarian leader, had secured over $40 billion in loans from the IMF and other lenders to strengthen his administration.
However, recent political and economic blunders have caused turmoil in Argentina’s markets once again, putting the South American nation in a precarious position. In response, the Trump administration is gearing up to assist its ideological partner.
In a bid to prevent a sell-off of Argentine assets, Bessent declared on Monday that the US government is prepared to provide whatever support is necessary to stabilize Argentina. He stated that all options are being considered to achieve this goal.
So, how did Milei’s proclaimed economic success almost come crashing down?
The libertarian economist, inspired by free-market advocate Milton Friedman, initially saw positive results. His severe austerity measures helped balance the budget and drastically reduce annual inflation from a peak of 289% in April 2024 to 34% in August.
However, economists highlight a major flaw in Milei’s strategy: his relentless focus on curbing inflation led to an artificially strong peso, hindering economic growth, increasing imports, and preventing Argentina from accumulating sufficient dollars to repay its substantial foreign debt.
“The government placed too much emphasis on controlling inflation and neglected to bolster reserves, leaving it vulnerable to a political upheaval,” explained Guido Sandleris, a former central bank chief in Argentina and an economics professor.
The turning point came on September 7 when Milei’s libertarian party suffered a significant defeat in local elections in Buenos Aires province, a key region representing over a third of Argentina’s population. This unexpected outcome, coupled with a corruption scandal involving Milei’s sister, policy inconsistencies, and erratic monetary decisions, triggered market jitters.
The peso plummeted nearly 10% in two weeks, hitting the lower limit of an exchange rate band established in April. Concerns grew that the government might have to devalue the peso, leading to increased demand for dollars and a currency run. The central bank intervened by spending $1.1 billion in a span of three days to stabilize the currency.
The dollar sales unsettled bondholders, who feared the depletion of scarce reserves essential for debt repayment, causing bond prices to plummet. The IMF had previously cautioned about Argentina’s negative international reserves in July, indicating a shortfall of over $6 billion.
“The election defeat exposed the underlying issues that had been concealed,” remarked Carlos Melconian, a prominent economist and former national bank chief, citing Milei’s exchange rate policies and political isolation.
Following Bessent’s pledge of support, which was set to be discussed in a meeting with Trump and Milei, market tensions eased. The peso rebounded by 6%, and yields on Argentina’s dollar debt dropped by 3.7%.
Simultaneously, Milei announced the temporary elimination of hefty taxes on agricultural exports, encouraging exporters to sell surplus crops and boosting the central bank’s dollar reserves.
“The bleeding has been stopped,” noted Nery Persichini, a research head at a local brokerage, expressing optimism that these measures could prevent the peso from hitting rock bottom before the midterm elections.
However, analysts caution that additional US aid, alongside existing multilateral loans, may not address the fundamental political and economic issues plaguing Milei’s administration.
“Merely increasing international financial assistance will not solve Argentina’s deep-rooted challenges at this stage,” remarked Alejandro Werner, a director at Georgetown University’s Americas Institute and former IMF official.
While the US’s Exchange Stabilization Fund boasts significant assets, including over $200 billion, access to these funds is limited. Werner emphasized the need for a new political coalition in Argentina to support the economic agenda for stability.
Addressing the current situation, Joaquín Cottani, an economist familiar with Milei’s administration, stressed the importance of consistent exchange rate and monetary policies for any external support to be effective.
“Argentina must adopt measures like floating the peso, bolstering reserves, and regulating interest rates to regain stability,” Cottani explained, suggesting that the Treasury would likely impose such conditions before extending aid to the country.