For Scott Bessent’s US$20-billion wager on Argentina to yield positive results, numerous factors must align favorably – factors that historically, in Argentina, have often not aligned as intended. The US Treasury secretary unveiled a support measure on Thursday aimed at stabilizing the nation’s financial markets amid escalating turmoil, while also assisting a key political ally in a challenging situation. The United States is implementing swap arrangements to stabilize the peso, having already taken the unprecedented step of directly purchasing the currency, a rare action in recent decades. “It’s not a bailout at all,” Bessent stated in an interview. To many observers, who are still anticipating the specifics to be elaborated, it certainly appears to be the case. The administration, which pledged to prioritize American interests, has presented this to a nation known for mismanaging external funds and failing to meet its own financial obligations. Argentina’s President Javier Milei – arguably the Trump administration’s most fervent supporter in Latin America, amid escalating superpower competition with China – has pledged to move beyond the burdens of a troubled past. He asserts that he is ultimately restoring order to the nation’s public finances and addressing rampant inflation, even if it necessitates a drastic approach to the budget. OpenAI and Sur Energy are collaborating to establish a substantial AI data center in Patagonia.
Financial markets had confidence in him until a few weeks prior, when Milei’s party experienced a significant setback in a crucial election in Buenos Aires Province. Subsequently, confidence experienced a notable decline. The peso experienced a significant decline, raising concerns about a potential resurgence in inflation, particularly as the country approaches a crucial electoral challenge with midterm elections just two weeks on the horizon. The crux of Bessent’s wager is that, bolstered by US financial strength, Milei has the potential to secure victory. Subsequently, with a cooperative Congress, he can realign his economic agenda and regain the confidence of investors. Analysts indicate that this scenario is not unfeasible, merely challenging. “It’s a gamble that all the problems that Argentina now faces are a function of politics, that Milei can pull a rabbit out of the hat and do better than expected in the October elections,” observes Brad Setser. However, Setser identifies persistent issues within the nation’s economic program that are unlikely to dissipate, thereby introducing additional layers of risk to the US intervention. “It’s a bet that the peso is not structurally overvalued,” he states. “It is an assertion that the band is capable of sustaining.” Over the last week and a half, Argentina’s Treasury expended US$1.8 billion to support the currency and maintain its trading band, facing a depletion of funds prior to Bessent’s intervention. The intervention by the US catalyzed a rebound in the peso, accompanied by a notable increase in government bonds. The argument in favor of Milei, which has resulted in robust market performance over the past two years, is that his decisive actions have yielded tangible results. Argentina has achieved its first budget surpluses since 2009, with inflation decreasing to approximately 30 percent from previous peaks that were nearly tenfold higher. This accomplishment is crucial for his appeal to the electorate.
However, it is supported by meticulous management of the peso, which has contained import prices – albeit at the cost of accumulating pressures. The US Treasury chief is well-acquainted with this landscape, having participated in what is arguably the most renowned foreign-exchange transaction in history. In 1992, Bessent’s analytical work was instrumental in enabling George Soros to secure a profit of US$1 billion through a strategic bet against the British pound. He is now fundamentally positioned on the contrary side, supporting a currency that is attracting the attention of speculators. Bessent stated that he believes the peso is undervalued. Many economists hold a contrasting perspective, arguing that the currency’s strength is detrimental to Argentina’s competitiveness. The argument stands without the need for economic theory: observable evidence can be found at shopping malls across the border in Chile, where Argentine consumers have engaged in a buying frenzy due to the peso’s enhanced purchasing power. “There is broad agreement that the FX regime must change,” and the peso should be allowed to float more freely, wrote Ivan Stambulsky. “A considerable number believe that the adjustment is imminent.” However, it is not imminent. Any such action prior to the elections would probably prove detrimental for Milei. US intervention implies that he is not yet required to take action. The precise nature of the intervention remains ambiguous. Further information is likely to surface during Milei’s upcoming visit with US President Donald Trump at the White House next week. Bessent has indicated that the Treasury’s Exchange Stabilisation Fund is set to be utilized, potentially incorporating its Special Drawing Rights – a type of global reserve currency provided by the International Monetary Fund.
The initial Trump administration contemplated intervening in Argentina to purchase pesos during a comparable period of instability but ultimately dismissed the idea, believing it would constitute throwing good money after bad, as per an individual acquainted with those conversations. Argentina has an opportunity to establish a favorable economic trajectory if Milei performs successfully in the midterms. However, this requires a series of ideal conditions, and the administration is primarily focused on maintaining market stability until election day, according to the source. The Treasury’s SDRs, if included in the arrangement, would likely be allocated towards settling a portion of the US$55 billion debt that Argentina has with the IMF. That debt accumulation positions Argentina as the Fund’s largest borrower by a significant margin. The history of IMF bailouts has often been fraught with difficulties, notably in 2001, when a financial crash incited significant civil unrest, and more recently during Trump’s initial term, when the market-oriented reform agenda of then-president Mauricio Macri faced severe challenges. The IMF consented to provide additional financial support to Argentina once more in April of this year, albeit amidst considerable domestic dissent. Fund chief Kristalina Georgieva has engaged in recent discussions with Bessent and the government of Milei. She has not indicated that additional funds from the IMF will be available at the lender’s annual meetings next week. One reason the United States is stepping into the gap and offering its own credit may be its desire to diminish Chinese influence in Latin America. The Trump administration appears to be allocating greater focus to the region compared to its predecessors, demonstrating a willingness to employ both incentives and punitive measures. It has threatened military action against Venezuela and imposed tariffs on Brazil – both of which are allies of Beijing – and is now providing incentives to Milei.
Argentina maintains a US$18-billion swap line with the Chinese central bank, a facility that existed prior to Milei’s tenure but was renewed under his administration this year. Bessent stated that Milei is “committed to getting China out of Argentina.” Although a firm stance towards China garners bipartisan backing in Washington, Bessent’s assistance for Argentina has faced scrutiny from both political parties. Some Republicans express concern that US soybean farmers, competing with their Argentine counterparts to sell the crop to China, may become unintended casualties of the rescue plan. Bessent was recently captured in a photograph examining what seemed to be a message from Agriculture Secretary Brooke Rollins, which conveyed apprehension regarding the Argentina proposal. In the interim, Democrats have criticized the administration, arguing that financial assistance for Argentina constitutes a betrayal of Trump’s “America First” agenda. Senator Elizabeth Warren has introduced legislation aimed at preventing the US Treasury from utilizing its funds in the rescue, while also interrogating asset managers regarding their involvement in the transaction.
Bessent on Thursday referred to Argentina as a nation of “systemic importance,” yet did not clarify the implications of this designation – and asserted that supporting Milei aligns entirely with America First principles. “I’ll explain the rationale,” he stated during an interview with Fox News’s Laura Ingraham late Thursday. “Do you wish to engage more with gunboats as seen in Venezuela?” We do not desire a failed state. Regardless of the traction that argument may achieve, the timing of Bessent’s support package for Argentina signifies a distinct form of political risk. It comes at a moment when Washington’s activities are stalled due to a fiscal impasse. That introduces an additional dimension to the entire wager, remarks Setser at the Council on Foreign Relations. In addition to his other investments, Bessent asserts, “A bet that the US political system will be comfortable putting money into Argentina, when the US government is shut down and not writing checks to Americans.” Bessent’s substantial wager on Argentina faces a limited pathway to success.