US Support Calms Argentine Peso, But Fundamental Issues Persist
A recent pledge of financial support from teh US, including potential bond purchases and a $20 billion credit line, has provided a temporary boost to ArgentinaS economy and stabilized its currency, the peso. The move, spearheaded by US Treasury Secretary Scott Bessent, followed market volatility triggered by political uncertainty after President Javier Milei’s party suffered a setback in Buenos Aires provincial elections.
The Trump management’s intervention was met wiht a positive market response, with S&P Global noting the US aims to bolster Argentina‘s foreign exchange reserves. This, according to S&P Global, can “help stabilize the Argentine peso, reduce volatility and mitigate the risk of a currency crisis, fostering a more stable economic habitat conducive to growth and investment.” The Argentine foreign exchange market “has welcomed the news.”
Capital Economics suggests the US support reflects a broader policy approach towards Latin America, demonstrating a willingness to back allies while taking a different stance with nations the administration views less favorably. Bessent specifically called Argentina a ”systemically significant US ally in Latin America,” a statement Capital Economics attributes to the ideological alignment between Trump and Milei. This contrasts with the administration’s general approach to leftist-led Colombia and Brazil.
While the US pledge has ”given authorities some breathing space” and may allow the goverment to navigate upcoming midterm elections without a devaluation, Capital Economics cautions that the measures do not address Argentina’s underlying economic problems, especially a misaligned exchange rate.
the firm argues that Milei’s focus on lowering inflation before the midterms, supported by a strong currency, has resulted in a “wildly overvalued” peso vulnerable to future declines. With net FX reserves currently at just over $5 billion, the central bank lacks sufficient resources for sustained peso support, making the US assistance crucial.
Concerns remain within the investment community regarding the potential for a strong showing by the Peronists in October’s federal midterm elections. such an outcome could jeopardize Milei’s economic stabilization plan and possibly lead to a return to interventionist policies.
Milei’s administration is currently focused on reducing the size of the state and attracting private investment as part of its broader effort to stabilize the Argentine economy.
