As we discussed in a recent editorial, the U.S. has been using some of its financial muscle (and/or the promise that it will be used) to head off a collapse in the Argentinian peso ahead of critical midterm elections on Sunday:
The Treasury has finalized a $20 billion swap line with Argentina’s central bank. In practice this means lending Argentina up to 20 billion badly needed greenbacks (without, conveniently, any requirement for congressional approval: The same maneuver was adopted by the Clinton administration as part of the Mexican bailout in 1995). Any such loans are collateralized with Buenos Aires’s unloved pesos. The Treasury has also been buying them in the markets to help prop up the price. All this is intended to head off a broader panic — as it was, the sell-off was not confined to the currency — that might lead to default of Argentina’s dollar-denominated debt and, possibly, set off a panic beyond its borders. To reinforce these efforts, the Treasury wants to round up $20 billion in additional finance from the private sector, sovereign wealth funds, and the like.
Another reason for U.S. involvement is to head off China, which has been taking a strong interest in resource-rich Argentina. Milei has pulled Argentina into the Western camp, but if he falters, Beijing will be ready to pounce.
Some of the background to the crisis is described in the editorial, but, in brief, it was triggered by an unexpectedly strong showing by the opposition Peronists in local elections in Buenos Aires province in early September. The province (which accounts for about 40 percent of the electorate) is a traditional Peronist stronghold, but the Peronists were also helped by corruption allegations connected to the administration, the last thing that voters attracted by Milei’s promise that Argentina would be run in a different way wanted to see. Additionally, the economy has been showing signs of slowing down again.
Fears that Peronist success in the provincial election was a sign that Milei’s party (LLA), which currently has only a weak position in congress, would not make enough gains in the midterms to give Milei the support he will need in the second half of his term, sparked a run on the peso. Although there are a plenty of dollars floating around in Argentina, the country’s central bank does not have access to enough of them to defend the currency, thus the U.S. Treasury’s intervention.
So far as Sunday’s vote is concerned, the general view seems to be that the LLA needs to get about 35 percent. Judging by some slightly elderly polling, it should score a a little above that. But “should” is most certainly not the same as “will”, and the peso has weakened over the last day or so.
Treasury Secretary Scott Bessent is in for a long weekend.