The US bet big on Argentina bailout

US Treasury Secretary Scott Bessent has been the point-person entrusted with selling financial markets on some of President Donald Trump’s riskiest economic gambles: sweeping global tariffs, trade talks with China and preparations to install a new leader at the US central bank.

But Bessent’s trickiest task may just be the White House bet on Argentina.

The US stepped onto the scene in mid-September, responding to a plunge in the peso – the Argentine currency – which officials feared could imperil Trump ally President Javier Milei and his party in looming midterm elections.

Bessent said the US would do whatever was needed to stabilise the situation, calling the country a key ally in the region.

In political terms, the US intervention – which included purchases of pesos and the establishment of a $20bn (£15bn) currency swap line that gives the Argentine central bank access to dollars – was a success for Milei.

His party not only fended off losses in the midterm elections but made inroads, strengthening his position.

But whether the US intervention in the country will be a success financially is another question.

The peso has fallen roughly 30% this year, including roughly 4% over the last month. The drop came despite the US commitments – and a modest rally after the election.

It’s an indication of the ongoing risk. At the end of the day, the US could find itself holding a pile of pesos worth much less than they were originally.

The intervention in Argentina was a highly unusual move – especially from a White House known for its “America First” approach.

Milei has endeared himself to conservatives in the US with his embrace of free-market reforms and radical spending cuts. He has met frequently with Trump, who has called him his “favourite president”.

But the US has rarely offered financial bailouts to other countries – especially in a case that posed no wider financial stability risks – and direct purchases of a struggling emerging market currency are unprecedented, says Brad Setser, senior fellow at the Council on Foreign Relations.

Adding to the risk is Argentina’s long history of currency devaluation and debt default, including most recently in 2020.

Few are positioned to be as aware of the potential pitfalls as Bessent, who made his name as a currency trader working for George Soros.

Bessent famously took part in the 1992 speculation against the British pound. At that time, investors who bet that Sterling had been overvalued were said to have broken the Bank of England with their heavy selling.

This time, Bessent finds himself on the opposite side of similar gamble. He has defended his moves, invoking the spectre of fellow South American country, Venezuela, and arguing that failure to shore up Argentina as a US ally could lead to destabilisation in the region.

“These results are a clear example that the Trump Administration policy of Peace through Economic Strength is working,” Bessent wrote on social media after the recent election in Argentina.

On Wednesday, Bessent posted again to say: “the Argentine economic bridge has now turned a profit for the American people”.

The US Treasury Department did not respond to inquiries seeking more details.

But it has kept quiet about key information needed to assess Bessent’s claims – including the timeline and scale of its peso purchases – or sales – and what, if any, other assets the Argentine government pledged in order to secure the swap deal.

Analysts have estimated the US has purchased as much as $2bn worth of pesos so far – hardly an earth-shattering figure.

But Democrats have criticised the help at a time of White House spending cuts and an ongoing government shutdown, accusing Bessent of wanting to protect finance “buddies” with investments in the country.

Even some members of Trump’s own Republican Party have questioned how the aid aligns with the president’s “America First” goals.

Bessent has disputed any characterisation of the US support for Argentina as a “bailout”, promising there will be “no taxpayer losses” and even declaring the peso “undervalued”.

But while that could be true for a short-term trade, that view is not the general consensus.

To the contrary – most analysts say the peso is overvalued, but has been propped up by support from the Argentine central bank, which set trading limits for the peso in April.

Economists say maintaining such limits is not sustainable. They cite the surge in Argentines travelling to make purchases in neighbouring countries where their money travels farther as one of the signs that the peso is being held artificially high.

The Argentine central bank has insisted it is committed to the trading band, which was intended to protect the country from wild currency swings destabilising prices and support Milei’s efforts to control inflation.

But it has already had to spend billions buying pesos to keep the currency steady, burning through International Monetary Fund (IMF) funding and dipping into its foreign reserves, which are key to paying its debt obligations.

Economists say they expect the bank will have to change its policy to allow the peso to fall more – or the country risks needing another bailout.

That choice presents a dilemma for Bessent, given his promises to guard the US against losses.

“Is the US willing to provide support to Argentina so that Argentina can defend the peso at this level?” Mr Setser asks. “Bessent has to decide in a sense whether to double down… or he has to let the peso adjust and recognise that his intervention was a bridge to the election.”

The peso plummeted ahead of the midterms, as businesses and households in Argentina rushed to trade the currency for dollars.

People wanted to protect themselves, remembering the way the currency collapsed in 2019 after the election loss of former president Mauricio Macri, who was also known for economic reform, says Joaquín Bagües, managing director of Buenos Aires-based Grit Capital Group.

“Every single guy that I talked to, they wanted to buy dollars… they have very fresh memories about that,” he said, describing the run as a “confidence crisis.”

Mr Bagües says the demand for dollars has eased since the election.

But the peso has not experienced the kind of sustained relief seen in other assets, like bonds or the stock market, which surged more than 20% the day after the election and has continued to rise.

While Argentine companies are starting to tap international lending markets again, after being frozen out ahead of the election, analysts say they expect US banks to remain wary of lending to Argentina, despite a push by Bessent to arrange an additional $20bn in private financing.

And Mr Bagües says there are too many policy questions ahead to predict what will happen to the peso.

Kathryn Exum, co-head of sovereign research at Gramercy Funds Management, suggests that the peso could rise “over the medium term” if the government is able to continue advancing economic reforms.

But, she adds, “there’s a lot that needs to be done between now and then”.

For now, Anthony Simond, investment director on the emerging market debt team at Aberdeen Group, says he expects the peso has farther to fall.

“Bessent may say one thing, but I think the economic reality may force them to be a little bit more flexible in terms of currency management,” he says.