Bessent puts US money at risk in US$20-billion Argentina backstop

The Donald Trump administration’s US$20-billion lifeline for Argentina leans on a Treasury fund that’s been successfully used to bail out troubled allies in the past – but it could still carry risks for US taxpayers.

Treasury Secretary Scott Bessent floated the idea of a rescue package this week, saying he’s prepared to deploy the agency’s Exchange Stabilization Fund to help Argentina. Bessent said the United States could offer swap lines and purchases of currency or government bonds, among other options.

The plan’s goal is clear: to help President Javier Milei weather a market slump and win mid-term elections next month. Trump’s team sees Milei as a political ally, and his drive to slash chronic budget deficits as Argentina’s best bet to pull itself out of a decades-old crisis cycle.

As for the details, little has been disclosed so far. Bessent’s comments suggest the Treasury is considering a swap of dollar holdings in its ESF facility for peso-denominated Argentine assets, according to experts and former officials.

That would be different from the swap lines that the Federal Reserve has with other developed-economy central banks, and more reminiscent of tools used to bail out Mexico three decades ago, they say.

And that’s if the US winds up actually implementing a rescue. The suggestion alone has had a stabilising impact on Argentine markets and the peso, and if Milei’s allies overperform in the coming election, such an intervention may be deemed unnecessary. ​

‘Need to answer’

Whatever kind of loans the US ends up extending, if any, it’s clear that Argentina is a high-risk borrower. 

The country has repeatedly been backed to the hilt by global creditors – including the biggest loan in International Monetary Fund history, greenlit during Trump’s first term – only to relapse into financial turmoil, raising doubts about its ability to repay.

What’s more, Milei has already gotten a sharp rebuff from Buenos Aires Province voters, which is what triggered the latest run on the Argentine peso and ultimately the US aid offer. Many economists reckon he’s spent too much cash propping up an overvalued currency – creating risks for anyone who lends the country dollars and gets pesos for collateral, as Bessent is hinting he might do. 

“It’s a pretty big gamble,” says Brad Setser, a former top US Treasury official who’s now at the Council on Foreign Relations.

Milei “has preferred a stronger peso than I think the Argentina economy can support,” and he’s already blown through billions of IMF dollars, Setser says. “The key question is why will this US$20 billion make a bigger impact? And I think that’s a question that the Treasury and Bessent need to answer.”

The US offer of help has already buoyed Argentina’s financial markets. With a month left before the midterm vote – which could shape Milei’s prospects of pushing his IMF- and US-backed policies through Congress – any US backstop wouldn’t necessarily have to be in place for long.   

Bessent hinted at that possibility in a Fox Business interview Wednesday, calling the menu of support options the Treasury is considering a “bridge to the election.”

The Treasury chief also blamed Argentina’s latest bout of financial turmoil on Milei’s predecessors. “I don’t think the market has lost confidence in him,” Bessent said. “The market is looking in the rearview mirror and looking at decades – about a century – of terrible Argentine mismanagement.”

The US Treasury did not respond to a request for comment.

‘Lot of exposure’

Use of the ESF to help Argentina was also contemplated during Trump’s first term, according to one person familiar with the matter.

In such a deal, the US would carry some exchange-rate risk because a precipitous decline in the peso would leave the Treasury on the hook, the person said. The ESF was also deployed for the Mexico rescue effort in the mid-1990s, but in that case it was collateralised with oil, the person said.

The Treasury fund, established in 1934, has also been used to offer liquidity to economies like Indonesia during the Asian financial crisis of the late 90s, and as a backstop for domestic bailout plans during the 2008 crash and the pandemic.

In the Mexican case, all the US$12 billion drawn from the ESF was repaid, and the US even made a $500 million profit, according to the Brookings Institution.

That’s not necessarily a reliable precedent for Argentina, which has a lot of IMF debt already on its books, and a currency that analysts reckon is overvalued by some 20 percent – threatening the value of collateral it posts.  

“The loan to Mexico was a loan to a country with a much cleaner balance sheet,” and one that had already seen its currency depreciate – opening the way for an export boom that helped repay debt quickly – says Setser.

Argentina also has a Central Bank swap line with China, dating back to Milei’s predecessor, and drew on US$6.5 billion to get through another bout of market upheaval in 2023. It’s by far the IMF’s biggest debtor – owing some US$42 billion after a loan deal this April that met with internal resistance at the Fund, suggesting that source of credit is likely tapped out. 

The risk of Bessent’s strategy is that it could turn into “an open-ended commitment to effectively be a lender of last resort,” according to Doug Rediker, who used to represent the US at the International Monetary Fund, and is now managing partner of International Capital Strategies.

“That’s a lot of exposure for the US government to be taking on,” he says.