Milei’s bet on Trump pays off at critical moment for Argentina

The years President Javier Milei spent courting Donald Trump are paying off at a critical moment as he battles Argentina’s latest currency crisis. 

When investors lose faith and the Central Bank burns dollars to prevent a peso crash, as it did this week, it rarely ends well. 

But as Milei tries to prevent a meltdown that would almost guarantee the wipe-out of his party in mid-terms next month, he has an advantage that very few emerging market leaders enjoy: the US Treasury is in his corner. 

“It’s very hard to believe that it is different this time, but I believe with President Milei it is,” US Treasury Secretary Scott Bessent said this week in an interview on Fox Business. 

In recent weeks, the libertarian leader has faced rock-hurling protesters, electoral humiliation and financial panic, calling into question his ability to tame inflation and make it to the October 26 midterm election without a crisis. A big defeat next month might effectively end his political project, and the Donald Trump administration is determined to prevent that. 

More than just trying to talk up confidence, Bessent announced on Wednesday that the US was ready to extend the beleaguered economy a US$20-billion lifeline.

Weeks of losses

Milei, who campaigned on promises to dollarise the economy and close the Central Bank, now finds himself negotiating a currency swap line between the US Treasury and Argentine monetary authority.

In the United States, Democrats questioned how lending money to a junk-rated borrower was compatible with an “America First” agenda. Trump himself said Tuesday he didn’t think Milei needed a bailout.

Bessent has floated buying Argentina’s dollar-denominated debt. Although the details are still being discussed, that was enough to ease the fears of investors who had ditched Argentine assets after Milei’s party lost badly in local elections in Buenos Aires Province earlier this month. The peso and the country’s dollar bonds rebounded after weeks of losses. 

Milei, who Trump has referred to as his “favourite president,” needs a strong performance in October to have enough strength in Congress to push through his pro-business reforms and keep the fiscal deficit in check. For investors, a good election for Milei would also likely ease Argentina’s borrowing costs and help pave the way for the country to return to international debt markets next year for the first time since a restructuring in 2020.

Since taking office in 2023, Milei has travelled to US over a half a dozen times, and was one of the few Latin American presidents invited to Trump’s inauguration. 

Though Trump often uses threats and sanctions to impose his will on Latin America, he has sometimes extended a hand to his allies in the region. He enlisted El Salvador’s Nayib Bukele to jail US deportees, and is currently in negotiations to finalise a security deal with Ecuador’s Daniel Noboa. 

Opponents attacked Milei’s foreign policy for putting all its eggs in the basket of a relationship with the United States. But it’s now paying huge dividends. 

“Sometimes they criticised him for that and, well, here you have the payout,” Economy Minister Luis Caputo told reporters in New York on Tuesday.

Hard currency

Before the US stepped in, Argentina’s Central Bank spent US$1.1 billion trying to shore up the peso. That left Argentina’s net reserves – the amount of hard currency that isn’t earmarked for liabilities such as loan payments – standing at just US$6 billion, according to JPMorgan. 

The Trump administration is “not known for writing a lot of cheques,” said Daniel Lansberg-Rodriguez, a partner at Aurora Macro Strategies, a consultancy in New York. “What they’re trying to do is staunch the bleeding.”

To curb inflation – a top priority for voters – Milei has propped up the value of the peso against the dollar. Multilateral lenders including the International Monetary Fund made that possible by issuing new lines of support to the serial-defaulting nation, encouraged by Milei’s austerity drive.

Guido Sandleris, a former head of Argentina’s Central Bank, likened Milei’s dollar crunch to trying to keep warm with a blanket that’s too small.

“By covering themselves with a short blanket on the inflation side, they became venerable to a run currency because they didn’t accumulate enough reserves,” said Sandleris, now a professor of economics at Johns Hopkins University and Buenos Aires’ Torcuato di Tella.

Consumers pinched 

While the annual inflation rate has plunged from more than 200 percent when Milei took office, it remains extremely high by world standards, at more than 30 percent. That’s hurt consumers, since wages haven’t kept up with inflation since Milei took office. 

Opinion surveys show that more than half of Argentines now disapprove of their president. 

Milei is trying to unwind decades of state control over the economy, by privatizing state enterprises, and cutting subsidies and regulation. 

Whether he can continue what he’s started will depend on the congressional support he can muster after the mid-terms. And that, in turn, depends on whether, with US help, he can prevent the economy on the tracks until then.