Authorities in Argentina said they successfully rolled over a large batch of local debt on Wednesday, passing a key test for Javier Milei’s strategy to contain a slide in the peso ahead of midterm elections.
The Finance Ministry sold about 7.7 trillion pesos of debt, according to an X post by Finance Secretary Pablo Quirno. But the sale came at a cost, with yields on the new notes maturing on September 30 reaching 75.7 percent, far above expected inflation and slightly up on the pre-auction market levels.
The sale had drawn special attention after a similar operation two weeks ago failed to extend a big chunk of the maturities, forcing the Central Bank to soak up the excess liquidity in the market to prevent further pressure on the exchange rate.
“This is in line with expectations,” said Dante Ruggieri, a partner at Buenos Aires consultancy AT Inversiones. “They’re trying to sweep all the pesos off the street.”
Milei’s administration has tightened monetary policy in the past few weeks to defend the peso, even as high interest rates hit the banking sector and the broader economy. On Monday, the La Libertad Avanza leader raised interest-bearing reserves for commercial banks, looking to restrict liquidity ahead of the auction and provide some relief for the battered peso.
“It was a good auction,” said Daniel Chodos, head of research and partner at Buenos Aires-based broker Dhalmore Capital. “This may help ease dollar demand a bit tomorrow. The Treasury had captive demand from banks after raising reserve requirements.”
The peso strengthened ahead of the auction’s results, advancing 0.5 percent at the market close on Wednesday.
Monetary policy points to one simple calculation by Milei ahead of congressional elections in October – after years of rampant consumer price increases and a free-falling currency, Argentines care more about inflation than economic growth.
“The government seems to prioritise a very high real rate that hits economic activity in order to moderate the rise in the exchange rate,” said Matías Montes, head of strategy at EMFI Securities.
Authorities may be playing for time ahead of elections in Buenos Aires Province.
On September 7, voters will go to the polls to elect local lawmakers and municipal councillors. The results will indicate whether Milei can build momentum for the October midterms and reassure investors that his reform agenda has staying power.
In the meantime, the peso’s defence is coming at a high cost. Yields on local notes known as Lecaps have almost doubled in the last month, surpassing 90 percent ahead of the previous auctions.
The increase is pushing up funding costs and squeezing profit margins at banks already reeling from a jump in overdue debt. Shares of Argentina’s biggest banks on Wall Street – such as Galicia, Banco Macro and Supervielle – have tumbled as much as 47 percent over the past three months.
As liquidity dries up, bank loan growth is slowing. The sector, which under the previous administration had grown used to profiting from investments in Treasury securities, had nearly doubled private lending by March from a year earlier – one of Milei’s main financial achievements.
But the currency turmoil in July abruptly interrupted that trend as the government debt policies pushed banks into taking funds away from the private sector and funnelling them into government securities.
“Investors are confused by recent FX, monetary policy & other policies reminiscent of past political management of the economy – and that run counter to President Millei’s narrative of regulatory reform,” Morgan Stanley’s strategists including Nikolaj Lippmann wrote in a report on Wednesday.
Argentine assets have been under pressure due to a barrage of political and economic troubles that investors fear could deteriorate Milei’s image ahead of October’s election. After his efforts to rein in spending suffered a setback in Congress, new corruption allegations erupted at the highest levels of government, involving Milei’s sister, Presidential Chief-of-Staff Karina Milei.
Dollar bonds have underperformed almost all emerging market peers, losing more than six percent in the past week.
“The second leg of reforms that Milei needs requires support in Congress, but if this scandal gains traction a few weeks before the election, the situation becomes more complex,” said Claudio Zampa, founder of Switzerland-based Mangart Capital Management. “This is a marathon, not a sprint. If it’s not sustainable, eventually you have a problem.”
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