Bessent’s big gamble on Argentina has a narrow road to pay off

The Treasury secretary announced a lifeline Thursday that’s designed to pull the country’s financial markets out of deepening turmoil, and a close political ally out of a hole. The US is offering swap arrangements to shore up the peso — and it’s already stepped in directly to buy the currency, a move with few precedents in recent decades. 

“It’s not a bailout at all,” Bessent told Fox News late Thursday. To a lot of observers, still waiting for the details to be fleshed out, it sure looks like one. It’s been delivered by an administration that promised to put America first, to a country with a long track record of squandering other people’s money and defaulting on its own debts.  

Argentina’s President Javier Milei — perhaps the Trump administration’s strongest backer in Latin America, where superpower rivalry with China is heating up — has vowed to leave all that bad history behind. He says he’s finally putting the country’s public finances in order and getting a grip on rampant inflation, even if it means taking a chainsaw to the budget.

Milei “is trying to break 100 years of bad cycles,” Bessent posted on social media Friday. “We do not want another failed or China-led state in Latin America.” 

Financial markets were inclined to believe Milei could pull it off — until a few weeks ago, when his party suffered a stinging defeat in a key provincial ballot. Then, confidence suddenly began to drain away. The peso entered a nosedive that threatened to send inflation soaring back up – right before an even bigger electoral test, with midterms now two weeks away.

The essence of Bessent’s bet is that, with US financial muscle behind him, Milei can win them. And then, with a supportive congress, get his economic program on track and investors onside once again. Analysts say that’s not impossible, just hard.

‘It’s a Gamble’

“It’s a gamble that all the problems that Argentina now faces are a function of politics, that Milei can pull a rabbit out of the hat and do better than expected in the October elections,” says Brad Setser, a former Treasury official now at the Council on Foreign Relations.

But Setser sees problems with the country’s economic program that won’t go away even if that happens – adding more layers of risk to the US intervention. “It’s a bet that the peso is not structurally overvalued,” he says. “It’s a bet that the band can hold.”

In the past week-and-a-half or so, Argentina’s Treasury burned through $1.8 billion to prop up the currency and keep it within the band it’s supposed to trade in – and was reckoned to be running low on funds before Bessent stepped in. US intervention triggered a peso rebound as well as a surge in government bonds on Thursday. The country’s markets were closed Friday for a public holiday.

The case for Milei, which has driven healthy market returns for most of the last two years, is that his chainsaw has delivered. Argentina posted its first budget surpluses since 2009, and inflation is down to around 30% from peaks almost 10 times higher. That achievement is key for his pitch to voters.

But it’s underpinned by careful management of the peso, which kept the lid on import prices – while storing up strains.

All this is familiar terrain for the US Treasury chief, who was involved in perhaps the most famous foreign-exchange trade in history. In 1992 Bessent’s analytical work helped George Soros win $1 billion by betting against the British pound. Now he’s essentially on the opposite side — backing a currency around which speculators are circling.

‘Regime Must Change’

Bessent told Fox News Thursday that he thinks the peso is undervalued. Most economists take the opposite view, saying the currency is too strong and hurting Argentina’s competitiveness. You don’t need economic theory to make that argument: the evidence is in plain sight at shopping malls across the border in Chile, where Argentine buyers have been on a spree thanks to the peso’s new purchasing power.

”There is broad agreement that the FX regime must change,” and the peso should be allowed to float more freely, Barclays economist Ivan Stambulsky wrote this week. “Many think the adjustment is close at hand.”

But not imminent. Any such move before elections would likely be disastrous for Milei. And US intervention means he doesn’t have to make it — yet.

Exactly what form that intervention will take remains unclear. More detail may emerge when Milei visits President Donald Trump at the White House next week. Bessent has signaled that the Treasury’s Exchange Stabilization Fund will be deployed, perhaps including its Special Drawing Rights – a form of global reserve cash issued by the International Monetary Fund. The Treasury turned to Spain’s Banco Santander SA as its conduit for Thursday’s peso purchases.

The first Trump administration also considered intervening in Argentina to buy pesos, during a similar bout of turbulence, but ruled out the option amid a sense that it would be sending good money after bad, according to a person familiar with those discussions.

There’s a chance for Argentina now to put itself on a good economic track if Milei does well in the midterms, but everything has to go perfectly and the administration is essentially looking to keep markets in line until election day, the person said. If the Treasury’s SDRs are part of the deal then they’d most likely be used to repay some of the $55 billion that Argentina owes to the IMF, the person said.  

‘Getting China Out’

That debt pile makes Argentina by far the Fund’s biggest borrower. It’s a legacy of IMF bailouts that have repeatedly turned sour – most dramatically in 2001, when a crash triggered massive civil unrest, and most recently in Trump’s first term, when then-President Mauricio Macri’s market-friendly reform program was collapsing.

The IMF agreed to dole out more cash to Argentina yet again in April this year, but only over widespread internal objections. Fund chief Kristalina Georgieva has been involved in recent talks with Bessent and with Milei’s government. She hasn’t signaled that more IMF money will be forthcoming at the lender’s annual meetings next week.

One reason the US is stepping into the gap and offering its own credit may be its desire to reduce Chinese influence in Latin America. The Trump administration seems to be paying more attention to the region than its predecessors, and ready to use both carrots and sticks. It’s threatened military action against Venezuela and hammered Brazil with tariffs – both countries are Beijing allies – and is now offering sweeteners to Milei.

Argentina has an $18 billion swap line with the Chinese central bank, which pre-dates Milei but was extended by him this year. Bessent said Milei is “committed to getting China out of Argentina.” 

While an assertive approach to China has bipartisan support in Washington, Bessent’s aid for Argentina has already been questioned on both sides of the aisle.

There’s concern among some Republicans that US soybean farmers, who compete with their Argentine peers to sell the crop to China, may be inadvertent victims of the rescue plan. Bessent was recently photographed looking at what appeared to be a text from Agriculture Secretary Brooke Rollins expressing concern about the Argentina proposal. 

‘More Gunboats’

Meanwhile Democrats have attacked the administration on the grounds that cash for Argentina is a betrayal of Trump’s “America First” agenda. Senator Elizabeth Warren has submitted legislation that would block the Treasury from using its fund in the rescue, and quizzed asset managers over whether they played a role in the deal.

Bessent on Thursday called Argentina a country of “systemic importance,” without explaining what that consists of — and said helping Milei is fully compliant with America First. “I’ll tell you why,” he told Fox News’s Laura Ingraham late Thursday. “Do you want to be shooting at more gunboats like in Venezuela?”

However much traction that argument gains, the timing of Bessent’s support package for Argentina represents another kind of political risk. It arrives at a time when Washington’s own operations are frozen amid a fiscal standoff.

That adds another layer to the whole gamble, says Setser at the Council on Foreign Relations. On top of all the other bets, he says, Bessent is making another one too: “A bet that the US political system will be comfortable putting money into Argentina, when the US government is shut down and not writing checks to Americans.”