The world’s biggest deadbeat has passed the begging bowl again. This time, Argentina is asking for $20 billion. That’s the size of the swap line that U.S. Treasury Secretary Scott Bessent has promised to pony up in order to bail out Argentina and its floundering president, Javier Milei.
Where will that kind of money come from? Secretary Bessent will dip into the seldom-used Exchange Stabilization Fund at the U.S. Treasury. He will do so without Congressional approval. Why? Because President Trump has bet on President Milei. Trump sees Milei as Uncle Sam’s man in Latin America—the man who will lead the charge against the “pink tide” of leftist Latin American governments and counter the commercial and geopolitical inroads made by China in the region.
But maybe President Trump has bet on a dead horse. After all, Argentina has never been a good bet. Since independence, it has faced one economic crisis after another. In the last two generations alone, there have been one hyperinflation (1989–90); six banking crises (1980, 1982, 1995, 2001, 2008, and 2019); five balance-of-payments crises (1958, 1962, 1981–82, 1989, and 2018–19); four external debt defaults (1982, 1989, 2001, and 2020); three local public debt defaults (1989, 2007–09, and 2019); numerous currency devaluations; and a near-constant, punishing inflation.
Indeed, inflation remains a noose around Milei’s neck. When President Milei took office in December 2023, the money supply (M3) was growing at 130% per year and inflation stood at 211% per year. Now, the money supply is still growing at 67% a year. That’s far above what I dub as “Hanke’s Golden Growth Rate” of 9.8% a year, a rate consistent with Argentina hitting its inflation target of 5%. As a result, it’s no surprise that inflation remains out of control at 33.6% a year.
Since joining the IMF in 1956, Argentina has called in the IMF firemen multiple times. At present, it is engaged in its 23rd IMF program. The result has been a series of poisonous IMF prescriptions. All have failed to cure the patient and have left Argentina in hock to the IMF for a staggering $41.8 billion. That’s over four times greater than the IMF’s second largest debtor, Ukraine. It’s clear that the IMF doesn’t put out fires—Sugar Daddy fans the flames.
Why Milei is floundering
So much for Argentina—what about President Milei? He is floundering and facing midterm elections on October 26. Milei is floundering because he failed to deliver on his most important campaign promise from two years ago: to mothball the Banco Central de la República Argentina (BCRA) and the unreliable peso, and replace the peso with the U.S. dollar. Now he is paying the price for his obstinacy and obtuseness.
Twenty billion dollars probably won’t save Milei. Among other things, I estimate that, as long as the BCRA and the peso exist, about 75% of the money coming in the front door will leave through the back door as capital flight. To call Secretary Bessent’s currency agreement a “swap” is, therefore, a misnomer. It’s like swapping Mar-a-Lago for a shack in the middle of the Pampas—or a bar of gold for a bar of lead. It will, in fact, be nothing more than a loan to one of the world’s most notorious serial defaulters. The only way to end Argentina’s currency nightmare and pull Milei’s chestnuts out of the fire is to replace the peso with the dollar.
And yet, Milei’s political future—and the future of his reforms—remains wobbly. The peso remains Milei’s Achilles’ heel. In 2001, one peso bought one U.S. dollar; now it takes more than 1,421 pesos to obtain a Greenback. Because of this lack of credibility, interest rates are sky-high. The average rate for mortgages in September was 57.3%. The real (inflation-adjusted) rate in pesos was about 20%, compared to roughly 3% in the United States.The U.S. Treasury’s swap won’t—and can’t—restore credibility to the peso. It may even make things worse. If speculators believe that the U.S. Treasury’s goal is simply to help Milei prop up the peso’s exchange rate until the election, after which a major devaluation will occur, the speculators will do what they always do. They will rush in and drain dollar reserves out of the BCRA. It’s a familiar pattern in Argentina.
In 1999, when I was a state counselor to the government of Montenegro, it was part of the rump Yugoslavia, and Montenegro was using the highly inflationary Yugoslav dinar as its currency. I designed and implemented a currency reform that made the mighty German mark legal tender. Within days, the dinar quickly disappeared from circulation, and Montenegro became “dollarized,” with the mark replacing the dinar. I also advised Ecuador’s finance minister Carlos Julio Emanuel, and assisted when Ecuador replaced the unreliable sucre with the U.S. dollar in 2001. In both cases, I heard objections similar to those raised about dollarizing Argentina. Today, Argentina’s Minister of the Economy Luis Caputo and the wisemen from the IMF sing from same song sheet about “dollarization.” They assert that dollarization is not feasible and unwise. This is nonsense. As was the case in Montenegro and Ecuador, dollarization in Argentina is feasible and wise.
John Maynard Keynes once observed: “Worldly wisdom teaches that it is better for reputation to fail conventionally than to succeed unconventionally.” Argentina is again taking a path it has trod many times before, a path that has always led to failure. We shall see if President Milei has the audacity to succeed unconventionally by dollarizing.
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