Trump has thrown him a lifeline

By John RAPLEY

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“Argentina is a systemically important US ally in Latin America”, tweeted US Treasury Secretary Scott Bessent on Monday morning. It was not a moment too soon for Javier Milei. “The US Treasury stands ready to do what is needed within its mandate to support Argentina,” wrote Bessent. “All options for stabilization are on the table.”

With this announcement, the US government indicated its readiness to do whatever was necessary to ensure the success of Milei’s agenda of economic reform. The next day, after his rambling address to the United Nations, Donald Trump met the Argentine President himself. Milei and his government didn’t need a bailout, said Trump, but he promised support. “We’re gonna help them.”

The effect was instantaneous. Investors who had been fleeing Argentina now began returning, if cautiously. The Argentine stock market rose from the lows it had hit on Monday. The Argentine peso, which hit a low at the end of last week, bounced back strongly this week. Argentine government bonds, whose prices had been nosediving, driving up interest rates, also rebounded — although interest rates still remain well into the double-digits. The White House has given Milei a bit of breather; it now hopes that respite will last until next month’s legislative elections.

There’s been little evidence of contagion-risk from Argentina’s recent financial travails. Its plunging peso hadn’t dragged any other currencies down with it, and regional stock markets continued rising even as the Buenos Aires market shed a quarter of its value since early August. But Bessent’s stark choice of language was revealing. An awful lot has come to ride on the success or failure of the chainsaw-wielding libertarian in the leather jacket.

The Trump administration has made Argentina its line in the sand, its Vietnam, the bastion that must hold lest it fall before the Leftist tide sweeping the region. It is a tide that has already washed over Brazil, Colombia, Mexico and Chile. The administration may not have intended to invest the Milei experiment with such significance, but the fact is that American Republicans, enthusiastically egged on by Elon Musk and celebrated by conservatives across the Western world, had already lionised the chainsaw-wielding libertarian as a hero. He can’t now be seen to fail.

“The Trump administration has made Argentina its line in the sand, its Vietnam.”

There was always going to be a lot of risk involved in putting so many eggs in the Milei basket. This is Argentina, after all, a country in which rescue packages repeatedly yield success, only to eventually unravel. It’s often said that Argentina is the most European country in Latin America, a place where Spanish is spoken with an Italian accent, and where the considerable degree of regulation in the country’s economy mirrors that of some European countries. But, like those countries, Argentina can be repeatedly crippled by inconsistent policymaking. It has a long history of boom-and-bust cycles, lancing inflation only to resume business as usual once the worst has passed.

Milei won election as president in 2023 on a platform of slashing the state and taming the country’s runaway inflation. Initially, things went better than hoped. By cutting public spending by the equivalent of 5%, Milei plunged the economy into recession. But that downturn reduced demand sufficiently to take the sting out of inflation, which fell from 300% in 2023 to 30% today. Whereas previously, the price of a cup of coffee could change by the time you finished it, now there is at least a growing predictability in household budgeting.

After two years of economic contraction, the economy has rebounded strongly. While government spending remained tight, private consumption picked up the slack, and investment took off and exports resumed, growing by 7% this year. Milei’s voters liked what they saw, and his approval rating briefly touched 50% early last year. In Argentina, a country that is deeply divided, this is about as good as it gets.

But thereafter, things started to sour. While exports have been strong this year, imports have surged past them, rising six times quicker. In no small part, this is due to Milei’s determination to maintain a currency peg. This means that the peso is allowed to trade within a fixed range of valuation. The Central Bank can maintain this valuation by buying or selling foreign exchange whenever the peso moves outside the band. Mindful that a sharp devaluation of the peso could reverse his progress on inflation, Milei has wanted to gradually adjust the band. But in recent months, increasing demand for hard currency has forced the government to dip into its reserves. With the Central Bank burning through cash, the risk of a self-fulfilling run on the peso had risen.

But the resulting strong peso has enabled middle-class Argentinians to keep holidaying abroad. Meanwhile, imports remain affordable, helping to drive that surge in foreign purchases. By the late summer, pressure on these reserves was becoming acute, and the government ran the risk of running out of money. What made the situation especially delicate was that Argentina’s reserves had been swollen in April by a large disbursement from the IMF. But this use of borrowed money to defend the currency has troubled bondholders, who have begun to worry whether the government will be able to meet its debt payments. After all, Argentina has form here: for fear that bondholders from previous defaults might seize the country’s assets, the government is still reluctant to fly its officials abroad in government aeroplanes.

Hoping to reduce the appetite for imports and make exports more competitive, Milei wanted to devalue the peso further. Knowing the move would be unpopular, he was holding out until after the legislative elections. But his hand was forced by a shock result in the Buenos Aires provincial election earlier this month, when his La Libertad Avanza coalition was soundly defeated. Although Buenos Aires is a bastion of the opposition Peronists, the province also holds 40% of the country’s people, so it’s a good bellwether of what to expect next month. Currency traders, pondering the possibility that Milei would suffer a setback and lose authority, started dumping their pesos.

Milei does not currently have a parliamentary majority. Because only half the legislature is up for election next month, there is no prospect of that changing, but he hoped to secure enough seats that he could govern in coalition with centrist parties. Thus the poor showing earlier this month raised the prospect that Milei could end up weaker than expected. Compounding matters is that Argentina’s federal system means the president must get provincial buy-in for many of his measures to be effective. Absent a strong mandate, Milei could find himself struggling to govern effectively.

And that could impede his plans for further reform. In addition to liberalising trade and allowing the currency to float, there are structural reforms Milei must implement if he’s to improve productivity. These reforms include a reduction in labour market regulation and social security taxes; reforming the tax system; reforming the rules by which revenue collected in Buenos Aires is transferred to provinces; and lowering the obstacles to new business formation. Yet all these existing barriers to economic activity have powerful constituencies behind them, from unions and business groups to political lobbies. Though Milei has made more progress on business deregulation, the road ahead is getting bumpier. Austerity eliminated many subsidies, on items such as gas, water, transport and electricity, all of which have hurt ordinary people.

To top it all off, Milei’s brand — that of a fiercely new kind of politician — was tarnished by the news last month that his sister and close adviser was under investigation for corruption. Leaked audio recordings caught a former government official revealing a kickback scheme that Karina Milei was running on government contracts. Outrage erupted. Following the revelation, Milei found himself pelted with stones when he attended a party rally late in August.

He has a narrow course ahead. A collapse in the peso now would jeopardise his hopes for gains in next month’s elections, and could thus be the death knell for his government. The White House’s rescue may therefore enable him to make it to election day, but it’s a gamble for Washington. If all the White House needs to do is offer the “whatever-it-takes” reassurance it has given Argentina, and it doesn’t actually have to bail the country out in any way, it will have been a well-judged intervention. But the US administration will have to hope that investors don’t call its bluff. If the run on Argentine markets resumes, Trump will have to decide whether he is prepared to back up words with money. And bailing out a foreign government at a time the US is cutting its spending on domestic programs could go down badly with American voters.

As for Milei, he still has his date with the electorate next month. Endorsement and backing from the Trump administration may be all he needs to get his reform programme back on track. Equally, in a country where nationalism runs strong, it could backfire. Javier Milei can breathe easier today, but only for long enough to resume the race.

Original article: unherd.com