Trump’s lifeline won’t stop Argentina’s president repeating old mistakes
Javier Milei has wasted foreign exchange reserves trying to hold up the peso
Alan Beattie
A charismatic showman president with luxuriant hair takes power in Argentina, promising to hack away at the choking thicket of Peronist regulation.
He finds an ideological and temperamental kindred spirit in the US president, who fetes him in Washington and bails him out with loans.
But after a promising burst of liberalisation, the Argentine finds himself beset by political dysfunction, defending a ruinously overvalued peso and heading for sovereign debt default.
For the 2020s, read the 1990s; for the unkempt chainsaw-wielding Javier Milei, read the sharp-suited technocrat Carlos Menem; for the reactionary Donald Trump, read the centrist Bill Clinton.
As for Argentine political dysfunction, well, nothing new there.
After assuming office in December 2023, Milei made a promising start, among other things cutting import tariffs; his similarity with Trump is often no more than rhetorical.
But after first letting the peso depreciate to regain competitiveness, Milei ran straight into Argentina’s traditional problem: high inflation undoing his work and raising the real exchange rate.
Mindful of the threats to his popularity — his party lost a recent regional election — Milei has kept the peso overvalued to reduce inflation, draining foreign exchange reserves.
Just as in Argentina in the 1990s, and more successfully with Mexico’s financial crisis in 1994, enter the US and the IMF obediently trotting along behind it.
US Treasury secretary Scott Bessent announced last week the US would extend a $20bn swap line to help Argentina out.
As before, the motive is largely geopolitical.
In the 1990s and 2000s, Clinton and the Bush presidents wanted to pull post-cold war Argentina and Mexico into the free-market orbit.
Trump’s aims are rather more targeted, to push back against growing Chinese influence in Latin America, including the swap line the People’s Bank of China has already extended to Argentina.
Politically-motivated lending to a country infamous for chronic debt and currency problems rarely ends in an improved economy.
As Brad Setser and Stephen Paduano pointed out in the FT this week, the mooted US swap line appears to have no economic conditions attached.
Its announcement has given Argentine debt prices a bounce, and the news may help Milei in the midterm parliamentary elections later this month.
But the problems will remain.
A true fundamental adjustment for Argentina would involve a big peso depreciation, if necessary followed by a hard fiscal tightening to prevent inflation pushing the real exchange rate up again.
Whether Milei has the cojones to risk the economic contraction that would follow is unclear, and opposition from regional authorities and parliament is always a serious constraint.
Apart from Milei himself, another player risking its reputation is the IMF, once again echoing history.
The fund got way too close to Menem, unwisely inviting him to address its annual meetings in 1998, a year before he was driven from office and only three years before Argentina’s colossal 2001 debt default.
It has now come perilously near to endorsing Milei’s presidency.
Kristalina Georgieva, the fund’s managing director, recently jeopardised the IMF’s impartiality in a photo opportunity with Argentina’s deregulation minister in which both wore chainsaw pins.
The fund is of course desperate to keep the US involved in the organisation, given Trump’s disdain for multilateralism.
But its management is imperilling its credibility by agreeing to lend despite misgivings from other governments.
It is absurd — familiar, but absurd — for an upper-middle income country like Argentina to have 35 per cent of the IMF’s total outstanding credit.
Much of the controversy surrounding Milei centres on his radical deregulation programme.
In reality, although that crusade may be heading in the right direction, it is not currently the main issue.
As veterans of IMF lending programmes will tell you, even successful “structural reforms” take time to work and do little or nothing to spur growth over the few years the loans typically cover.
Change is disruptive, and companies must adjust to new opportunities.
Milei’s liberalisation plans are unlikely to be vindicated or discredited for a long time.
Menem’s privatisations and other deregulatory efforts initially looked impressive until it became clear they had fuelled corruption and created uncontrolled private monopolies.
Mauricio Macri, Milei’s predecessor but one, similarly made a brisk deregulatory start before being overwhelmed by currency and debt problems.
You can see why Trump wants to back Milei, especially since the US is fast losing friends in Latin America.
Trump has clobbered Brazil, Argentina’s traditional rival, with 50 per cent tariffs, but it doesn’t export much to the US anyway.
Meanwhile, Brazil’s world-beating soyabean growers are gleefully filling the gap in the Chinese market left by Beijing’s boycott of American farmers (as, to be fair, are Argentina’s).
As an agricultural export market as well as a source of finance and inward investment, notably in electric vehicles, Xi Jinping’s China often looks a better bet than Trump’s US.
The US may well end up simply holding Argentina’s hand as it stumbles down the primrose path to yet another debt default.
Milei’s deregulation is his signature policy, but it’s the macroeconomics that matters now.
It’s all too easy to imagine Argentina’s chronic exchange rate problems and obstructive political system repeating the outcome so often seen before.
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