HOW ARGENTINA´S JAVIER MILEI LOST THE MARKETS AND TURNED TO DONALD TRUMP / THE FINANCIAL TIMES

How Argentina’s Javier Milei lost the markets and turned to Donald Trump

Libertarian president’s tight grip on inflation cost him dollars and slowed growth

Ciara Nugent in Buenos Aires, Michael Stott in Rio de Janeiro and Joseph Cotterill in London

While Javier Milei scored early successes, a landslide defeat at local elections precipitated a crisis in which his self-proclaimed economic miracle has come close to unravelling © FT / ontage/Reuters

Less than six months ago, US Treasury secretary Scott Bessent was in Buenos Aires, congratulating President Javier Milei for “bringing Argentina back from the precipice”, as the libertarian secured more than $40bn in loans from the IMF and multilateral lenders to bolster his government.

Now, with political and economic mis-steps sparking panic in Argentina’s markets, the South American nation is once again on the brink, and the Trump administration is preparing to bail out its ideological ally.

In an apparent attempt to halt a sell-off of Argentine assets, Bessent announced on Monday that the Trump administration “stands ready to do what is needed” to support Argentina and that “all options for stabilisation are on the table”.

So how has Milei’s self-proclaimed economic miracle come so close to unravelling?

The libertarian economist, whose heroes include free-market evangelist Milton Friedman, scored early successes. 

His drastic austerity programme balanced the budget and slashed annual inflation, from a peak of 289 per cent in April 2024, to 34 per cent in August.

But economists point to one big error: obsessed with keeping inflation down at all costs, Milei kept the peso’s value artificially strong, which hurt economic growth, sucked in imports and prevented Argentina from building the stock of dollars it needs to repay a mountain of foreign debt.

“It’s a small blanket problem: the government covered itself too much on the inflation side, and didn’t cover itself on the reserves side, leaving it vulnerable to a political shock,” said Guido Sandleris, a former head of Argentina’s central bank and professor of economics at Johns Hopkins University and Buenos Aires’ Torcuato di Tella.

Milei during a campaign speech this month before his party lost badly in Buenos Aires local elections © Getty Images

That shock came on September 7, when Milei’s libertarians suffered an unexpected landslide defeat at local elections in Buenos Aires province, which is home to more than a third of Argentines and had been seen as a bellwether for national midterm elections on October 26. 

The result hit markets already nervous about a corruption scandal ensnaring Milei’s sister and chief of staff, Karina, a breakdown of his alliances with the centrist opposition, and a series of erratic monetary policy moves, including interest rate increases, that boosted the peso but sapped economic activity.

The peso plunged almost 10 per cent in a fortnight, hitting the bottom of an exchange rate band adopted in April when Milei relaxed Argentina’s strict currency controls after securing a $20bn loan from the IMF.  

Fears mounted among local investors that the government would have to abandon the band and devalue the peso, compounding demand for dollars and accelerating the run on the currency. 

The central bank spent $1.1bn in three days last week to prop it up.

The dollar sales, in turn, unnerved bondholders, who fretted that the government was burning through scarce hard currency reserves it may eventually need to repay debts, sending bond prices plummeting.

The IMF had already warned in late July that the country’s international reserves, net of liabilities such as foreign exchange debt to banks, had fallen to more than $6bn in the red, after failing to meet a series of targets.

“The election loss pulled away the veil, revealing all the problems that had been hidden,” said Carlos Melconian, an economist and former head of Banco Nación, Argentina’s national bank, citing Milei’s “completely inconsistent” exchange rate policies and his “lack of interest in political agreements”.

Milei was given some relief on Monday. 

Bessent’s offer of support, due to be discussed at a Tuesday meeting between him, Trump and Milei, helped calm markets, with the peso rebounding 6 per cent and yields on Argentina’s dollar debt, which move inversely to prices, falling 3.7 per cent. 

At the same time, Milei announced a temporary elimination of Argentina’s big taxes on agricultural exports, incentivising exporters to sell some of billions of dollars' worth of stockpiled crops and boosting the central bank’s access to dollars.

“They stopped the haemorrhaging,” said Nery Persichini, head of research at local financial broker GMA Capital, adding that Monday’s moves might be enough to keep the peso away from its lower limit ahead of the midterm elections, which would shield the central bank’s reserves.

But analysts warned US help, on top of the billions in multilateral loans Argentina has already received, would not solve the deeper political and economic challenges that drove Milei into crisis.

Demonstrators in Buenos Aires last week. Argentina’s lower house voted by more than two-thirds to reject Milei’s vetoes on a bill to boost the public university budget and another to boost health spending © Tomas Cuesta/Bloomberg

“You cannot fix Argentina at this point only with the availability of more international official financing,” said Alejandro Werner, director of Georgetown University’s Americas Institute. 

As head of the IMF’s western hemisphere department, Werner oversaw Argentina’s record-breaking $57bn bailout in 2018.

The US’s Exchange Stabilisation Fund, which Bessent says can be tapped to help Buenos Aires, has more than $200bn in assets. 

But the vast majority of this cannot easily be accessed, and the fund only has around $22bn of liquid securities.

Werner added: “Financing from the US will not be sufficient to stabilise Argentina unless a new political coalition is formed that will support Argentina’s economic programme.”

Milei has alienated moderate opposition allies in congress through his aggressive local election campaign strategy. 

They have sided with the leftwing Peronist movement to approve a series of spending increases in recent weeks, unnerving investors.

The government’s efforts to rebuild alliances following the Buenos Aires drubbing have stalled, as powerful provincial governors wait to negotiate until after the midterms.

Joaquín Cottani, an economist who served as deputy to economy minister Luis Caputo for the first six months of Milei’s presidency and left over differences on currency policy, said US support “will only help” if the government also implements “consistent exchange rate and monetary policy”.

Those included floating the peso, implementing a plan to buy reserves, and controlling interest rates, he added. 

“I expect the Treasury will make those firm conditions of its support before it gives Argentina access to a single dollar.”