The American intervention to prop up the Argentinian peso has failed. Despite the United States intervening in the foreign exchange market and opening a $20 billion swap line, the Argentine peso lost 10% of its value in the first two weeks of October, pushing the overnight interest rate to 157%.
Global and domestic Argentinian investors are expecting another devaluation, which would only add to threat of inflation that had reached 285% in March 2024 and has declined to 32% in September.
Should the Argentine election on Oct. 26 go against the current government, the probability of large devaluation of the peso in the range of 15% to 30% and a change in the current currency regime is highly probable.
The most obvious policy shift would be to let the peso float to bring its value back into a more stable alignment.
But that would result in a sharp increase in inflation and raise the cost of servicing all dollar-denominated debt.
The devaluation in 2023 was followed by a crawling peg to the dollar that lasted until its float this April. Since the April float, the peso has lost 36% of its value.
State of play
The U.S. has put forward what amounts to a $20 billion line of credit to prop up the peso in which the U.S. Treasury receives pesos as collateral and Argentina in turn uses those dollars to defend its currency. In addition, the U.S. is pushing private lenders to provide another $20 billion in loans to Buenos Aires.
Given that the Milei government has already exhausted $20 billion in aid from the International Monetary Fund, it is necessary to ask the question: Will the U.S. get paid back?
At this point, Buenos Aires will probably follow a path of devaluation and possible default, putting at risk whatever amount—early estimates are anywhere between $200 million and $400 million—that has been put forward to prop up the peso.
Argentina is a serial defaulter that has sought renegotiation of its foreign debt nine times since 1816, most recently in 2020.
While the U.S. has a history of intervening in global currency markets to provide support to its trade and security partners, these arrangements have traditionally been accompanied by conditionality and collateral.
In 1995, Washington bailed out Mexico by providing $20 billion as part of an international rescue package. In that case, Mexico City put up revenues from Mexico’s crude oil exports that included oil earnings deposited into escrow accounts to secure payment and avoid ex-post reneging.
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Washington also imposed strict conditionality on that aid including tough and transparent fiscal reforms, all of which resulted in Mexico fully repaying the aid package early.
From our vantage point, conditions and collateral come first and only then should any further aid be disbursed.
That is clearly absent here and should Buenos Aires decide to head for the exit through devaluation, default or both, there is a risk of large financial losses to an economy that is neither a major trade partner nor strategically important.
