Daddy Yankee gives Argentina more gasoline
The Trump administration bails out Argentina! But why did they need it?
And so the Trump administration finally actually comes through for an ally! The Treasury just announced that it would be lending $30 billion to the Argentine Republic to prop up the peso. The U.S. Treasury will deposit the money at the Banco Central de la República Argentina (BCRA) to make debt service payments over the next few years.
Wowza. Given that Argentina has to make about $23.5 billion in debt payments between now and the end of 2026, that’s a lot of money!
But was it necessary? Well, yes. Argentina was facing a run on the peso, which started around September 7th.
What happened on September 7th? President Milei’s Liberty party got unexpectedly creamed in the Buenos Aires provincial legislative elections. The incumbent Peronists squashed Liberty, 47% to 34%. At first glance, that doesn’t look so bad: the margin was 45% to 25% in 2023. But at second glance it’s terrible. In ‘23 there were two conservative parties in the mix which collectively got 51% of the vote. So the right lost half its vote share to smaller leftish parties.1
Since the Peronist governor of Buenos Aires — Axel “Kichi” Kiciloff — is the leading candidate for the presidential nomination in ‘27, it’s doubly bad for Milei. Triply so because the election result emboldened Congress to start overturning presidential vetoes. He can’t ignore it with the national midterm election approaching on October 26th.
That said, we still have to peel the balloon further back, because the above recap begs two questions. First, why did Milei’s party do so badly? Second, why did investors react so strongly to the result? Let’s take them in turn.
Milei agonistes
Well, we’re not really sure that President Milei has much of an inner struggle about anything, but we don’t know the man, and he certainly is engaged in an outer struggle with the Argentine economy. We’ll stick with “agonistes” for now.
One part of the explanation for the loss is that the economic recovery has been halting. Inflation ran last month at an annualized rate of 25%. That’s better than when Milei took office, but it isn’t good by any standard. Unemployment is down slightly, but only slightly. Poverty has fallen from it’s peak, but it still around the same elevated level as it was in 2020.. Real wages have managed to touch the level they had when Milei took office in June of this year … but they are still much lower than in the recent past. And as we all know, inflation angers voters even when their real wages rise, because they see the nominal raised as deserved and see inflation as stealing something from them.
But the economy is only one part of the wipeout at the polls, and we suspect it is actually a very small part.
The election saw an August surprise: Diego Spagnuolo, who ran the country's National Disability Agency, was caught on tape claiming that Milei’s sister, Karina, helped create a kickback scheme from pharmaceutical companies. We’ll recount what Spagnolo said because it’s juicy:
Karina is owed three or four [percent]. I calculate three because they will surely tell her that out of the five, one percent is for the operation, another one percent for me and the remaining three percent for Karina. It’s surely like that and they’re making an Olympic grab. They’re going to ask for cash from the providers. They’re embezzling the agency … behind my back. I have nothing to do with it.
I went and told him [President Milei]: “Javier, I’m denouncing all this filching and below me I have people who are going to ask for cash. What do I do?”
This is about as simple as a corruption scheme gets. Which means it lands hard. No one needs to sit down with a 20-minute explainer to understand the wrongdoing.
The President canned Spagnolo, but won’t distance himself from his sister. They have a very strange and very close relationship; he is not about to throw her under the bus. But even in the absence of direct evidence, the scandal looks terrible.
In short, there is a decent explanation of why the Libertarians lost: a corruption scandal hit amidst an incomplete recovery. But if the explanation is so decent, why did investors react so strongly to the result? Were they really that surprised?
No. They had two reasons to be scared by a bad outcome for Milei. One is economic and the other is political.
The economic catch-22 that is the Argentine peso
Milei’s anti-inflation plan has two anchors. The first is a balanced budget. The second is what’s called a crawling peg. Instead of being subject to market forces, the central bank lets the currency fluctuate inside an ever-widening band against the dollar. That takes into account the fact that Argentine inflation is higher than in the United States, but insures that the peso won’t fall in an abrupt or drastic fashion.
Empirically, most successful disinflationary programs in Latin America have involved a crawling peg.
The problem is that prices have risen by rather more than the exchange rate has fallen. We were worried about that back in October ‘24. It has since gotten worse. In other words, Argentina has become a rather expensive place to do business. To lift our explanation from October:
The “real exchange rate” tries to capture whether the exchange rate is keeping up with relative changes in inflation. For example, if inflation in Argentina is lower than in the USA, but the peso doesn’t fall at the same rate, then things will get more expensive in Argentina measured in dollars and the real exchange rate will rise. Similarly, the peso falls faster than relative prices rise, then things will get cheaper in Argentina and the real exchange rate will fall.
The blue line in the below graph captures the change in the real exchange rate against the dollar. President Milei took office at the vertical line.
As of July, the country was on average twice as expensive as it had been in November 2023. Yikes.
And that is the root of the problem. The Argentine central bank has to keep the peso within a band. That means it cannot freely buy and sell dollars. If it sells dollars, it will drive up the value of the peso … but then the central bank will use up its supply of dollars, which it needs to make debt service payments. If it buys dollars, it will build up its reserves, but the central bank pays for those dollars by printing up pesos and exchanging them in the market. It it does that, then the value of the pesos will fall against the dollar, and the effect on inflation from running the printing press is left as an exercise for the reader.
So the BRCA right out can’t accumulate dollars by going out on the market and buying them unless it wants to blow up the exchange rate band. Doing that, however, risks igniting inflation or crushing interest rate hikes.
If the Argentine economy were regularly selling more to the rest of the world than it was buying from it, then that would not be a problem. Dollars would flow in, and a lot of those dollars would end up in the coffers of the central bank. The analogy is with a person: when you sell more to the rest of the world than you buy from it, you’ll use some of that surplus to buy shares or bitcoin or lend to your sister or whatever, but a lot of it will end up in your bank account, which you can then use to pay interest on your debts.
Except, well, Argentina lost its surplus at of the start of this year. In the first quarter, Argentina’s current account surplus plunged to negative $5.2 billion from US$176 billion in the first quarter. The cause was not a fall in exports — in fact, exports rose by $1.2 billion.
Nope, two things killed the surplus: a $4.2 billion dollar rise in goods imports and a staggering $2.8 billion deterioration in net tourism revenues. In other words, as the peso’s real exchange rate went off exploring Mars, Argentines took advantage of cheap relative prices elsewhere to buy stuff from overseas or go vacation in Brazil. And that blew open a hole in the current account deficit. Which meant that Argentina had to either run down its holdings of foreign assets or borrow from abroad to pay for those cheap imports and bargain vacations.
And that wouldn’t necessarily be a problem but for the fact that …
No hay plata
The Argentine central bank doesn’t have any cash.
Really, it doesn’t have any cash. If you just look at the gross headline figures, it’s sitting on almost $40 billion. But most of that is tied to either bank reserve requirements (which the BRCA technically owes the banks in dollars) or Chinese swap lines. Netting that out leaves you with only $6 billion.
Except about half of that is needed to cover three-year dollar bonds that BRCA issued to help importers pay their foreign suppliers. (The importer bought the bonds with and received a promise to get paid back in dollars at 3% interest.2) That leaves you with only $3 billion.
Except the IMF thinks the situation is even worse than that. It thinks that when all is said and done, the BRCA’s liquid reserves are negative:
And this is a problem, because as we indicated earlier, Argentina has bills to pay: $6 billion left this year and $17 billion next year. Foreign creditors want to be paid in dollars, and if Argentine businesses aren’t earning them then somebody else is gonna have to cough them up.
But Argentina doesn’t have dollars! It could get them by letting the peso slip. Dollars would flow in. But it would smack the country on the head in two other ways:
The government collects taxes in pesos, which it then exchanges for dollars. If the peso falls, then it gets fewer dollars for the same amount of pesos. So wonderful as it would be for there to be more dollars around, Argentine taxpayers would have to shell out more of their income to buy those dollars, only to hand them back over to foreigners as debt repayments. Voters won’t like that.
If the peso falls, import prices rise. And that feeds right into inflation. Voters won’t like that either.
We think the country should probably let the peso fall a bit further, but in the words of Nic Saldías, “If they lose control of the peso, they lose the election.” And sometimes it is very hard to just let a currency fall “a bit” before panic and speculation take over and move things a lot further than you had planned.
Losing my religion
And who would they lose that election to? Well, none other than Governor Axel Rose Kiciloff. (I really wrote “Rose” but decided it was too funny to correct.) Noel met the man back in 2012. He was primed to like the guy. They were the same age, Jewish, not terrible looking, and had these 1970s sideburns that some people might find cool. He was also very defensive — he clearly didn’t trust Noel — and spoke in tight cliches. Well, loose cliches, wordy cliches. He called himself a Keynesian but it wasn’t a Keynes that either of us would recognize. Rather, he seemed more like a Marxist, in the sense that he didn’t seem to believe that the price system was a good way to allocate resources.
But he eloquently and cogently defended the decision to nationalize the YPF oil company — which is why Noel was in the country in 2012. He accused YPF’s Spanish owners of tunneling, and provided evidence consistent with that story. (A Shell executive called him “Excel” Kiciloff. He knew his numbers.)
The problem is Kiciloff does not seem to have learned anything from the last economic crisis to break out on the Peronists’ watch. Watch this interview. He does not seem to believe that it was the previous administration’s fiscal irresponsibility what caused the recent inflationary blowout. Nor does have much to say about tradeoffs. Milei might well be making the wrong decisions, causing pain in the wrong places, but the guy certainly isn’t trying to avoid tradeoffs. Kiciloff might.
First, Kiciloff couldn’t bring himself to say that a balanced budget over the business cycle might be sensible, or admit that faking economic data was a nistake. Second, he botched his own analysis of the YPF nationalization. It’s true that the Spanish owners were tunneling through their own enterprise instead of reinvesting. But in the interview he said that’s why the government then had to control prices and subsidize energy, when in fact the causality went the other way: controlled prices —> energy shortages —> big subsidies. Finally, Kiciloff kept repeating “no hay dólares” like a mantra, without any plan as to how to get the dólares or make do with fewer.
In other words, we understand why the prospect of President Kiciloff fills investors with fear. The Peronists really did create a disaster and he gave no reassurance that it wouldn’t happen again. And if they do get a hold on Congress on October 26th, then they have every incentive to do everything they can to wreck the economy in order to help their candidate in the 2027 presidential election.
Light at the end of the tunnel
The Argentine economy was facing a Catch-22. But if the $30 billion from Daddy Yankee materializes, then a way out materialized. We both hope that they authorites decide to let the peso sink more than they seem to want, but that’s a second order if the money comes through.
The balance of payments situation already looks to be easing. Exports spiked in June and July, more than doubling to $10.2 billion. Argentines have contined to take those cheap foreign vacations, and we would not want to work in an Argentine factory right now, but if this keeps up then the dollar shortages just might eventually solve themselves. (Although keep things in perspective: those red columns on the bottom represent largely net interest payments, and those aren’t going away.)
Second, despite some headlines, as far as we can tell the budget is still in generally good shape. It’s true that spending has recently moved into deficit, but that happened in the same month last year and we suspect it’s seasonal. (The relevant columns are helpfully put in dashed boxes below.) The accumulated surplus through August is still there . At some point the Milei administration is going to have to increase spending — particularly on infrastructure — but it still has breathing room.
In other words, if Milei can make it out of the midterms without too much disaster and assuming that the commodity boom holds, then Argentina should be able to get out of the woods. We’re agnostic as to Argentina’s long-term growth prospects (to be honest, but if corruption doesn’t sink him and there are no new political shocks, then Argentina could have a good decade.
But it’s Argentina. You’d be forgiven for thinking that shocks are inevitable.
The Peronists picked up three seats in both the lower and upper houses (gaining an outright majority in the Senate); the conservatives crashed from 54 seats (between two parties) to 30 (in one) in the lower house and from 25 to 16 in the provincial Senate. There are 92 seats in the lower house and 46 in the Senate.
See IMF Country Report No. 25/219 (August 2025), p. 10, footnote 10.
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I hope that Argentina, in the short to medium term, will emerge out of this mess much like post-Communist Poland: https://www.realclearmarkets.com/articles/2024/07/24/argentina_can_grow_by_following_the_poland_growth_model_1046708.html