Becent’s big bet on Argentina has only a narrow way to pay off

The Treasury Secretary on Thursday announced a lifeline aimed at pulling the country’s financial markets out of deep turmoil and pulling a close political ally out of trouble. The United States is offering swap arrangements to support the peso — and has already intervened directly to buy the currency, a move unprecedented in recent decades.

“It’s not a bailout at all,” Besant said. Fox News late Thursday. To many observers, still waiting for details to be clarified, it certainly seems that way. It was delivered by an administration that promised to put America first, to a country with a long record of squandering other people’s money and defaulting on its own debts.

Argentine President Javier Miley – perhaps the Trump administration’s strongest supporter in Latin America, where great power competition with China is intensifying – has vowed to leave all this bad history behind him. He says he has finally succeeded in getting the country’s public finances in order and controlling rampant inflation, even if it means wielding a budget chainsaw.

Miley is “trying to break 100 years of bad cycles,” Besant posted on social media on Friday. “We don’t want another failed or Chinese-led state in Latin America.”

Financial markets tended to believe Miley could deliver – until a few weeks ago, when his party suffered a crisis Stinging defeat In a major regional ballot. Then suddenly the confidence started to disappear. The peso has entered a sharp decline that threatens to send inflation back up – just before an even bigger electoral test, with the midterm elections two weeks away.

The essence of Besant’s bet is that Miley is able to win it, thanks to the American financial power backing him. Then, through a supportive conference, his economic program could be put on the right track and investors encouraged again. Analysts say this is not impossible, just difficult.

“It’s a gamble”

“It’s a gamble that all the problems Argentina has now are the result of politics, and that Miley can pull a rabbit out of the hat and do better than expected in the October election,” says Brad Setser, a former Treasury Department official who now works at the Council on Foreign Relations.

But Setser believes that problems with the country’s economic program will not disappear even if they do, adding more layers of risk to US intervention. “It’s a bet that the peso is not structurally overvalued,” he says. “It’s a bet the band can make.”

In the past week and a half or so, Argentina’s Treasury has spent $1.8 billion to prop up the currency and keep it within the range in which it is supposed to trade — and was thought to be running out of money before Picent intervened. The US intervention led to a rebound in the peso as well as a rise in government bonds on Thursday. The country’s markets were closed on Friday on the occasion of a public holiday.

The argument for Miley, who has had good returns in the market for most of the past two years, is that his saw has done well. Argentina recorded its first budget surpluses since 2009, and inflation fell to about 30% after peaking about 10 times higher. This achievement is the key to communicating his idea to voters.

But it is based on cautious management of the peso, which has kept a lid on import prices – while buffering the pressures.

All of this is familiar territory for the US Treasury Secretary, who was engaged in perhaps the most famous foreign exchange trade in history. In 1992, Besant’s analytical work helped George Soros win $1 billion by betting against the British pound. Now it’s basically on The other side – Supporting the currency around which speculators revolve.

“The system must change”

Picente told Fox News Thursday that he believes the peso is undervalued. Most economists take the opposite view, saying the currency is too strong and hurts Argentina’s competitiveness. You don’t need economic theory to make this argument: the evidence is clearly visible in cross-border shopping malls in Chile, where Argentine buyers have been in a state of activity thanks to the new purchasing power of the peso.

“There is broad agreement that the foreign exchange system needs to be changed,” and the peso should be allowed to float more freely. Barclays Economist Ivan Stampolsky wrote this week. “Many believe the amendment is within reach.”

But not imminent. Any such move before the election would likely be disastrous for Milley. American intervention means that he does not have to achieve this yet.

The exact form this intervention will take remains unclear. More details may emerge when Miley visits President Donald Trump at the White House next week. Besant has indicated that the Treasury’s Exchange Stabilization Fund will be deployed, perhaps including the Special Drawing Rights – a form of global reserve cash issued by the International Monetary Fund. The Treasury turned to Spain Santander Bank SA as a channel for peso purchases on Thursday.

The first Trump administration also considered intervening in Argentina to buy pesos, during a similar bout of unrest, but ruled out the option amid a sense that it would send good money after bad money, according to a person familiar with those discussions.

The source said there is an opportunity now for Argentina to put itself on a good economic path if Mayle performs well in the midterm elections, but everything must go well and the administration is mainly looking to keep the markets on side until Election Day. If Treasury Special Drawing Rights are part of the deal, they would likely be used to repay part of the $55 billion Argentina owes to the IMF, the source said.

“Out of China”

This pile of debt makes Argentina the Fund’s largest borrower ever. It is a legacy of IMF bailouts that have repeatedly deteriorated – most dramatically in 2001, when the collapse led to massive civil unrest, and more recently in Trump’s first term, when then-President Mauricio Macri’s pro-market reform program collapsed.

The International Monetary Fund agreed to this Subsidy Sending more money to Argentina again in April this year, but only on a large scale Internal objections. The head of the Fund, Kristalina Georgieva, participated in the recent talks with Besant and with the Miley government. She did not indicate that more IMF money would be made available at the bank’s annual meetings next week.

One reason the United States has closed this gap and extended its own credit may be its desire to limit Chinese influence in Latin America. The Trump administration appears to be paying more attention to the region than its predecessors, and is willing to use carrots and sticks. It’s threatened Military action Against Venezuela and hit Brazil with tariffs – both countries are allies of Beijing – and is now offering temptations to Milley.

Argentina has an $18 billion swap line with the Chinese central bank, which pre-dates Miley but was extended Of it this year. Picente said Miley is “committed to getting China out of Argentina.”

While an assertive approach to China has bipartisan support in Washington, Becente’s assistance to Argentina has already been questioned on both sides of the aisle.

There are concerns among some Republicans that US soybean farmers, competing with their Argentine peers to sell the crop to China, could be unintended victims of the bailout. Besant was recently photographed looking at what appears to be a text message from Agriculture Minister Brock Rollins Expressing his concern about Argentina’s proposal.

“More gunboats”

Meanwhile, Democrats attacked the administration on the grounds that the money allocated to Argentina constituted a betrayal of Trump’s “America First” agenda. Senator Elizabeth Warren introduced legislation preventing the Treasury Department from using its funds for the rescue operation He was interrogated Asset managers on whether they played a role in the deal.

On Thursday, Picente described Argentina as a country of “systemic importance,” without explaining what that was — and said helping Miley was entirely consistent with America First. “I’ll tell you why,” he told Fox News Channel’s Laura Ingraham late Thursday. “Do you want to shoot at more gunboats like in Venezuela?”

However much attention this argument has gained, the timing of Becente’s support package for Argentina presents another kind of political risk. It arrives at a time when Washington’s own operations are as well Frozen In the middle of a financial crisis.

This adds another layer to the whole gamble, says Setser of the Council on Foreign Relations. On top of all the other bets, he adds, Besant is making another bet as well: “a bet that the American political system will be comfortable putting money in Argentina, when the American government is shut down and no checks are being written to Americans.”