IMF bets billions on Milei’s chainsaw to avert past debacles

Six years after Argentina’s record financial bailout collapsed, the International Monetary Fund is again putting billions of dollars to backstop a similar rescue strategy for the troubled South American economy, this time under the leadership of President Javier Milei.

The US$20-billion programme approved Friday by the IMF executive board marks the 23rd time the Washington-based lender comes to Argentina’s rescue over the past seven decades. The key difference now is Milei himself — a chainsaw-wielding libertarian who has retained popular support while implementing spending cuts more draconian than even the Fund expected.

Fiscal austerity has become a cornerstone of Milei’s reforms, and a key instrument to reduce Argentina’s rampant inflation. It may have also encouraged the IMF to give Milei immediate access to more than half of the money pledged in the new programme, including US$12 billion coming into Central Bank coffers this week. 

Frontloading such disbursements is a controversial move that increases the IMF’s exposure to its biggest debtor just as Milei faces the same policy dilemmas that have doomed his predecessors.

“While frontloading may make sense, it also carries risks,” said Mark Sobel, a former US Treasury Department official with experience in international policy and the IMF. “The resources could be spent defending an overvalued exchange rate and not end up bolstering reserves or ensuring competitiveness.”

Argentina has just started dismantling foreign exchange controls built by prior administrations — a scaffolding of regulations and fees that limit access to foreign currency, as well as foreigners’ appetite for investing in the country. The task is delicate, however, as it risks fanning inflation at a time Milei needs good economic news to maintain his popularity. 

Early access to IMF funds ensures the government will have dollars to intervene in the foreign exchange market and fight any currency devaluation that could jeopardise its anti-inflation strategy.

As part of the plan to remove controls, the Central Bank will abandon this week the crawling peg that has for years artificially limited the peso’s weakening. Instead, the Argentine currency will be allowed to trade freely within an initial range of 1,000 pesos to 1,400 pesos per dollar. 

The foreign exchange reforms unveiled by Economy Minister Luis Caputo and his team on Friday have won widespread investor praise, but both sides are clear-eyed about the risks of floating a currency during a global market sell-off: The IMF staff report makes 15 references to Argentina’s contingency planning.

“It’s crucial to see what happens over the next three months with floating” the peso within a range, said Claudio Loser, a former senior IMF official who oversaw previous Argentina programmes in the 1990s. “If it goes well until the end of the year, the chances of success improve substantially.” 

For the IMF, the first year of the programme is especially critical because it’s dolling out money to Argentina more than a year before Milei has to start repaying the Fund — a strategy that has failed many times before. 

The IMF gave money up front to Argentina in 2018, when it put together its largest rescue package ever for a country. The plan had many shortcomings, including lack of a credible fiscal policy, and finally collapsed when an unexpected election outcome sunk the economy deeper into recession.

Past mistakes

In Argentina, foreign exchange policy poses a test that has eluded countless presidents. 

Mauricio Macri axed controls and let the peso float freely in 2015, only to face a massive currency sell-off that turbocharged inflation and ended his re-election bid. Alberto Fernández beat Macri in 2019 and tried the exact opposite approach, layering one control over another and promising he would never devalue the peso. His grip on the currency became so unsustainable he was forced to abruptly devalue it in 2023.   

Milei is now trying to deliver on his promise to remove controls. On Friday the government announced Argentines will be able to legally exchange pesos for dollars without a US$200-monthly limit and skyrocketing fees slapped on top.

Other capital controls, including those preventing companies from sending dividends abroad, are being gradually removed after grinding most foreign investment to a halt. 

“This is a step in the right direction,” said Andrés Borenstein, senior economist at BTG Pactual in Buenos Aires. “It is an ambitious liberation of many currency controls and this was what the programme needed at this point. Even if there is a temporary inflation cost in the short term, the balance is quite good.”

But the new currency strategy — combined with extreme market volatility stemming from the US trade war — may cause inflation to accelerate in the upcoming months, potentially weakening Milei’s popularity among voters before midterm elections where his party needs a big win to advance his reform agenda.

“The success of the plan hinges on whether Argentina can attract foreign investors who have stayed away for several years, and on whether authorities overindulge in FX intervention. The strategy has risks for both Milei and the IMF," said Adriana Dupita, Bloomberg's Argentina and Brazil economist.

Over the next six months, “if the government is able to stabilise the exchange rate below the ceiling of the range and build up foreign reserves, the programme will likely work,” said Martin Rapetti, executive director of consulting firm Equilibra. But “if social support falls, it’s likely that the market support will fall too, and then you can enter a vicious circle that could derail the programme.” 

Removing all controls is also part of Milei’s pitch to win back Wall Street five years after a sovereign default, the nation’s ninth in a crisis-plagued history. His government intends to return to international capital markets in early 2026, making the coming months mission critical regardless of what happens during the rest of the programme.  

The IMF is supporting Milei’s business-friendly government, but needs to avoid both its money and reputation getting burned again. When IMF leaders proudly supported Macri in 2018 with a record US$50-billion program, one dollar was worth about 27 pesos, compared with more than 1,300 pesos today, according to a rate commonly used by financial markets. 

“Is the 23rd time a charm? We’ll see,” said Benjamin Gedan, a lecturer at Johns Hopkins University and former Director on the National Security Council in the White House. “This is a 180-degree change from the last IMF bailout, when Argentina fought tooth and nail to avoid any meaningful reforms.”