Argentines dump the peso, betting US rescue is doomed to fail

Argentines are convinced that even a flood of cash from the United States won’t be able to stop another painful devaluation of the peso.

US Treasury Secretary Scott Bessent has moved to prevent that by stepping in to buy the currency, talking it up as “undervalued,” and looking at potentially doubling the size of Argentina’s rescue to US$40 billion through a private arrangement with international banks.

But residents are continuing to dump the peso in droves, betting it’s virtually assured that President Javier Milei will need to let it tumble after the October 26 legislative elections. That conviction strengthened after the efforts to prop up the currency sent short-term interest rates skyrocketing to as much as 157 percent by pulling pesos out of the financial system, threatening to deal a shock to an economy that’s been rattled by crises off and on for decades.

“Bessent’s announcements have diminishing marginal returns: each one lasts less and less,” said Ezequiel Asensio, portfolio manager at Valiant Asset Management who has traded in Argentina for the past three decades. “The market doesn’t believe Bessent, not even with the cash he’s putting in.”

After an initial surge on the week of September 22, when Bessent first pledged to help Milei, the peso has resumed its slide and lost ground against the dollar almost every session since Sept. 29. It weakened for a second straight session on Thursday as short-term rates came off their highs.

The confidence in the US was undercut this week, when US President Donald Trump signalled he would pull his support if Milei suffers an electoral defeat, in what was seen as an effort to influence the vote in the Argentine president’s favour.

The speculation that Milei’s free-market agenda will be derailed by the upcoming vote intensified after his party was dealt a resounding setback in the Buenos Aires Province local elections last month. That hastened the shift away from the peso that had begun months earlier and had already resulted in Argentines buying a net US$18 billion in the five months through August, or roughly US$400 for each resident, according to Central Bank figures.

Banks have continued to report steady demand from companies and individuals looking to buy dollars. Argentine savers are buying about US$300 million a day, according to estimates from market participants who asked not to be identified while discussing private data.

The US Treasury hasn’t been disclosing the size of its currency market interventions, which have caused temporary snapbacks in the peso. But instead of shoring up faith in the currency, traders have seized on those moments as a prime time to sell.

Lucio Arrocha, a strategist at StoneX, said that a devaluation is seen as inevitable. He said the only real question is whether the scale will be worsened if a defeat for Milei intensifies the retreat from Argentina’s markets.

“There’s not enough dollars in the country to face the capital flight that will take place,” he added.

The wager that Argentines are making is similar to the one that Bessent was involved with early in his career at George Soros’s hedge-fund company.

In 1992, the UK was in a similar position of defending the pound’s exchange rate. As it looked increasingly untenable and threatened to stall the economy by forcing the Bank of England to hike interest rates, Soros’ firm bet that the UK would be forced to let the pound tumble. It made about US$1 billion when it did.

Javier Timerman, managing partner at AdCap Grupo Financiero in Buenos Aires, sees that episode as a cautionary tale about Bessent’s current push.

“All Argentines, investors and analysts believe the exchange rate in Argentina has to adjust and that there won’t be economic activity while rates and the exchange rate stay where they are,” Timerman said.

One reason the currency is seen as overvalued is because it hasn’t fallen enough to account for Argentina’s elevated inflation. The current exchange-rate is now at the same level range as the unofficial rate was in April – before the partial lifting of foreign-exchange controls – even though consumer prices have risen 12 percent since then.

The effort to offset the recent selling is also contributing to a credit crunch as the amount of pesos in the system shrinks, pushing up the cost of local loans. The government on Wednesday was able to roll over less than half of the maturing local-currency debt that came due. The yields on similarly dated notes are currently above 100 percent.

The US rescue, which included a US$20=billion swap line to provide Argentina with dollars, came after the government was rapidly burning through its reserves and is widely seen as only giving it some time to maintain the status quo.

“This can’t go on much longer,” said Miguel Kiguel, a former finance secretary. “People still think the intervention lasts until the election, and after that no one knows how it continues.”