US lifeline buys Argentina time as investors urge overhaul

A US$20-billion lifeline from the US is almost certain to keep Argentina's President Javier Milei from being engulfed by a currency crisis in the run-up to key midterm elections this month.

After the October 26 vote – a make-or-break moment that could derail his ability to keep pushing his free-market agenda through Congress – the outlook is much less clear.

The peso soared about five percent on Monday, the first day of trading after a local holiday on Friday, as relief continued to wash through Argentina’s currency market after US Treasury Secretary Scott Bessent swooped to buy pesos last week. Comments from Bessent that the peso was undervalued and statements from Argentina Economy Minister Luis Caputo that the US was willing to continue buying pesos are also helping fuel the surge.

The impacts on broader markets are less clear. Local stocks, which also resumed trading Monday, fell as much as four percent on open before paring most of that drop. Argentine bonds, which had soared on the news Thursday, dropped Friday as the euphoria faded. Bond trading is closed Monday due to the US holiday.

Traders remain mindful of the risk that sell-offs could flare up again if Milei is dealt a resounding loss in this month’s election. And beyond that, it’s widely expected that Argentina will eventually have to ditch the currency-trading bands that have held the peso at artificially high levels.

“Bessent’s ‘whatever it takes’ sentiment and prospect for further support keeps upside optionality on bonds alive in the short-term,” Kathryn Exum, co-head of sovereign research at Gramercy Funds Management. “However, the outcome of the mid-term elections remains the major event followed by FX and political adjustment in the aftermath.”

Milei, a libertarian who rose to power by promising to usher in sweeping reforms and budget cuts that would revive the economy and tame inflation, had won over global investors as his policies started to take hold and show some success.

But after his party suffered a defeat in a Buenos Aires Province election last month, investors started pulling out cash. His administration responded by tightening currency controls and burning through its reserves to buy up pesos and fend off a devaluation that would likely worsen inflation and deal a fresh economic shock.

By the time the United States stepped in last week, Argentina’s Treasury was estimated to have almost depleted its reserves, putting pressure on local interest rates as it pulled pesos out of the financial system, with yields on some short-term note jumping to record levels.

Investors have increasingly seen the situation as unsustainable – and anticipate that Milei will need to stop defending the peso and let it float freely in the markets after the upcoming election.

David Austerweil, emerging-markets deputy portfolio manager at VanEck in New York, said its clear to Argentines, as well, that the currency is overvalued.

“The Treasury can say what it wants, it won’t change the fact that Argentines can take a cheap holiday,” he said.

Bessent, however, has muddied the picture. Last week – after the peso had closed for the long weekend – he asserted that the peso was actually undervalued in televised comments, stoking fears that the US is willing to provide prolonged support for an overvalued currency.

This weekend, Caputo suggested to local TV channel LN+ that Argentina will maintain its current FX band regime after the midterms. In a Sunday interview, he said the deal with the US Treasury doesn’t imply dollarisation or a devaluation of the peso, and that the US “is willing to continue buying pesos and bonds, and all options are on the table.”

Ramiro Blazquez, a strategist at Stonex, said there are still questions about how the US$20 billion of funds available under the US swap line will be deployed, with some speculating it could be used to buy back government debt.

“Bonds rallied due to the confirmation of the swap and the rumor that they will be used for a buyback,” he said. “But then the US Treasury bought pesos. If they use it mainly to maintain an overvalued peso, the market won’t take it well.”

The US aid could at least pave the way for a less shocking adjustment by providing the government with dollars needed to appease Argentines desperate to shift their savings into the currency.

The support could also facilitate political alliances with the centrists and the governors, said Thierry Larose, a portfolio manager at Vontobel Asset Management. JPMorgan Chase & Co economists echoed that view, saying it may buy Milei some time to forge a consensus on what’s next.

“We continue to underscore the importance of forging a broader political consensus and recalibrating the foreign exchange framework,” JPMorgan economists including Diego Pereira wrote in a note to clients. “These steps are essential to fully capitalise on generous US support to secure macroeconomic stabilisation prior to the 2027 election cycle.”