America's Argentina rescue won’t save the peso for long

The Argentine peso is in trouble again, but this time the US government is riding to the rescue. In late September, Treasury Secretary Scott Bessent announced several supportive measures, including possible US purchases of Argentine dollar bonds and a $20 billion swap line to the Banco Central de la República Argentina (BCRA), the country’s central bank. The Trump administration's goal appears to be to keep the Argentine peso within the band that the Milei government announced last April—shown in the figure—at least until Argentina’s October 26 legislative elections.

What US interest does this dramatic intervention serve, and will it rescue Argentine president Javier Milei’s economic program from a disruptive devaluation? The answers to these questions are closely related: Markets will not view US promises as reliable unless they serve compelling US interests, but anything less than an open-ended US commitment is unlikely to avert a currency crisis for long.

Bessent expressed US backing for Argentina in terms that were no doubt carefully chosen. He stated that “Argentina is a systemically important US ally in Latin America, and the US Treasury stands ready to do what is needed within its mandate to support Argentina.” He later added that “We are willing to do whatever it takes to support Argentina and the Argentine people.” As a former currency speculator himself and a student and teacher of financial history, Bessent surely knew that he was channeling former European Central Bank (ECB) president Mario Draghi’s famous statement of July 26, 2012, at a critical stage of the euro crisis: “Within our mandate, the ECB is ready to do whatever it takes to preserve the euro.”

Draghi’s bold statement effectively defused the euro’s system-wide crisis, even without substantive follow-up market interventions by the ECB. But if Bessent hopes that similar statements will save President Milei’s program without concrete US action, he will be disappointed, as continued market testing of the peso’s currency band has shown. Even concrete US interventions are unlikely to save the peso for long unless they go further than so far promised—though they might just give Milei a rickety bridge through the October election without an embarrassing devaluation. Bessent’s pledges that “all options” are on the table lack credibility, and financial market actors understand this.

The euro area’s architecture explains why Draghi’s words carried so much more weight than Bessent’s regarding Argentina.

First, exchange rates within the euro area were never in question, thanks to the Eurosystem’s TARGET mechanism for payments between banks in different member countries. Under it, the national central banks in the Eurosystem automatically extend unlimited and unconditional credit to each other to allow euros to move freely across borders.

A second and more prominent aspect of the euro crisis was the fear in markets that some member governments might default on their sovereign debts. This fear made sovereign yields rise and bond prices slump, as is happening to Argentina’s dollar bonds now. But while no national government in the Eurosystem has the technical capacity to print euros without limit and support sovereign bond prices, the ECB can, and this is precisely what Draghi was promising to do.

In comparison, what has the United States put on the table for Argentina? It is a $20 billion loan to the BCRA, collateralized by pesos, coupled with promises of possible further direct intervention of unspecified magnitude to purchase troubled Argentine dollar debt. Funding for these initiatives would come from the US Treasury’s Exchange Stabilization Fund (ESF), which may have less capacity, given political constraints, than is apparent. This strategy will not rescue Argentine debt or the peso for long, but it will allocate American taxpayers’ money toward reducing the losses of global investors who may wish to exit from Argentine debt.

A more effective tool would be a direct swap line from the Federal Reserve to the BCRA. The Fed can create unlimited dollars; the Treasury cannot. Currently, the Fed has five standing uncapped swap arrangements with rich-country central banks; it has extended temporary limited swap lines in the past during global crises to an additional small group of well-managed and systemically or regionally important smaller countries. However, Fed swap lines are currently under the Fed’s control, not the Treasury’s; there is no global crisis underway; Argentina clearly does not meet the strict criteria for swap lines that the Fed has used in the past; and attacking Fed independence further by forcing the Fed to act anyway would open the US administration to the charge of printing dollars to bail out Argentina.

Alternatively, the Treasury could intervene in the foreign exchange market and buy pesos until the United States owns the entire peso money supply and Argentina is dollarized. This approach would save Argentina the cost of earning the dollars through surpluses or borrowing them at interest, a bigger gift from US taxpayers to Argentina. But apparently, Treasury has now ruled out even more limited direct purchases of pesos in the foreign exchange market. So much for “all options.”

The United States will ultimately not go to the mat for Argentina’s peso because the US effort stems from the political affinity between Milei and President Donald Trump rather than genuine US national interest. The implausible justifications that have been offered for US action—inconsistent with the “America first” principles on which President Trump campaigned—may not survive serious domestic opposition, for example, from angry US soybean farmers who have been shut out of China’s market because of Trump’s trade policies and see Argentina rushing to fill the gap.

Contrary to Bessent's statements, Argentina is sui generis, not a systemic risk to countries in Latin America. The successful US support for Mexico 30 years ago, also financed with $20 billion of ESF funds, offers a useful comparison. Mexico was a systemic risk: Its woes rippled throughout the region, even with the US rescue. Other national interests motivating the rescue were fears of Mexican migrants fleeing north from economic calamity, the launch only a year earlier of the North American Free Trade Agreement, and Mexico’s large share of US goods exports, which was 9.92 percent in 1994. In contrast, Argentina accounted for only 0.44 percent of US goods exports in 2024. Importantly, the US lifeline for Mexico came after it had stopped defending an overvalued currency, allowing the money to be put to better use.

To be sure, the United States may view support for Argentina as a counterweight to growing Chinese influence in Latin America. But Trump’s trade policies have been pushing Latin America into China’s arms.

Milei’s reform efforts succeeded beyond expectations until recently and were worthy of support when the International Monetary Fund launched a new program last April. But to move forward, he will need a new monetary framework based on exchange rate flexibility and probably much more multilateral financial support. A more flexible exchange rate would allow the BCRA to orient monetary policy toward supporting growth rather than maintaining an artificially strong currency.

Even then, the country’s political polarization and legacy of instability pose daunting obstacles, despite great potential. But staking success on an exchange rate peg is always risky, especially when resident capital is free to leave and an electoral cycle looms.[1] Latin America is a museum of failed exchange rate–based stabilization efforts. That is why most countries in the region moved long ago to flexible exchange rate regimes and inflation targeting. Sadly, Argentina is likely to provide a late-stage rerun of a sad history, despite whatever support the United States will muster.

Note

1. The BCRA moved to tighten capital outflow controls at the end of August, and will likely have to go further.