Trump's Argentina Lifeline Faces Critical Test as Midterm Elections Loom

FINANCIAL NEWS DESK

As Argentina's libertarian President Javier Milei battles to stabilize the peso ahead of pivotal midterm elections, the Trump administration has extended a controversial financial lifeline that could expose Washington to significant risks.

The Crisis Unfolds

Milei's government entered turbulent waters following a devastating defeat in Buenos Aires province local elections last month—a region representing nearly 40% of Argentina's population. The loss triggered intense skepticism about public support for his aggressive free-market reform agenda.

The political setback sparked a currency crisis, with panicked investors dumping pesos and forcing the government to deplete hard currency reserves at an alarming rate. The pressure raised fears of an imminent collapse of Argentina's exchange rate band—a scenario that could destabilize the country's macroeconomy just days before Sunday's crucial congressional elections, where Milei needs additional seats to advance his economic program.

Washington's Unprecedented Intervention

In a highly unconventional move signaling strong political alignment between the two administrations, Treasury Secretary Scott Bessent has orchestrated a multi-pronged rescue operation:

Direct peso purchases: Since October 9, the US Treasury has conducted three direct peso acquisitions totaling approximately $400 million, according to Argentine economists' estimates, though neither government has officially confirmed the figures.

$20 billion stabilization facility: Argentina's central bank announced Monday it secured an "exchange rate stabilization" agreement with the US Treasury, utilizing the Exchange Stabilization Fund to provide dollar liquidity through peso-dollar swaps.

Proposed $20 billion loan package: Bessent disclosed plans for additional financing sourced from private banks and sovereign wealth funds to help Argentina service its debt obligations, characterizing it as "a private sector solution."

"We do not want another failed state in Latin America, and a strong, stable Argentina as a good neighbor is explicitly in the strategic interest of the United States," Bessent stated on social media Tuesday.

Market Response: Mixed Results

The intervention has provided modest relief. Argentine sovereign debt spreads over US Treasuries narrowed from 14.6 percentage points to 10.5 percentage points following Bessent's initial announcement. However, the peso continues its downward trajectory, hitting a record low of 1,489 per dollar Tuesday—dangerously close to its 1,491 band floor.

"The number of dollars deposited in Argentine banks has reached a record high as people and businesses dollarize their savings," noted Nery Persichini, lead researcher at GMA Capital, highlighting persistent investor skepticism about the currency's sustainability.

Mark Sobel, former Treasury official and US chair of the Official Monetary and Financial Institutions Forum, expressed concern about opacity surrounding the arrangements: "There's a remarkable lack of transparency about what's going on. Part of me thinks they're just throwing a lot of big numbers and ideas out there to try and create an announcement effect to get the Argentines past the elections."

High-Stakes Electoral Calculus

Trump himself added volatility last week, declaring the US "would not be generous with Argentina" if Milei loses Sunday's elections—a statement Bessent later attempted to soften by tying continued support to policy continuation rather than electoral outcomes.

Downside Scenarios

Analysts warn of multiple risk pathways:

Weak electoral performance: If Milei's La Libertad Avanza party captures only 30% of votes or trails the leftist Peronist opposition, peso devaluation pressure would likely intensify dramatically. The magnitude of potential currency decline remains uncertain, with investors doubting the government's capacity to implement necessary structural reforms.

Debt refinancing challenges: Falling bond prices would complicate Argentina's ability to refinance approximately $17 billion in dollar-denominated obligations maturing in 2026.

Policy dilemma: Even with strong electoral results, economists anticipate Milei may need to devalue and adopt a more flexible exchange rate regime to rebuild reserves. "The current exchange rate scheme is on its last legs," said Fabio Rodriguez, director at M&R financial consultancy. "The market will not take it well if the government attempts to use US money to sustain an artificially strong peso."

US Exposure

Washington faces its own vulnerabilities: potential losses on currency transactions, extended credit line commitments that could constrain flexibility during domestic financial stress, and political blowback from Trump's base who view the intervention as contradicting America First principles.

The coming days will determine whether this unprecedented financial diplomacy stabilizes a key regional partner or leaves both nations entangled in Argentina's chronic economic instability.