US moves to short-circuit fear-spiral in Argentina
Portfolio Manager Thomas Haugaard analyses how the US commitment to provide support for Argentina has calmed markets ahead of important mid-term elections. Milei has persistently sent strong signals of policy continuity, but low and declining international reserves amid pressure on the peso set off a vicious spiral of fear that needed short-circuiting. Support only buys Milei time and solves little.
5 minute read
Key takeaways:
- While the proposals are light on detail, the US commitment to support Argentina’s economy has helped to stabilise the peso and bolster the sovereign bond market. Support was bigger than most expected.
- This increases the likelihood of continued policy efforts by Milei to maintain Argentina’s fiscal anchor, crucial for long-term economic stability and investor confidence.
- One of the most important aspects of the upcoming election on October 26 is whether Milei will secure enough votes in Congress to sustain his vetoes, which, if achieved, would result in governability not too dissimilar to now.
This week, the US has pledged exceptional support for Argentina’s economy, helping to stabilise financial markets. This comes after a tumultuous month for Argentine sovereign bonds and the peso, triggered by an unexpectedly large setback for President Milei’s La Libertad Avanza party in the regional Buenos Aires (PBA) elections, corruption allegations against Milei’s sister and closest advisor Karina Milei (which she denies), and a currency selloff ahead of national midterm elections. At the core of the problem is an overvalued peso and too-low international reserves. Next steps will likely be to adjust the currency to facilitate reserve accumulation, but this will only happen after the election.
The statements from the US administration, including those from US Treasury Secretary Scott Bessent and President Trump, have been notably strong. They have stated that “all options” are on the table. Specifically, the US and Argentina are currently in negotiations for a US$20bn swap line.1 Bessent also said that the US is prepared to purchase Argentina’s USD-denominated bonds (primary and secondary). However, details on these measures are still to be confirmed.
Additionally, the World Bank has pledged support for the country, with an early deployment of up to US$4 billion, US$2.5 billion of which was already anticipated as part of a larger US$12 billion package announced in April.
Strong signal, but timing and implementation less clear
The expression of support has already had a stabilising effect on the Argentine sovereign bond markets and the peso, which reduces pressure on international FX reserves and eases concerns about short-term payments capacity. However, the core problem – a low real exchange rate (overvalued peso) hindering reserve accumulation – has not been solved. One of the commitments required for the support from the US could very well be to move to a more flexible exchange rate after the elections. This was already in the cards before the recent turmoil.
Apart from US support, markets found comfort in Milei’s decision to eliminate export taxes (previously 27%) on certain agricultural products to encourage farmers to sell their dollars to the central bank. Meanwhile it is very clear that the fiscal anchor remains a central pillar of the stabilisation programme.
It is highly probable that the US will require something in return for any support it provides. This can be either on the policy front (such as increased FX flexibility after the election) or some strategic partnerships in key sectors of the Argentine economy (energy, lithium, and other critical minerals). Clearly, the private sector in the US is also signaling a willingness to invest in Argentina contingent on Milei having a reasonable mid-term election. Measures to reduce China’s influence in the country are also likely.
Election outcome looms
The upcoming election in Argentina, which is set to take place on October 26, holds significant importance in determining the balance of power within the government, particularly in relation to the ability of President Milei to sustain his vetoes. The Argentine government operates with a bicameral Congress, consisting of two chambers: the Senate (the Upper House) and the Chamber of Deputies (the Lower House).
For President Milei to effectively block legislation in Congress, he would need to secure enough votes in at least one of these chambers. Specifically, he would require more than 33% of the votes in the Lower House to sustain his vetoes. This means that even if he does not have a majority, having more than one-third of the seats would enable him to prevent the override of his vetoes and allow him to continue with many of his transformative policies.
Despite the negative outcome for Milei’s party in the recent Province of Buenos Aires (PBA) election, where his party was defeated by a bigger margin than expected, it is still considered very likely that he will manage to secure the necessary support in the Lower House in the national elections. Hence, a regime change is not anticipated and we expect to see Milei as president in the coming two years with governability not too dissimilar to this year, where it hinges on securing alliances with the centrist opposition and some of the more moderate Peronists.
We believe Milei is in fact more pragmatic than his reputation suggests and will be able to build the necessary alliances to improve his result in the mid-term October elections and, importantly, to garner support for reforms and maintaining vetoes after the election. In the Argentinian presidential system, there are many levers for the President to use to incentivise support. We expect him to do whatever it takes.
IMPORTANT INFORMATION
Emerging market investments have historically been subject to significant gains and/or losses. As such, returns may be subject to volatility.
Sovereign debt securities are subject to the additional risk that, under some political, diplomatic, social or economic circumstances, some developing countries that issue lower quality debt securities may be unable or unwilling to make principal or interest payments as they come due.
Fixed income securities are subject to interest rate, inflation, credit and default risk. The bond market is volatile. As interest rates rise, bond prices usually fall, and vice versa. The return of principal is not guaranteed, and prices may decline if an issuer fails to make timely payments or its credit strength weakens.
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Volatility measures risk using the dispersion of returns for a given investment.
1 Swap lines are financial arrangements between central banks that allow them to exchange currencies, providing liquidity support to financial markets. These lines are typically established to prevent liquidity shortages and stabilise currency exchange rates during times of economic stress.
Capital controls are regulatory measures that countries implement to manage and restrict the flow of foreign capital in and out of their domestic economies.
Deregulation refers to the reduction or elimination of government rules and restrictions in an industry to enhance efficiency and competitiveness.
Disinflation: A fall in the rate of inflation.
External Debt, on the other hand, refers to any debt borrowed from foreign lenders, which can include international banks, foreign governments, or international financial institutions like the World Bank. External debt can be denominated in either hard currency or the local currency of the borrower.
Fiscal anchor: A fiscal anchor is a predetermined, quantitative target for a key fiscal indicator designed to guide budgetary decisions and ensure long-term fiscal stability and sustainability.
Fiscal balance: The difference between a government’s total revenues (including grants) and its total expenditures (including net lending) over a specific period, typically a year.
Hard Currency Debt refers specifically to debt that is denominated in a currency considered to be stable and widely accepted internationally, such as the US dollar.
Interest rates: The amount charged for borrowing money, shown as a percentage of the amount owed. Base interest rates (the Bank Rate) are generally set by central banks and influence the interest rates that lenders charge to access their own lending or saving.
Foreign exchange (FX) rate float: This refers to a system in which the exchange rate for a currency is allowed to fluctuate in response to the foreign exchange market. In this system, the value of the currency is not fixed by the central bank or government but is determined by supply and demand dynamics in the market.
Foreign exchange reserves (FX reserves) are assets held on reserve by a central bank in foreign currencies. These reserves are used to back liabilities and influence monetary policy. They are an essential tool for central banks to ensure the stability and integrity of their nation’s currency and to manage exchange rates.
Inflation pass-through: Inflation is the rate at which the prices of goods and services are rising in an economy.
Liquidity/Liquid assets: Liquidity is a measure of how easily an asset can be bought or sold in the market.
Principal: Within fixed-income investing, this refers to the original amount loaned to the issuer of a bond. The principal must be returned to the lender at maturity. It is separate from the coupon, which is the regular interest payment.
Real GDP is the value of all final goods and services produced in an economy over a given period, adjusted for inflation to reflect changes in the actual volume of output, rather than just price increases.
Sovereign debt/bonds: Bonds issued by governments to raise money to pay off debt or finance spending. Sovereign debt can also refer to the total of a country’s government debt.
Swap line: In finance, a “swap line” refers to an arrangement between two central banks to exchange currencies, enabling a central bank to obtain foreign currency liquidity from the other central bank. This is typically done to provide financial stability and to ensure liquidity in foreign exchange markets.
Volatility measures risk using the dispersion of returns for a given investment.
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The information in this article does not qualify as an investment recommendation.
There is no guarantee that past trends will continue, or forecasts will be realised.
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5 minute read
Key takeaways:
- While the proposals are light on detail, the US commitment to support Argentina’s economy has helped to stabilise the peso and bolster the sovereign bond market. Support was bigger than most expected.
- This increases the likelihood of continued policy efforts by Milei to maintain Argentina’s fiscal anchor, crucial for long-term economic stability and investor confidence.
- One of the most important aspects of the upcoming election on October 26 is whether Milei will secure enough votes in Congress to sustain his vetoes, which, if achieved, would result in governability not too dissimilar to now.
