U.S. Treasury Secretary Scott Bessent recently announced that the United States would make a $20 billion swap line available to Argentina to help stabilize the country’s financial markets and the value of the peso. Argentine President Javier Milei took office two years ago promising to fix Argentina’s economic problems through libertarian reforms. The U.S. financial intervention suggests that those reforms haven’t worked according to plan.
How exactly has Milei’s presidency gotten to this point? What sort of historical precedents are there for the U.S. swap line? And what are the risks involved for the United States?
Those are just a few of the questions that came up in my recent conversation with FP economics columnist Adam Tooze on the podcast we co-host, Ones and Tooze. What follows is an excerpt, edited for length and clarity. For the full conversation, look for Ones and Tooze wherever you get your podcasts. And check out Adam’s Substack newsletter.
Cameron Abadi: How exactly has Milei’s presidency gotten to this point? Why is Argentina again facing a financial crisis?
Adam Tooze: If anything, Milei’s program has been about trying to stop inflation. The numbers commonly being cited right now are that annualized inflation in Argentina in April 2024 was 289 percent, almost 300 percent—so prices triple every year. And then the inflation rate is now down to 34 percent, which is still unthinkably high by the standards of Europe or the United States, but obviously one-tenth of what it was heading toward.
Milei’s done this through a standard deflationary austerity package. He’s slashed government spending. The result is that wages remain about 8 percent below where they were in 2023 when he was elected. So essentially there’s been a deflationary shock. Unemployment has ticked up. Economic growth is down. But what Milei didn’t do was really bite the bullet and fully liberalize the foreign exchanges.
Milei was rewarded for this austerity package by a big influx of funding from the IMF [International Monetary Fund], where the U.S. of course has a very powerful vote. And he removed some of the foreign exchange controls that previously limited the amount of money that Argentinians could take out of the country. But he didn’t allow a free float of the peso. Why not? Because he’s worried that the peso will collapse, there will be huge capital flight, and this will drive inflation upward. It will also sort of shake the legitimacy of his government.
So instead, they set pegs for the exchange rate—a maximum, a minimum—and that really sets you up as a sitting duck, because the financial markets, insofar as they can exchange freely, will move the exchange rate close to either one of the pegs where they know you have to intervene. More obviously, they will sell and drive the peso down. And then they will basically play a game of chicken with the Argentinian authorities over whether they have reserves that they can burn to defend the peso by buying pesos against a market that is selling pesos. And the market will just make bigger and bigger bets until the moment comes when the government runs out of reserves.
What Milei’s administration was not able to do was substantially build reserves beyond the single-digit billions, when you net everything out in terms of what they were borrowing and what they actually had available. By the standards of foreign exchange speculators, that’s really peanuts. [Milei’s administration] spent apparently a billion dollars earlier this week trying to stabilize the currency. That took them down to perhaps less than $5 billion in reserve. For an economy and country the size of Argentina, that’s far too little—all of the emergency lights light up.
The question is, do you let the peso crash or do you try to pile more money in to stabilize? And what Bessent and what [U.S. President Donald] Trump are trying to do is I think to stabilize Milei, to perhaps allow them to hold this peg. Because it’s a matter of confidence, and if speculators think they’re gonna get burned betting on the peso falling, they’ll stop speculating. So, you can scare them off for a while, and you can ignore the longer-term problems—the lack of foreign investment in Argentina, the fact that people are pulling assets out—just to maintain the peg for a while. I think it’s that kind of extend-and-pretend, kicking-the-can-down-the-road world that we’re in right now.
And it’s explicitly politically motivated. [Argentina’s legislative] elections are on Oct. 26, and that I think is the deadline they’re working toward. Because [Milei’s party] had a terrible result in [provincial elections in] Buenos Aires, which is by far the largest of the Argentinian states. And so [the Trump administration is] worried that [Milei is] going to have a crushing nationwide defeat, and they’re helping to stave that off.
CA: What are the risks involved for the United States?
AT: The way this is going to be sold—and Bessent has already been trotting out this line—is that this is a liquidity crisis, so it’s not really a structural problem. So Argentina just has a cashflow issue, and so there’s no real risk in extending a loan in that situation. By extending a loan, you put out the fire and then it turns out everything’s actually all well. The rhetoric on the American side will downplay the risks.
The swap line lending is not really supposed to be lending, right? It’s supposed to exactly balance, and there’s supposed to be an unwind. Generally speaking, swap lines are not done into a situation in which there’s major exchange risk. Presumably, the [U.S. Federal Reserve] is gonna get insurance against whatever risk it’s taking in extending dollars. But the details of this are a little unclear. Bessent also said that the United States would, if necessary, buy Argentinian dollar-denominated debt, which is a much larger undertaking.
CA: Are there historical precedents we should be keeping in mind as this gets underway?
AT: Historically speaking, in 1995—this is the example people are invoking—with a big strategically relevant crisis in Mexico in the mid-1990s, in the context of building [the North American Free Trade Agreement], the United States actually made money by giving money to the Mexican government. Because if you’re a deep-pocketed investor with a long time horizon, buying debt in a crisis can often turn out to be a good deal because you can stand to benefit as the debt recovers, assuming your intervention works.
But Mexico is one thing, and those interventions were collateralized against oil revenues. The number of people who have made serious money investing in Argentina by anything other than vulture funds is pretty small. I mean, this is a bit of a reach.
The remarkable thing about the U.S. intervention is that it’s overtly political. This isn’t just another Argentinian financial crisis. Bessent has let the cat out of the bag. He basically has said: America is stepping in to save the Milei project ahead of the upcoming midterm Argentinian elections, in so many words. This is not just your vanilla, communal garden, macroeconomic stabilization—it’s an explicit effort by the Trump administration to stabilize an administration in Argentina that is seen as ideologically friendly to not just conservatism or the United States, but to Trump in particular, to MAGA. It’s really quite extraordinary.
[The Trump administration is] basically putting tens of billions of dollars on the line to ensure that their guy wins in that election. It’s kind of classic Cold War stuff, but not pitched that way. You know, I would have gone harder on the China card than they are—but, you know, they don’t tick the way I do. I would have said: No, this is a strategic play, Argentina also has a swap line from China, we want to unhook Argentina from China, and that’s why we’re doing this. And, you know, they just said: No, it’s all about the election, we want our guy to win.
On the face of it, you’d think Congress might have things to say about this. In normal circumstances, it would. In the ’90s, Congress certainly had things to say about the Clinton administration’s efforts in Mexico. But Congress is Congress right now, so God knows they’re probably just twiddling their thumbs.
In any case, the United States is on the hook by way of the IMF, and Argentina is by far the largest single IMF program—the most exposed, the most out of the box, the most “We’re just going to do this anyway” kind of lending. There’s an argument that in for a penny, in for pounds, you might as well double down. But it really is extraordinary in its overt partisanship, and a little bit analogous to U.S. interventions in Brazil as well. This is not picking sides of democracy versus the Communist Party. This is literally: Our guy in that election, that’s the one that we want to support. It’s very crude.
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