U.S. Offers 200 Billion Dollar Currency Swap to Stabilize Argentina's Economy

The United States is in discussions with Argentina to establish a 200 billion dollar currency swap arrangement. This move is aimed at providing a financial bridge for Argentina's President to navigate through the upcoming midterm elections in October. The U.S. Treasury Department is also prepared to purchase Argentina's dollar-denominated bonds, a significant step in supporting the South American nation's economy.

This initiative underscores the U.S. President's eagerness to assist his libertarian ally in mitigating the peso's devaluation crisis. The two leaders, along with their respective teams, met during the United Nations General Assembly in New York. Following the meeting, Argentina's President expressed gratitude for the U.S. President's steadfast support.

In a post on the X platform, the U.S. Treasury Secretary stated that the department is currently in talks with Argentine officials to establish a 200 billion dollar currency swap arrangement with the Argentine Central Bank. The goal is to coordinate closely with the Argentine government to prevent excessive currency volatility.

Over the past few weeks, Argentina's President has faced challenges in provincial elections, leading to market instability. However, since the U.S. signaled its support earlier this week, market expectations for U.S. assistance have surged, resulting in a significant rebound in Argentina's markets. The peso's exchange rate has appreciated by 2.4%, and the prices of all dollar-denominated bonds have risen. Notably, the price of the more liquid 2035 maturity bonds has increased by approximately 4 cents, erasing the losses incurred since the Buenos Aires provincial elections.

This development has alleviated the liquidity challenges and uncertainties associated with Argentina's economic plans. The U.S. Treasury's willingness to directly purchase sovereign debt has significantly increased the likelihood of a reduction in the country's risk premium, potentially enabling the government to issue new debt by early 2026.

During an interview with a news outlet, the U.S. Treasury Secretary referred to this assistance as a "bridge to the elections," specifically the October 26 midterm elections in Argentina. The President hopes to expand his party's seats in Congress during these elections, as lawmakers have recently pushed to override his veto on spending bills.

The U.S. Treasury Secretary believes that the market has not lost confidence in Argentina's President, but rather is reflecting on the country's century-long history of poor economic management. An Argentine official noted that U.S. support provides an opportunity for the President to adjust exchange rate policies, aiding the Central Bank in rebuilding its depleted foreign exchange reserves. As part of Argentina's latest agreement with the International Monetary Fund, the country has set a trading range for the peso since April. Last week, Argentine monetary authorities depleted over 1 billion dollars in foreign exchange reserves to maintain the peso's exchange rate within this range.

This support helps correct market expectations and is seen as an ideal step towards a more open, market-based exchange rate mechanism. The U.S. President has expressed support for Argentina's leadership but has not disclosed specific details about financial assistance to the South American nation's government. During the United Nations General Assembly, the U.S. President stated that they would assist Argentina, believing that the country does not require a bailout.

This is the second significant financial aid package provided by the U.S. President to Argentina during his term. The U.S. government is playing an increasingly prominent role in Latin American politics. In 2018, during the U.S. President's first term, the IMF approved an initial 50 billion dollar rescue package for then-President Mauricio Macri, but the plan quickly unraveled. Subsequently, the IMF reached two more agreements with Argentina, including a 20 billion dollar aid package secured by the current President this year.

As the U.S. President enters his second term, tensions with Brazil's President have escalated, and threats of new tariffs against Mexico's President have been issued. Additionally, the U.S. has ordered the interdiction of vessels suspected of drug trafficking in the Caribbean, sending a warning to Venezuela's President. Throughout this period, Argentina's President has made multiple visits to the U.S. and publicly praised the U.S. President.

Even before the U.S. Treasury Secretary detailed the financial support plan, U.S. economists criticized the government's backing of Argentina's President's economic policies. Argentina has repeatedly failed to fully comply with IMF plans and has defaulted on its sovereign debt three times since 2001. It is crucial for the U.S. to avoid repeating the IMF's past mistakes, as lending money to Argentina is easy, but recovering it is challenging.

Argentina's President identifies as a proponent of free markets but has increasingly intervened in the stagnant economy to support the peso and prevent a surge in annual inflation ahead of the midterm elections. The country's inflation rate has decreased from 289% last year to 34%. To secure a strong performance in the elections and consolidate his minority position in Congress, the President needs to overcome opposition from lawmakers who resist his market-friendly agenda and economic reforms.

Under the President's intensified intervention, Argentina's economic activity has declined in recent months. Analysts predict that the country's GDP will continue to contract in the third quarter, following a slight decline in the previous quarter. Unemployment remains high, particularly as consumer spending has weakened, leading to difficulties in the construction, manufacturing, and retail sectors.

The currency swap arrangement proposed by the U.S. government may draw attention from China, as its scale exceeds the current 180 billion dollar swap arrangement between Argentina and the Chinese Central Bank. In addition to the swap arrangement, the U.S. Treasury Secretary mentioned that the U.S. is prepared to provide standby credit through the Treasury's Exchange Stabilization Fund. It is unclear whether both the swap arrangement and standby credit will be sourced from this fund.