U.S. Treasury Prepares 200 Billion Dollar Swap to Support Argentine Peso Ahead of Elections

The United States Department of the Treasury is preparing to purchase Argentine dollar-denominated bonds and is in discussions for a 200 billion dollar currency swap agreement with Argentina. This move is aimed at providing a "bridge" of support for Argentine President Milei ahead of the crucial midterm elections in October. The Treasury's actions underscore the Trump administration's firm support for its liberal ally, aiming to prevent a potential run on the peso.

Following the Treasury's recent statements of support, Argentine financial markets experienced a strong rebound this week. The peso-to-dollar exchange rate surged by 2.7% during Wednesday's trading session, while dollar-denominated bonds saw across-the-board gains. Notably, bonds maturing in 2035 rose by approximately 4 cents, erasing all losses since the Buenos Aires local elections. This support pledge effectively alleviated market concerns over Argentina's liquidity issues.

Analysts believe that the U.S. financial support will significantly enhance Argentina's chances of returning to the international bond market by early 2026. The chief economist of Adcap Grupo Financiero, Federico Filippini, noted that this move has eliminated the uncertainty surrounding the liquidity challenges faced by Milei's economic plan.

On the same day, it was reported that the Argentine Central Bank significantly reduced the one-day repo rate for the local currency, peso, by 10 percentage points, bringing it down to 25%. This action curbed the peso's upward momentum, with the peso-to-dollar rate rising by less than 1% intraday. This move indicates that monetary policy is still seeking a delicate balance between currency stability and inflationary pressures.

This marks the second major financial bailout provided by the Trump administration to Argentina. During Trump's first term in 2018, he pushed for the International Monetary Fund (IMF) to approve a 500 billion dollar assistance package for then-President Macri, although the agreement ultimately failed.

In a post on the social media platform X, the Treasury Secretary stated, "The Treasury is currently in discussions with Argentine officials regarding a 200 billion dollar swap facility for the Central Bank. We are closely coordinating with the Argentine government to prevent excessive volatility." The Secretary also mentioned that the U.S. is prepared to provide crucial standby credit through the Exchange Stabilization Fund.

During an interview with the media on Wednesday, the Treasury Secretary referred to the U.S. assistance as a "bridge to the election," alluding to Argentina's midterm elections scheduled for October 26. Milei hopes to strengthen his party's influence in Congress during these elections, as lawmakers have recently begun to override his vetoes on spending bills.

The Treasury Secretary emphasized that the U.S. supports Argentina and Milei, and does not believe that the market has lost confidence in Milei. Instead, the Secretary suggested that people are recalling past crises. "We will not allow market volatility to hinder Milei's implementation of major economic reforms," the Secretary stated.

Over the past few weeks, Argentine markets have been volatile due to Milei's poor performance in local elections. The monetary authorities used over 10 billion dollars in foreign exchange reserves last week to maintain the peso's trading range within the limits set in April as part of Argentina's latest agreement with the IMF.

A former Argentine Finance Minister, Daniel Marx, commented, "This helps correct expectations. The ideal approach now is to transition as quickly as possible to a more open, market-based foreign exchange mechanism." An Argentine official noted that U.S. support has created an opportunity for Milei to adjust exchange rate policies and for the Central Bank to rebuild its depleted foreign exchange reserves.

While the domestic inflation rate has decreased from 289% last year to 34%, economic activity in Argentina has continued to decline in recent months. Analysts predict that Argentina's GDP will contract in the third quarter, with high unemployment rates and sluggish consumption affecting the construction, manufacturing, and retail sectors.

The 200 billion dollar swap facility from the U.S. will exceed the approximately 180 billion dollar swap agreement between Argentina and the People's Bank of China. During Trump's second term, relations with Brazilian President Lula have become strained, and there have been threats of new tariffs on Mexican President and orders to crack down on drug trafficking vessels related to Venezuela. In contrast, Milei has made multiple visits to the U.S. and publicly praised Trump.

However, some U.S. economists have criticized Washington's support for Milei's economic policies. A senior researcher at the Council on Foreign Relations and a former official in the Obama administration's Treasury Department, Brad Setser, warned, "The U.S. must be concerned about ultimately finding itself in the same situation as the IMF. The world knows that lending money to Argentina is easier than getting it back."

Since 2001, Argentina has defaulted on its debt three times and has repeatedly failed to fully comply with IMF program requirements. Although Milei identifies as a proponent of free markets, he has increasingly intervened in the market to support the peso and prevent the annual inflation rate from surging again, given the stagnant economy and the upcoming midterm elections.