The United States rescue plan for Argentina, under the analysis of one of the largest and oldest financial institutions in the United States, warns that this latest lifeline does not address the country’s structural problems.
Contrasting sensations have generated in the marketsand continue to do so, the administration’s plans trump to save the president Milei and his libertarian project in the face of the mid-term legislative elections. When it was believed that the mere announcement or knock on the table that the United States would come to the rescue of the Argentine Government was enough to calm things down, once again, the ruling party underestimated the sense of survival of the Argentines and of those who put some chips in the libertarian adventure. The shock tactics do not seem to have the effect, as they once did, at least for a brief period, giving the authorities time to react or change course due to fear of an electoral debacle or a financial or exchange crisis. Something doesn’t convince.
Perhaps, listening or reading those who have managed investments at a global level for decades, one can perceive a little better how they see from the outside, less contaminated by the domestic rift, the rescue of Trump, via the US Treasury to Argentina. In this framework, it is interesting to know the vision of one of the centenary international managers on the Argentine case. This is Northern Trust, created 135 years ago and which manages more than US$1.7 trillion in global investments. Vaibhav Tandonis the international economist Head of the Global Risk Management division of Northern Trust and days ago, once the announcement of a currency swap of US$20,000 million was known, the exchange interventions of the US Treasury in Argentina and the possible credit of a club of banks for another US$20,000 million for the country, he issued his vision on the matter to clients and colleagues, warning, as a spoiler, that “The US rescue package will not stabilize the Argentine economy”. Although it is a voice in the global market, it is valid to know how they see things from the outside, what they pay attention to and what they see as strengths and weaknesses, and what they conclude, so their influence on third parties should not be ignored since they are references for other managers and investors.
What did Tandon think?
- For him, Argentina has long been an example of economic instability, with recurring cycles of defaults, hyperinflation, balance of payments crises and abrupt policy changes that have constantly eroded investor confidence. “Over time, economic turbulence has ceased to be an exception and has become a characteristic feature of the country’s macroeconomic panorama.”
- Regarding the plan, Milei highlights that the Argentine president’s radical reform agenda was beginning to yield positive results, with an aggressive fiscal adjustment that generated an exceptional budget surplus and contributed to curbing inflation. “However, the country once again finds itself on the brink of the abyss.”
- It warns that investor confidence has been hit by growing political uncertainty ahead of the Oct. 26 midterm elections, as Milei has faced a series of internal setbacks, including corruption allegations and a weak performance by his party in provincial elections. “But the biggest blow came when the Argentine Congress annulled key elements of the government’s fiscal consolidation plan. This setback not only threatens to generate budget deficits again next year, but could also derail support for Argentina from the International Monetary Fund (IMF).”
- These events shook the markets, causing a sharp drop in the Argentine peso. The central bank (BCRA) intervened to defend the currency, but its already depleted international reserves were unable to reverse the situation. “Fortunately for Milei, support came from an unexpected sector: the Trump administration extended a $20 billion bailout to Argentina. This extraordinary measure, for now, has calmed market nervousness and helped stabilize the peso.”
- In this sense, he warns that, although US support has ensured payment of Argentina’s bonds until 2026, it has failed to address the country’s financial problems. “Growing job losses and low consumption have raised fears of a recession, almost a third of Argentines live in poverty, the BCRA has had difficulty rebuilding its reserves, which has left it vulnerable during episodes of panic in the markets.”
- And wide. While Argentina has several options to increase its dollar reserves, each comes with its disadvantages: drastically reducing the value of its currency could attract more dollars, but would lead to higher inflation and a political backlash; Given its long history of debt restructurings, skepticism about Argentina’s ability to pay is not misplaced.
- He clarifies that the US intervention does not consist of a direct injection of cash, but rather a liquidity support through the Exchange Stabilization Fund (FSE), while the US Treasury finalized a currency swap agreement for US$20,000 million with the BCRA and bought pesos in the open market on Thursday the 9th. “However, the lack of clarity around the terms has raised doubts about the conditions imposed, which has fueled concerns about legal oversight and transparency.”
- It further explains that while the ESF gives the US Treasury flexibility to act without congressional approval in emergency situations, longer-term or larger-scale commitments could still require legislative support, and Republican lawmakers have expressed opposition, citing concerns about taxpayer exposure.
- Remember that US intervention in this form has precedent: The use of the ESF and swap lines dates back to the Mexican peso crisis of 1995, when the US offered a similar bailout to its southern neighbor; The amount was eventually repaid with interest and was considered a successful stabilization effort. “However, Argentina’s structural weaknesses make this case much riskier; the country has defaulted on its sovereign debt nine times and remains the IMF’s largest debtor, owing more than $40 billion from the 2018 bailout.”
For the Northern Trust economist, the US may not be driven solely by economic altruism, as many observers consider aid to the ideologically aligned Argentine government as a strategic measure to counter China’s growing influence in the region. “Washington is reportedly pressuring Argentina to cancel its $18.5 billion currency swap line with China and increase rare earth extraction. The US could also consider a stable Argentina as a buffer against new migratory flows, particularly in the face of the current Venezuelan refugee crisis.”
For all this, Tandon concludes that “US aid simply postpones the next crisis and does not mark a turning point. Without meaningful reform, that reality is unlikely to change.”
Source: Ambito
