The United States commitment to support Argentina calmed the markets before the legislative elections. The Argentine president, Javier Milei, has sent strong signals of political continuity, but the low and decorned international reserves amid pressure on weight, triggered a Fear spiral that it was necessary to counteract. Support only gives Milei time and resolves little.
The United States promised exceptional support to the Argentine economy, contributing to the stabilization of financial markets. This occurs after a turbulent month for the Argentine sovereign bonds and the peso, caused by an important setback for Freedom Avanza, a party headed by President Milei, in the legislative elections of the province of Buenos Aires, accusations of corruption against Karina Milei, sister and general secretary of the Presidency, and a wave of currency sales before the national elections of half of the mandate.
The root of the problem is the overvaluation of the weight and the low level of international reserves. The next steps will probably consist of adjusting the currency to facilitate the accumulation of reservations, but this will only happen after the elections.
The statements of the US administration, including those of the Secretary of the Treasury, Scott Besent, and President Trump, have been blunt. They affirmed that “all the options” are on the table. Specifically, USA and Argentina are currently negotiating a swap line of 20,000 million dollars. Besent also said that the US is willing to buy Argentine bonds called dollars (primary and secondary). However, Details about these measures are still confirmed.
In addition, the World Bank promised support the country with an early deployment of up to 4,000 million dollars, of which 2.5 billion were already planned as part of a broader package of 12,000 million dollars, announced in April.
Strong sign, but without clarity about implementation
The expressed support has already had a stabilizer effect on the markets of Argentine sovereign bonds and in weight, which reduces pressure on international foreign exchange reserves and relieves concerns about short -term payment capacity. However, the central problem, a low actual exchange rate (overvalued weight), which hinders the accumulation of reserves, has not been resolved.
One of the necessary commitments for the support of the US could very well be the adoption of a more flexible exchange rate after the elections. This was already planned before the recent crisis.
In addition to US support, markets felt comforted by Milei’s temporary 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 evident that the fiscal anchor remains a fundamental pillar of the stabilization program.
It is very likely that the US demands something in exchange for any support you provide. It can be in the political sphere (as greater exchange flexibility after the elections), or in some strategic alliances in key sectors of the Argentine economy (Energy, lithium and other critical minerals). Clearly, the American private sector is also showing its willingness to invest in Argentina, provided that Milei has reasonable intermediate elections. It is also likely that measures are taken to Reduce China’s influence in the country.
The result of the elections is coming
The next elections in Argentina, scheduled for October 26, are crucial To determine the balance of power within the government, in particular in regards to President Milei’s ability to maintain his vetoes. The Argentine government works with a bicameral congress, composed of two cameras: the Senate (upper house) and the Chamber of Deputies (lower house).
For President Milei to effectively block legislation in Congress, he would need to obtain enough votes in at least one of these cameras. Specifically, it would need more than 33% of the votes in the lower house to keep their veto. This means that, even if it does not have the majority, having more than a third of the seats would allow you to avoid the cancellation of your vetoes and continue with many of its transformative policies.
Despite the negative result of Milei’s party in the recent elections of the province of Buenos Aires, where his party was defeated by a major margin to expected, it is very likely that the necessary support in the Chamber of Deputies in the national elections is very likely. Therefore, a regime change is not anticipated and we hope to see Milei as president in the next two years with a governance similar to this year, which depends on forging alliances with the centrist opposition and some of the most moderate Peronists.
We believe that Milei is, in fact, more pragmatic than its reputation suggests and may forge the necessary alliances to improve its result in the intermediate elections of October and, fundamentally, to get support for the reforms and keep the veto after the elections. In the Argentine presidential system, the president has many tools to encourage support. We hope you do everything possible.
Janus Henderson Wallet Manager
Source: Ambito
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