By Ashley Lo
Wielding a chainsaw in crowded public areas, say the American Conservative Political Action Conference (CPAC), may get some arrested for reckless endangerment. But Argentine President Javier Milei has made the chainsaw both a prop and political credo. In February, Milei ran up to the CPAC stage, enthusiastic to gift a chainsaw. The recipient was Elon Musk, then a special government employee of the US Department of Government Efficiency (DOGE). Brandishing it onstage to symbolize his philosophy of hacking away at state excess, Milei has applied the same approach back home. Since taking office in December 2023, the economically libertarian president has implemented austerity measures, a shock-therapy program aimed at breaking Argentina’s inflation spiral.
While Milei won’t need to be bailed out of jail for reckless endangerment, his economy has just been bailed out by the U.S. Treasury. Treasury Secretary Scott Bessent announced in October that the U.S. would provide $20 billion in economic assistance to Argentina through a currency swap line. In mid-November, the U.S. pledged to provide another tentative $5 billion in loans.
To understand how Argentina arrived at this latest rescue package, it is important to revisit the country’s recent economic history. Argentina’s early 20th century was marked by immense economic growth, largely supported by its agricultural sector. By 1913, the country had become one of the world's wealthiest countries per capita. However, Argentina’s national income dropped dramatically as agricultural export prices fell during the Great Depression in 1929. The economic crisis led to social unrest and a military coup in 1930, which overthrew President Hipólito Yrigoyen. Since then, the Argentine economic cycle has been defined largely by chronic inflation, fiscal mismanagement, and a reliance on foreign support.
The role of the dollar is also important in the Argentine economy. Argentina uses both the peso (controlled by the central bank) as well as the dollar (which it must earn through exports, investment, or borrowing). Given Argentina’s poor economic track record, citizens tend to save in the more stable dollar. Since the country does not produce dollars, the central bank loses its reserves as people rush to convert pesos into dollars during times of economic turmoil. To defend the peso, it must intervene in currency markets by selling dollars and buying pesos to prop up the peso’s value. But if its reserves run low, the central bank loses the ability to do so. Once Argentines realize the government cannot maintain the exchange rate, the demand for dollars surges further while demand for pesos collapses; the resulting imbalance leads to the depreciation of the latter.
Surprisingly, wielding a chainsaw at political rallies can make you quite popular. Milei, considered the underdog in the 2023 Argentine Presidential Election, campaigned on economic reform as a former economist and conservative, anti-establishment outsider. Since assuming office, inflation has fallen from an annual rate of 211.4% in 2023 to a projected 30% for 2025. Milei’s austerity cure has involved fiscal policies to throttle public spending. Notably, he took the proverbial chainsaw to 10 of Argentina’s 18 federal ministries, including the Ministries of Education, Culture, and Transport. Along with Mieli’s fiscal measures, his monetary policy has relied on peso devaluations and a strict control over the money supply. The gradual devaluation of the peso is meant to close the gap between the official peso-dollar rate and black‐market dollar purchases. A more realistic, albeit weaker, peso might restore credibility as the official rate falls in line with what the market already thinks it’s worth. Devaluing the peso also allows the central bank to avoid defending an artificial rate that props up the peso, preserving the central bank’s dollar reserves.
Though Milei’s shock therapy has seen success in revitalizing the Argentine economy, leaked recordings of the then Argentine head of the National Disability Agency Diego Spagnuolo on August 19th have threatened Milei’s momentum. Spagnuolo claimed on the tape that Milei’s sister and advisor, who was the General Secretary of the Presidency of the Argentine Nation, had been accepting kickbacks for government contracts in the pharmaceutical industry. Almost immediately, the peso lost roughly 3% in value, and the Argentine stock market benchmark (the MERVAL Index) dropped 4%. People worried the scandal threatened the popularity Milei needed for ramming through his economic agenda. Later in September, the peso further dropped 6% after Milei’s party, La Libertad Avanza, was defeated in Buenos Aires’ local election. This was considered an indicator of broader Argentine sentiment ahead of the October 26th midterms. The MERVAL Index did not escape the election unscathed either, tumbling 13% in just one day.
The perilous economic situation ahead of Argentina’s October midterms, a crucial election for Milei’s party to prevent presidential veto overrides, set the stage for Milei to turn to the U.S. government. President Trump had been a vocal ally of Milei. In mid-October, the Trump administration announced a $20 billion currency swap line provided by the U.S. Treasury. Argentina’s central bank could exchange pesos for up to $20 billion in U.S. dollars to shore up its dollar reserves, defending the peso. Argentina would later have to return the dollars with interest. Later that month, the administration announced a new addition: $20 billion in loans assembled from sovereign wealth funds and private banks to help finance Argentina’s budget and debt obligations. President Trump noted that America’s “generosity” towards the Argentine economy was contingent upon Milei’s political success in the late October midterms. Fortunately, Milei’s party, La Libertad Avanza, came out ahead with 77 of the 151 contested seats in the Senate and the lower house.
The Argentine market was euphoric, with stocks soaring over 20% and the peso strengthening nearly 15% intraday. The agriculture, energy, and financial services sectors have been some of the biggest beneficiaries amidst the bailout-driven rally. There have also been implications for U.S. lenders as American banks like JPMorgan Chase, Bank of America, and Goldman Sachs were approached to fund the $20 billion loan. While these banks are interested in the high yields Argentine debt can offer, they have surely been hesitant given the less-than-solid guarantees provided by Argentina’s checkered credit history. In mid-November, the additional $20 billion loan deal fell through, and the amount has since been reduced to only $5 billion. Lenders now plan to provide Argentina the additional funds via a short-term repurchase agreement (“repo”) facility. This agreement would allow Argentina to pledge a portfolio of assets, such as bonds or other securities, as collateral and receive dollars from the banks. At maturity, Argentina is expected to buy back the assets, repaying the loan.
Although the U.S.-backed bailout has been a turning point for Argentina’s markets and the peso, what the Milei administration does next will determine the efficacy of the aid. The real test now is whether Milei’s chainsaw economics can drive stability and ward off any charges of reckless endangerment.
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