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Argentina was once one of the richest countries in the world. Recently, it is a side term for the crisis-induced economy that defaulted nine times on international sovereign debt. An offer of financial support from Uncle Sam shows how far it has fallen.
Javier Mairei’s 2023 Election – A self written by analco capitalists who wielded chainsaws during the presidential election, symbolizing the war on waste, was to turn the pages of this story.
However, after some initial success, it appears that Milei’s Chainsaw has been splashed out. The value of PESO hit a record record this month after a fierce defeat of Milei’s party in local elections, after shocking concerns about the future of his free market overhaul. Investors dumped bonds and stocks. The national benchmark Merval Index, home to the state-owned oil company YPF, extended its losses that year to 25%.
Amidst the panic, the country’s central bank spent more than $1 billion in foreign reserves to protect the peso last week. This week, Treasury Secretary Scott Bescent said the US will do “anything necessary” to support Argentina, including direct or direct purchases of Argentina’s debt.
This support show should provide a short-term rest for sales. However, it cannot reach the heart of the Mylay problem. The inherent tension between his strategy of using strong pesos and fiscal austerity while trying to grow the economy and improve the country’s external balance sheet.
The problem with pursuing a strong peso is that while imports are cheaper, exports from Argentine companies are less competitive. This limits the country’s ability to accumulate the foreign currency needed to serve its obligations.
According to Barclays, Argentina has $95 billion in dollars and euro-religious debt against a net reserve of about $6 billion. A debt repayment worth $44 billion will need to be made by the end of Milei’s 2027 term. Milei can be unfairly out of control to use rare forex reserves to support the peso.
He’s exhausted from simple choices. Massive reductions in government spending help tame inflation as they leave people with fewer people to spend less money in their pockets. However, the Maylei party that was received in this month’s local elections suggests that Argentina has lost austerity patience. When voters release bail, investors may too.
Support from the US has just broken this negative spiral for now. However, the devaluation of the peso appears increasingly inevitable. According to Capital Economics, PESO should drop by about 30% to restore Arasentina’s competitiveness and rebuild its FX reserves. Mylay needs a strong show if he leads the peso to gradually weaken in the mid-term elections in October. The alternative is an unconventional fall.
pan.yuk@ft.com
