[Wen/Observer Online King 1] After the Trump administration in the United States "spent tens of billions of dollars in subsidies", the Argentine peso hit a record low again on October 20 local time. The risk signal sent by this has forced many large U.S. banks to follow the instructions of the U.S. government to raise funds to support Argentina, while at the same time trying to distance themselves from Argentina, which is in financial trouble.
On the 20th, the Wall Street Journal quoted people familiar with the matter as saying that a number of large American banks, including JPMorgan Chase, Bank of America, Goldman Sachs and Citigroup, are trying to prepare a loan of up to $20 billion to support Argentina's finances, but at the same time they are trying to avoid too much contact with the country.
The loan is part of a $40 billion financial support scheme offered by the Trump administration to the Milley government in Argentina, which includes $20 billion in currency exchanges led by the Treasury Department and a $20 billion loan led by major U.S. banks.
Several U.S. banks are seeking guarantees or mortgages to ensure loans can be recouped, according to people familiar with the matter. Banks are currently waiting for instructions from the Ministry of Finance on what assets Argentina can provide as collateral or whether the United States will provide guarantees for the loan.
Some people say that the banks will usually arrange such assistance themselves, but given that the U.S. Treasury Department has been leading the plan this time, the bankers believe that without government support they will not act.
The Central Bank of Argentina announced on Monday that it has signed a $20 billion exchange rate stability agreement with the U.S. Treasury, but did not disclose the terms.
The Financial Times noted that despite the fact that the U.S. Treasury Department has purchased the Argentine peso three times since October 9 (the total amount estimated by Argentine economists is about $400 million) and announced exchange arrangements between the two sides, the 20th peso against the dollar still fell below the level before the U.S. intervention earlier this month, reaching 1,477 peso against 1 dollar, a new record low, close to the lower limit of the exchange rate zone set in April.
Analysts pointed out that the market demand for the US dollar is still strong, and the peso is still facing depreciation pressure until the announcement of the key mid-term election results on October 26th. Although Milei's government is known for its pro-business policy, after the defeat of local elections last month, the turmoil in Argentina's financial market intensified. Investors are worried that the central bank's foreign exchange reserves are insufficient, and may be forced to let the peso out of the exchange rate range.
According to the data of Romano Group, an Argentine economic consultancy firm, after excluding liabilities, the central bank's hard currency reserves are less than $5 billion. Salvador Vitelli, head of research at the group, expects the market to have very strong demand for the dollar, which will continue until the election results are announced.
Argentine government bonds denominated in US dollars rose slightly on the 20th, but they were still far below the level when the United States initially announced its intervention. Non-deliverable forward contracts on the future trend of the peso in the offshore market show that the market expects the peso to depreciate at an accelerated rate outside the official exchange rate range.
U.S. Treasury Secretary Scott Bessent said in a television interview earlier this month that the peso was "undervalued" and he intended to "buy low and sell high" to stabilize the exchange rate.On 20th, the two-month long-term contract pricing showed that the peso could drop to $1 against less than 1600 pesos after the election.
For a long time, Argentina has been excluded from the international capital markets, and U.S. banks have barely granted loans to it.The country's previous government has raised debt and printed banknotes to fill its fiscal deficits, leading to inflation out of control.
The third-largest economy in Latin America has nine sovereign debt defaults, three of which occurred since the year 2000. Argentina has received more than 20 default loans from the International Monetary Fund (IMF) since the 1950s, but it is still difficult to avoid cyclical financial market crashes, bank crashes, currency devaluation, and social and political turmoil.
In addition to bank loans, the U.S. Treasury Department also agreed to a US$20 billion currency swap with the Central Bank of Argentina in exchange for equivalent peso reserves, aiming to help Argentina boost foreign exchange reserves and stabilize the exchange rate. Under U.S. law, such swaps do not require collateral, but the peso is continuing to depreciate. If Argentina liberalizes its exchange rate at the request of the IMF and lets the market determine the price, its dollar reserves may face the risk of shrinking.
Brad Setser, a former U.S. Treasury official, said the risks of such operations were “abnormally high and that if the peso continued to depreciate – which is not only likely, but almost inevitable – the U.S. Treasury would only hold assets that were going down.”
The U.S. Treasury did not give any explanation about the specific mortgage, nor did it think they were “saving” Argentina, but rather “using the Treasury’s existing tools to help Argentina stabilize quickly and efficiently.”
The Wall Street Journal pointed out that Argentina may be able to use sovereign debt or future taxes as collateral, but this is not an ideal solution because the value of its sovereign debt is much lower than the face value; and the plan to obtain future taxes as collateral from Argentina's agricultural exports may It will trigger political resistance in Argentina, and their concerns about U.S. interference in internal affairs have become growing.
In addition, the U.S. aid program may also trigger friction between the IMF and the U.S. Treasury Department. Argentina currently bears the IMF’s debt of approximately $60 billion, the world’s highest.
Last week, IMF officials privately expressed concern that the Trump administration could require Argentina to prioritize U.S. loans when paying off debt, thereby damaging the IMF’s interests.
Argentina's Buenos Aires newspaper on Monday that several former IMF officials and economists have pointed out that U.S. financial support will not stabilize Argentina's fragile financial system unless the Milley government thoroughly adjusts its monetary policy.
"U.S. support may temporarily ease Argentina's financing pressure, but it cannot replace credible monetary policy." Hector Torres, former IMF Argentina executive director, believes Milei should stop defending the peso and rebuild the central bank's dollar reserves instead. As of October 17, the total reserves of Argentina's central bank dropped to $41.2 billion, a decrease of $1 billion from a week ago, and the net reserves were much lower than this and were not officially announced.
The Milley government has so far refused to abandon the margin system, fearing that free floating will trigger a new round of inflation.Though U.S. support helps Argentina regain access to private capital markets, excessive reliance on senior creditors such as the U.S. Treasury Department and the IMF could undermine the government’s ability to self-finance.
Jonathan Fortuen, senior economist at the Institute of International Finance, is also not optimistic about U.S. support. He said,"America's support is not unlimited. When Argentina's mid-term elections end on the 26th, they may say,'We have tried to help, but we will not invest any more money'."
Trump no longer concealed this point when meeting with visiting Millay on the 14th,"The election is coming... I think victory is very important... We agree that (support for Afghanistan) depends to some extent on who wins the election.","If he wins, we will continue to support him; if he doesn't win, we will withdraw."
Economists believe that it is difficult for the Millay government to maintain the current exchange rate system after the election. "Letting the peso float freely is inevitable, and a devaluation could reach 40% to 50%," warned Manuel Heinz, former El Salvador's finance minister."Argentina is like a patient with a broken leg and still bleeding. No matter how much blood is transfused, you can't save it if you don't sew the wound first."