The moment of “whatever costs” that Argentina had with the United States this week could have given the country its best chance to escape from decades of default and bailout chaotic, according to investors. But it all depends on the national elections of October.
The Argentine assets shot after the US Treasury Secretary, Scott Besent, declared that “all the options” were on the table to stabilize the country and support President Javier Milei, an ideological ally whose drastic austerity policy was politically expensive, as demonstrated by his defeat in the provincial elections of Buenos Aires on September 7.
The intervention of Washington partially reversed the market fall caused by the low performance of the Milei party in the provincial elections, a stumbling block that fueled the fears of a broader defeat in the national elections of October 26 that could stop or block its reform agenda.
“This is an unprecedented support from the United States,” said Gustavo Medeiros, Ashmore Group Research Chief.
Milei’s radical reforms since he assumed the presidency in December 2023 had helped address the solvency problem of Argentina, said Medeiros, but the concern for a liquidity crisis persisted.
“(Argentina) had a liquidity problem to the announcement … now it has neither of them,” he said.
But that the promises of the US predate a change of course will depend on the performance of the Milei party and its allies in October.
“Everything depends on the result of the elections and whether internal support is available to continue the reforms they need,” said Joyce Chang, Global JPMorgan research director.
SWAP lines and fertilizer support
Besent presented on Wednesday a package that included a swap line of 20,000 million dollars, American bond purchases called dollars in primary and secondary markets, and an important stand-by credit of the exchange stabilization fund.
The American support infusion is the last one, although the brightest, ray of hope for the Latin American giant to change his reputation as a synonym for poor sovereign financial management.
While the terms and conditions are still clear, the force of the American signal alone is helping to overcome a complicated period, according to investors.
“It is rather to be overwhelmed with rhetoric so that the figures import less,” said Carmen Altenkirch, an analyst for emerging markets for Aviva Investors.
Argentina already cheated investors with false advances. In 2017, investors, attracted by faith in the then President Mauricio Macri to implement reforms, acquired a bonus of a century of 2,750 million dollars. Two years later, Macri lost power and, by 2020, the country had fallen again.
That story left households and companies with the “muscular memory” of accumulating dollars to the first indication of turbulence, said Medeiros, a reflection that can exhaust reserves and increase stress. The nervousness resurfaced after the provincial elections of Buenos Aires. The markets fell, and last week the Central Bank spent approximately 1.1 billion dollars of its few reserves in just three days to underpin the peso.
SOST CONTEXT: EU is ready to support Argentina with a 20,000 MDD swap line
Key test in October
Those who support Milei’s reform argue that the year 2025 is presented differently.
They indicate the fiscal consolidation, the cooling of inflation and a fiscal surplus by 2024, the first in decades, which together attracted investors again. The promised swap line and the possible entries of US dollars stabilize the currency, which could promote the electoral perspectives of the Milei coalition, are expected to stabilize.
The suspension of key -grain export taxes fulfilled its objective of promoting dollars entry earlier than expected, which allowed the Government to reimpose taxes after only two days.
If Milei’s party, La Libertad progresses (Lla), and its ally of center -right, Republican Proposal (PRO), obtain at least the expected third of seats in the lower house, it is likely that the Government keeps the opposition of the center -left and keeps its influence to boost the reforms.
“It’s hard not being constructive at this point,” said Thierry Larose, Vontobel portfolio manager.
“This announcement is a victory that can restore confidence in the government and help Lla+Pro to maintain their leadership in surveys for the intermediate elections next month.”
Citi, who maintained his overponderation in Argentina during the rebound, warned that the “risks of governance” would persist, but argued that Milei could continue to drive the reforms, and that his coalition prepares to maintain the necessary votes to sustain a presidential veto even in the most unfavorable result.
The IMF maintains reinforcement pressure
The other key support from Argentina, the International Monetary Fund (IMF), will also maintain the pressure so that difficult reforms are implemented. At the end of September, Argentina’s total credit with the Fund amounted to just under 60,000 million dollars, almost four times the amount of its next largest debtor, Ukraine.
The IMF has a long list of tasks for Milei, which includes the reconstruction of foreign exchange reserves, the transition to a more flexible exchange rate, the reform of labor standards and the progress of privatizations.
The reforms could be painful for a population of 46 million people, affected by repeated inflation and monetary crises. But any delay could cause another negative market reaction.
“It should be noted that this rescue package is probably the last letter from the government to ‘get out of the free prison,” Laros said. “Investors have not forgotten the fiscal management of the past.”
With Reuters information
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