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Washington’s Debt Trap Diplomacy and Election Meddling in Argentina

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This unprecedented decision by the Trump administration to bail out Argentina directly has more to do with geopolitical considerations than economic ones.

It seems perfectly fitting that in the same week that Javier Milei launches his new book, La Construcción del Milagro (The Building of the Miracle), Argentina’s zombified economy once again needs a massive bailout, this time directly from the US Treasury Department. News of the bailout came after Argentina’s central bank burnt through $678 million of foreign reserves on Friday trying to support the peso — its largest intervention for a single day since Oct 2019.

On Monday, US Treasury Secretary Scott Bessent announced that the US was standing ready to do what is needed to support Argentina, a “systemically important US ally in Latin America”.  registers as a trade partner for the US.

On Wednesday, after meeting with Presidents Donald J Trump and Milei, Bessent provided a little more clarity on what kind of financial support Argentina can expect as the country gets ready to vote in its mid-term elections in October. 

Under President Milei, Argentina has taken important strides toward stabilization. He has achieved impressive fiscal consolidation and a broad liberalization of prices and restrictive regulations, laying the foundation for Argentina’s historic return to prosperity. The @USTreasurystands ready to purchase Argentina’s USD bonds and will do so as conditions warrant.

We are also prepared to deliver significant stand-by credit via the Exchange Stabilization Fund, and we have been in active discussions with President Milei’s team to do so.   The Treasury is currently in negotiations with Argentine officials for a $20 billion swap line with the Central Bank. We are working in close coordination with the Argentine government to prevent excessive volatility.

In addition, the United States stands ready to purchase secondary or primary government debt and we are working with the Argentine government to end the tax holiday for commodity producers converting foreign exchange.

Needless to say, the news of the Milei government’s latest bailout — its second in just five months — triggered a cacophony of memes on Twitter. A few stand-outs:

This was one of the sharpest observations:

Rich Irony

The irony got even richer when Bessent, the former billionaire hedge fund manager who was a leading member of the firm (Soros Fund Management) whose bet on the Black Wednesday collapse of the British Pound sterling earned the firm over $1 billion, warned on Wednesday that “Argentina has the tools to defeat speculators, including those who seek to destabilize Argentina’s markets for political objectives.”

It is even more ironic when you consider that Milei’s government, with the assistance of the IMF, has enriched the speculator class more than any other Argentine government in recent history, with the possible exception of Mauricio Macri’s (2015-19). Like Macri’s, Milei promoted creative financing, largely through the so-called carry trade, that kept inflation artificially low by keeping the peso artificially high.

Just as with Macri, these policies enriched financial speculators, domestic and foreign, at the expense of the broader economy. As we warned in December 2024, the carry trade was not remotely sustainable and its inevitable unravelling would trigger a new currency and debt crisis, as has happened so many times before. Four months later, the IMF stepped in. Five months after that, it’s the US Treasury’s turn.

This was eminently foreseeable the moment Milei hired the same JP Morgan bankers who had entrapped Argentina into tens of billions of dollars of debt during Macri’s term, to head the most important positions in his administration and central bank. We warned about the possible repercussions in the first month of Milei’s presidency in our post, “Who Is Luis Caputo, Argentina’s New Economy Minister (Who Is Already Making the Economy Scream)?“:

In Spanish, as in English, the word “kaput,” taken from the German “kaputt”, means done for, knackered, wiped out. The surname of Argentina’s new Economy Minister, Luis “Toto” Caputo, is similar, just with a “c” instead of a “k” and ending in “o”, which is probably fitting given that his first dose of economic shock therapy — including a 54% devaluation of the Argentine peso, to bring the official exchange rate closer to the informal “blue” one; a halt on all public works; the freezing of public sector salaries; a sharp rise in taxes, and the elimination of many public subsidies — could wipe out what remains of Argentina’s fragile economy.

Predictably, the package of measures places the lion’s share of the burden on the already buckling shoulders of Argentina’s middle and working classes while the so-called political and economic caste — whom Milei vowed to eliminate during his election campaign — will emerge either largely unscathed or even wealthier.

It took just a year and a half for Argentina’s economy to require another 10-figure bailout — the 23rd of its 209 year history. This one was worth a total of $42 billion, and was provided by the IMF ($20 billion), the World Bank ($12 billion) and the Interamerican Development Bank ($10 billion). Much of that money was delivered upfront, prompting accusations that the IMF was essentially bankrolling Milei’s electoral campaign for Argentina’s mid-terms.

Which is precisely what happened — only that the bank did not roll for quite long enough. Hence the need for a second bailout.

As we noted at the time, many senior members of the IMF staff refused to sign off on the April loan even at the risk of getting fired, presumably because they knew it would never be repaid. Just like the loan in 2018, this one was politically motivated.

They also presumably feared that the Fund, by pressuring the Milei government to remove many of the country’s capital controls, would once again be facilitating another round of massive capital flight, allowing the same speculators who had gorged on the carry trade to get their money out of dodge as the trade unravelled.

One thing that is now clear is that the half lives of economic bailouts of Argentina are growing dangerously short.

US-Style Debt Trap Diplomacy

One last irony: the US is engaging in exactly the sort of “debt trap diplomacy” that it has been accusing China of in recent years, with an important difference: most of the debt in this case is used to enrich financial speculators rather than build actual things for the benefit of the country or its people. It is debt in return for nothing.

As we warned in May, Washington is once again weaponising the IMF to try to reclaim its “back yard”:

Through its lending to struggling economies in Latin America, the IMF is once again helping Washington to reassert its strategic influence in its backyard. It is probably no coincidence that three of the four countries in the region that have outstanding debts with the IMF — Argentina, Ecuador and El Salvador — all have governments that are not only completely aligned with Washington but are also completely on board with Israel’s genocide.

It is also clear that the Trump administration is now meddling directly in Argentina’s political process, just as it has been meddling in Brazil’s by trying to get Trump’s close friend, Jair Bolsonaro, off the hook for his attempted coup in 2022. To that end and at the alleged urging of Bolsonaro’s son, Eduardo, Trump has even imposed 50% sanctions on US imports of many Brazilian goods.

During his address to the UN General Assembly on Tuesday, Brazil’s President Luiz Inácio Lula da Silva gave a powerful defence of national sovereignty:

“[E]ven under unprecedented attack, Brazil chose to resist and defend its democracy regained 40 years ago… Before the eyes of the world, Brazil sent a message to all aspiring autocrats and those who support them: our democracy, our sovereignty are non-negotiable.”

Meanwhile, Milei’s Argentina is more firmly than ever in Washington’s grip. And Washington, through the mouth of Bessent, has a very clear message for the Argentine people — vote for Milei, or else:

I have also been in touch with numerous US companies who intend to make substantial foreign direct investments in Argentina multiple sectors in the event of a positive election outcome.

The Trump Administration is resolute in our support for allies of the United States, and President Trump has given President Milei a rare endorsement of a foreign official, showing his confidence in his government’s economic plans and the geopolitical strategic importance of the relationship between the United States and Argentina. Immediately after the election, we will start working with the Argentine government on its principal repayments.

I will be watching developments closely, and the Treasury remains fully prepared to do what is necessary.

“No Strings Attached”. Yeah, Right. 

The obvious next question is: what does the US get out of this?

Senior figures in the Milei government have been making the risible claim that there will be no strings attached to this latest bailout. Even Milei’s strongest supporters are having trouble swallowing that one.

The last time the US Treasury directly participated in the bail out of another country was that of Mexico during the Tequila Crisis of 1995. Crushing austerity and privatisation policies quickly ensued — imposed, as always, by the IMF. In 1998, the then-President of Mexico (and notorious US lackey) Ernesto Zedillo socialised the outstanding debt of many of the country’s banks and other well-connected companies, arguing that it was necessary to avoid another banking crisis.

Not only are the Mexican people still paying off the debt for that bailout today, 27 years later, but the total amount outstanding has almost doubled in size despite the fact that the country has already paid $200 billion pesos more than the principal: the magical wonders of compound interest.

As El Cronista reports, in its bailout of Mexico the US government made sure the Mexican government put up as collateral for the loan the revenues from oil exports of Mexico’s state-owned oil company, Pemex (machine translated):

The probable financial support of the United States Treasury to the government of Javier Milei to stabilise the exchange rate and contain the economic crisis has brought to the fore a little-known but very powerful instrument: the Exchange Rate Stabilization Fund (ESF). This fund, created by the Gold Reserve Act of 1934, is made up of dollars, foreign currencies and Special Drawing Rights (SDRs) of the IMF, and can be used to intervene in foreign exchange markets or lend resources to foreign governments, always with the authorisation of the Secretary of the Treasury…

In this context, many – including Alvarez Agís himself – recalled Mexico’s precedent in 1995, when the Tequila Crisis led to an unprecedented debt and currency crisis. Then, Bill Clinton’s government decided to go to the ESF to put together a rescue package for $20 billion. According to the US Department of Justice’s 1995 legal memorandum, the ESF’s resources could be used for “loans to foreign governments or to guarantee their foreign currency obligations.”…

The Mexican bailout was structured with very precise guarantees. According to a report “Mexico in crisis, the United States to the rescue,“ by the Brookings Institution, a Washington-based think tank, the Treasury demanded that Mexico allocate collateral to “the revenues from oil exports managed by Pemex.” The logic was simple: if Mexico defaulted on payments, the United States was charged directly from crude oil sales abroad. That condition ensured that the FSA money was not exposed to pure sovereign risk, but was backed by a real and tangible flow of foreign currency.

One of the most innovative elements of the 1995 bailout was the way the guarantees were structured. The fact that the Treasury required Mexico to collateralize the oil export revenues managed by Pemex allowed the loans from the Exchange Stabilization Fund (ESF) to be backed by a tangible flow of foreign currency, reducing sovereign risk.

The agreement included the transfer of part of Pemex’s accounts in New York as collateral. According to U.S. congressional records cited in the same legal memorandum, it was established that the Treasury would have priority over any other creditor in the collection of those revenues. In the words of the document, “the ESF loans would be guaranteed with liquid collateral derived from Mexican oil exports, which significantly reduces credit risk.”

In the case of Argentina, will the Milei government have to put up as collateral the export revenues of the state-owned oil company YPF? In its Vaca Muerta (Dead Cow) field, Argentina boasts the world’s fourth largest reserves of shale oil and more shale gas than anywhere except China.

Such a move could be complicated by a ruling issued a few months ago by US federal judge Loretta Preska ordering the Milei government to hand over 51% of YPF to firms affected by the oil firm’s 2012 nationalisation. That ruling has been put on hold by a US appeal court but is hanging over Argentina like a sword of Damocles.

Alternatively, the Milei government could be asked to put up Argentina’s vast lithium deposits, the second largest in the world, as collateral, or even its uranium deposits.

Geopolitical Considerations

However, as the Argentine expert in international relations Juan Gabriel Tokatlian notes, the Trump administration’s “unprecedented” decision to bail out Argentina has more to do with geopolitical considerations than economic ones:

In the year 2024, the bilateral trade between the United States and Mexico was worth $830 billion. The bilateral between the US and Argentina was worth $17 billion. The total accumulated stock of capital invested by US companies in Mexico is more than $150 billion. In the case of Argentina, it’s just $12 billion.

So, you ask: why is this country that doesn’t have a deep, intense, complex, dynamic relationship with the United States suddenly getting a massive bailout from Washington?

I think that you have to approach it from a much more geopolitical angle as well as what Trump and Milei like to call the cultural battle.

There is a possibility that in one year’s time South America will be almost totally identical, politically speaking, to the United States. We have elections in Chile, which could be won by ´´[the right-wing populist] José Antonio Cast, elections in Peru, which could be won by someone on the right, elections in Colombia, which could bring the right back into power, elections in Brazil which Bolsonaro could win [NC: presumably in reference to Jair’s son, Eduardo], the second round of elections in Bolivia, which someone on the right will win.

While I largely concur with Tokatlian’s thesis on the role of geopolitical considerations in the US’ decision to bail out Argentina, there is a key economic consideration that should not be ignored: the massive and growing exposure to Argentine debt of the largely US-controlled and -funded IMF.

The Bretton Woods institution’s peak exposure to Argentina is expected to reach an eye-watering $58 billion in 2026. And as we noted, the half-lives of these bailout is getting shorter and shorter. As Bloomberg noted in May, the more money the Fund throws at the serial defaulter, the more risks it heaps onto its own balance sheet:

There are risks for the lender in handing over so much cash upfront in a program that’s essentially refinancing large existing debts, according to Brad Setser, a former senior official at the US Treasury.

“The Fund would be raising its exposure when the peso is clearly overvalued and the country is repaying bonds,” he said. “It looks like the Fund is positioning itself as, de facto, the junior creditor.”

It’s safe to assume that the US government, with or without Trump at the helm, could not allow a default to take place so shortly after the IMF bailout. Also, as Ben Norton notes, the US, by bailing out Argentina, is not only propping up one of the US [and, crucially, Israel’s] most loyal puppet governments in Latin America, it is also benefitting wealthy US investors who hold Argentine stocks and bonds, as well as US corporations that want Argentina’s lithium.

At the same time, Washington has clear political motives to keep Milei in power for as long as it can. Washington would like nothing more than to see a cascade of right-wing, US and Israel-aligned governments coming to power in South America over the next year — governments that might be willing to walk away from the BRICS, just as Milei did.* At the same time, it continues to escalate its war on progressive, non-aligned governments the drug cartels in the region.

Conversely, imagine what would happen if the Milei experiment crashed and burnt before all those elections took place? Imagine what impact that would have on the electoral prospects of people like Cast in Chile?

Washington needs the Milei government to stay strong, or at least to stay in place for another year, and if that means propping up the Argentine economy with tens of billions of dollars while at home enacting the largest recorded cuts to US healthcare, so be it. Argentina’s latest flirtation with ultra-neoliberalism must be sold as a success story, an approach worth emulating.

This may explain why such a staunch defender of the Transatlantic order as Niall Ferguson was gushing over Milei’s economic miracle just a month ago, when the Argentine economy’s vital signs were already flashing. The world needs to watch and learn from Argentina, Ferguson said, even as the country’s economy once again teetered on the edge of collapse. He even told La Nación:

“I think Milei must be one of the best read, if not the best read, world leader, particularly when it comes to economics.”

Another Western commentator who recently made the economic case for Milei was Noah Smith, this time in July, by which point Milei’s economic model had destroyed 200,000 jobs and 15,000 companies. In the 21 months of his presidency the peso has gone from being worth 360 to the dollar to 1,334; industrial production has done nothing but fall; consumer prices have surged by 226% and consumer confidence remains rock bottom.

Oh, and the government also pawned a large chunk of Argentina’s gold reserves at a time that most countries on the planet are buying gold hand over fist.

Milei’s ratcheting asphyxiation of Argentina’s economy shows no sign of ending. At the beginning of this year, the IMF and US lenders like JP Morgan Chase were predicting a 5-6% rebound in economic growth. After all the economic pain of 2024, including four consecutive quarters of contraction and a brutal (and ongoing) slowdown in industrial activity, everything was going to improve, we were told. The U-shaped recovery was on its way.

Now, everybody is talking about recession again while the bond market is in crisis. According to an index compiled by Torcuato Di Tella University, the probability of the Argentine economy entering a recession rose to 98.61% in Augus.

In other words, Argentina has swapped triple-digit inflation for the world’s most extreme case of stagflation (with annual inflation still clocking in at 33%). And yet Milei’s governing model, if one can call it that, is still being lauded and applauded in certain quarters, particularly Wall Street and Washington. Here’s Bessent giving the presentation speech for Milei’s Global Citizen Award, from the Atlantic Council of all places:

The money quote (02:45):

President Milei’s governing philosophy has galvanised reforms not only in Argentina but in other Latin American countries as well. President Milei is a leader of a great nation but also a continent.

That is the hope. In order for it to happen, though, enough voters in South America must swallow the party line that this new version of neoliberalism, which is arguably worse than the original, works despite all the proof to the contrary. One is reminded of that quote from Orwell’s 1984:

“The Party told you to reject the evidence of your eyes and ears, it was their final, most essential command.”

It is Argentine voters who must choose in a month’s time (October 27) between Milei, and by extension Trump’s promised bailout and all the strings attached, or the Peronist parties, and the prospect of no bailout at all. Milei already suffered a crushing setback in August as a large majority voted for the Peronist parties in Buenos Aires province, the country’s largest. He is also losing control over Congress, which has overturned a number of his vetoes in recent weeks.

But much like Trump, Milei still enjoys a hardcore of support. As the economy worsens and the political scandals mount, many directly involving Milei and his sister, will Trump’s economic lifeline be enough to reverse Milei’s sliding approval rating, now below 40%, and thereby secure him — and by extension, his US and Israeli backers — victory in a month’s time. If it doesn’t, what could that mean for Argentina’s eternally embattled economy?

These are questions that for the moment have no clear answers.

 

According to journalists close to the Milei government, such as Jonathan Viale, the US is calling on the Milei government to further distance itself from China, Argentina’s second largest trade partner. Apparently, the main bones of contention are its $18-billion swap line with Beijing, the involvement of Chinese companies in Argentina’s nuclear power and hydraulic energy sectors, and Huawei’s dominance of Argentina’s 5G network.

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4 comments

  1. Ignacio

    Thank you Nick for your watch on Argentina. It is indeed worth watching. One has to read Ferguson in the context of his thinking. The Cash Nexus for instance. This is not about (sound) economics but politics and geostrategic agendas. Ferguson has always been a libertarian dreamer. Interestingly, Ferguson has claimed before to be absolutely against public debt but let us make an exception with libertarian Milei. Mustn’t we?

    Reply ↓
    1. Carolinian

      Perhaps the takeaway is that the only politics that really matter here in the 21st are the ones in this country with the Trumpies seizing the TINA reins with gusto. Of course to put himself in that position Trump promised the opposite and took the Buchanan line against foreign policy adventurism.

      Anyhow thanks for the above.

      Reply ↓
  2. TomDority

    So the US Treasury is laundering cash through (country x) to pay private investors/corporations pre-guaranteed returns while also lowering commodities prices on the global market. With the added bonus of eviserating the common man/woman and trashing the environment.
    I probably have that wrong – please correct me – seems the speculative financial markets are getting government guarantees of returns.
    Guess thats been the theme for six decades?

    Reply ↓
  3. lyman alpha blob

    Excellent reporting again, Nick. I will add during fundraiser week that this is exactly why NC is worth paying for.

    Reply ↓

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