Argentines are convinced that even with substantial U.S. financial aid, it is impossible to prevent the Argentine peso from once again suffering catastrophic depreciation.
According to Bloomberg, on October 16 local time, U.S. Treasury Secretary Becerra announced at a press conference that the U.S. had once again intervened in the Argentine foreign exchange market by selling dollars and buying pesos to provide support. He also stated that the U.S. is considering reaching private agreements with several international banks to double the total amount of aid to Argentina to 40 billion U.S. dollars.
This intervention by the U.S. Treasury did stabilize the exchange rate in the short term, preventing the peso from breaking through the "1 dollar to 1,400 pesos" threshold in the foreign exchange market.
Bloomberg Finance
But unlike the first time, this news no longer "scared" the market, nor did it bring about the previous "stimulating effect." Investors generally no longer believe that the Argentine government can maintain the exchange rate, so they continue to buy dollars aggressively to preserve value and avoid risks, and see the short-term exchange rate rebound as an opportunity to sell pesos.
The market widely bets that President Milei of Argentina will allow the peso to depreciate further after the parliamentary elections on the 26th of this month. Previously, to maintain exchange rate stability, the Argentine government continuously raised interest rates, and short-term interest rates have soared to an astonishing 157%, aiming to "drain" the liquidity of pesos in the market through high interest rates. However, this approach of maintaining the exchange rate through extremely high interest rates has placed greater pressure on Argentina's already fragile economy.
"Becerra's words are now becoming less effective. Each time the exchange rate is stabilized, it lasts for a shorter period than before," said Ezequiel Asensio, an asset investment manager who has been working in the Argentine financial market for 30 years, to Bloomberg. "The investment market does not believe in Becerra. Even if he really throws money in, few people are willing to follow up."
Argentina and the U.S. governments have repeatedly intervened in the peso exchange rate Bloomberg
On September 22 local time, Becerra first promised aid to Milei, and the peso only briefly rose. However, the good times did not last long. Since September 29, the peso has entered a downward trend almost every day. By October 16, the peso had fallen for the second consecutive trading day, and short-term interest rates also slightly declined from their peak.
The confidence of the U.S. in its aid to Argentina was thus shaken. U.S. President Trump even publicly hinted that if Milei lost the election, the U.S. might withdraw its support. This statement was generally interpreted by the Argentine market and public opinion as interference in internal affairs, aimed at supporting Milei's campaign.
In fact, since early September, when Milei's ruling party lost in key electoral districts, the prospects of free-market reforms by the party have been closely watched by all sectors in Argentina. The market generally worries that the mid-term congressional election scheduled for the 26th may interrupt the reform process of the Argentine government, and even exclude the risk of policy reversal.
This political uncertainty has clearly accelerated the "selling pesos and buying dollars" trend that had already begun months ago. According to data from the Argentine central bank, from April this year when Argentina lifted individual foreign exchange purchase restrictions, until August, the net purchase of dollars by non-official entities reached 18 billion U.S. dollars, equivalent to an average of about 400 U.S. dollars per person.
Additionally, according to estimates from the Argentine banking sector, Argentine depositors purchase approximately 300 million U.S. dollars daily to preserve value.
Lucio Arrocha, a macroeconomic and foreign exchange strategy analyst specializing in Argentina and Latin America, pointed out that the market generally believes that the depreciation of the peso is inevitable. He further analyzed that the real mystery is whether a loss by Milei in the election would trigger more severe capital outflows, thereby increasing the pressure on currency depreciation.
"With Argentina's level of foreign exchange reserves, it is absolutely insufficient to cope with an upcoming capital flight," Arrocha emphasized.
Other analysts point out that the current currency purchase, betting, and risk avoidance behavior of the Argentine people easily reminds one of the large-scale speculative strategies taken by Soros' hedge fund, where Becerra once worked, in international markets.
This situation is not the first time in history. In 1992, the British government tried to defend the pound exchange rate to fulfill its commitment to the European Exchange Rate Mechanism. However, due to limited foreign exchange reserves, massive market speculation pressure, and the need to significantly increase the central bank interest rate to support the exchange rate, which severely suppressed economic growth. Soros Fund accurately predicted that the British government would be unable to sustain, and made a large short sale, eventually gaining about 1 billion U.S. dollars.
British newspaper covers after the "Black Wednesday" of 1992 New York Times
"All Argentines, investors, and analysts believe that the exchange rate must adjust; as long as the interest rate and exchange rate remain at the current level, economic activities cannot proceed," the analyst said.
Therefore, the peso is generally considered overvalued, one of the key reasons being that its exchange rate has not fully reflected the continuously rising inflation levels within Argentina. Since Argentina partially liberalized foreign exchange controls in April, the official exchange rate and the market exchange rate have become closer, but at the same time, consumer prices have risen by 12%.
Under this overvaluation and inflation pressure, the market generally doubts the sustainability of government interventions. "This situation cannot last much longer," said former Argentine Treasury Secretary Kiguel. "Currently, the market generally expects the government to maintain the intervention until the election, but what happens after the election, no one can predict."
At the same time, the measures taken by the Argentine government to curb capital outflows have further exacerbated domestic credit tightening. With the contraction of peso liquidity in the financial system, local financing costs have significantly increased. On October 15, the Argentine government successfully rolled over less than half of the maturing local currency debt, while the yield on bonds of the same maturity has now exceeded 100%.
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