Saving Argentina; losing America

What a week! Of course, we’ve seen more ICE raids, additional extra-judicial killings on the high seas, no respite from the government shutdown, and another Trump enemy, John Bolton, being indicted by the de-weaponized Justice Department run by the ever-ethical Pam Bondi. Those occurrences are nothing new. Just more of the same. This week’s novelties, however, include (1) an AI-generated video Trump put out on X depicting himself as a fighter pilot dumping excrement on citizens exercising their constitutional rights, presumably in blue-run cities (classy), (2) Trump indicating that he’s be seeking a $230 payment from the Justice Department to compensate him for that department’s misconduct in connection with the Russian investigation and the case involving the classified documents held at Mar-a-Lago (even classier), (3) a former Congressman con artist and a convicted Crypto fraudster (both Trump supporters) being pardoned, and (4) the demolition of the East Wing. Can’t wait to see what’s in store in the coming week!

With that backdrop of dysfunction at home, it’s almost a relief to turn to chaos abroad — in this case, the effort to “save” Argentina.

As explained in an earlier blog, the program to support Argentina consists of two parts: an immediate purchase of Argentinian pesos (ARS), which, depending on the size of the purchase, would either stem the weakening of the currency or otherwise foster a spike; but in either case, whether the currency strengthens or weakens after that initial intervention will depend on future supply and demand considerations. Those conditions, however, would likely be affected by the currency swap feature of the program.

The currency swap commits the US treasury to lend USD to the Argentinian central bank, with expectation that those dollars will be repaid as some later date, with interest. To date, however, neither the rate of interest nor the repayment date has been specified. In any case, presumably, those USD would be used by the Argentinian Central Bank to support the ARS (i.e., to buy ARS) over some extended time. The problem, however, is that ultimately, Argentina will have to sell ARS to raise the dollars necessary pay the US back when the swap terminates. Whereas the act of buying ARS serves to support the value of the peso, selling the ARS (required at or before the swap termination date) would depress its value. Thus, expecting the swap policy to affect a permanent change in the value of the currency may be wishful thinking.

The swap also introduces a significant additional risk. That is, if the value of ARS tanks by the time the swap terminates and Argentina needs to repay dollars to the US, the loss realized on the ARS position could precipitate a default by Argentina, where they simply don’t have the wherewithal to satisfy their obligation to the US treasury. To put this risk in perspective, shortly after Milei became the President of Argentina, he orchestrated a devaluation of ARS, setting its value to $0.001. Ten months later, the exchange rate stands at about $0.00067 per ARS — a value decline of about 33 percent.

Unfortunately, expecting a reversal in this long-term trend of a weakening currency when the country is facing an inflation rate in the range of 30 percent per year is fanciful. As somewhat of a casual observer, it seems to me that the weakening currency that we’ve witnessed during the last ten months may be the market’s reasonable adjustment to the rate of inflation that country is facing. Inhibiting that adjustment — which is what this policy appears to be trying to do — may not be doing Argentina any favors, all the while the US is exposing itself to a default risk that had not been present before.

To be clear, I don’t have any suggestions as to how Argentinians should stabilize the value of its currency — or even whether that’s a good idea in the first place. A cheaper currency serves the interest of the country’s exporters, while a stronger currency serves the importers. In Argentina, Exports represent about 15 percent of GDP, imports represent about 12 percent. While stability would generally be seen to be the most desirable outcome, it’s one that’s unlikely to be achieved without some fundamental structural change that will stimulate a sustained increase in the demand for ARS over time. And that’s not something the treasury officials in the US have any likelihood of successfully engineering.

Both America and Venezuela are suffering a degradation of their quality of the lives of their denizens. From this vantage point, Argentina’s problems appear to be financial, affecting the population writ large. In our case, suffering is more diffuse, with selected pockets of our population bearing the brunt of decisions made by an increasingly authoritarian executive branch while many remain largely insulated from the fears and anxieties that befall our less insulated neighbors. We’re witnessing a corrupt and untethered president transform our republic at an alarming rate, and those responsible for maintaining the guardrails to protect us from this trajectory have shamelessly abandoned their responsibilities. America may not be in the financial straits of Argentina yet, but the direction of our country should be no less concerning.