Supporting the Argentinian Peso: Altruism, political interference, or crony capitalism?

The story that got my attention this week was the implementation of a plan to support the Argentinian peso. While the stated intention has been to stabilize the value of the peso, it’s unclear exactly what the US is committing to and, more importantly, whether the intended objective has any chance of working.

The clearest statement about this policy seems to be coming from the Treasury Secretary’s X account, which reads as follows: “… today we directly purchased Argentine pesos. Additionally, we have finalized a $20 billion currency swap framework with Argentina’s central bank. The U.S. Treasury is prepared, immediately, to take whatever exceptional measures are warranted to provide stability to markets.”

Two things are going on here: (1) the direct and immediate purchase of the Argentinian peso (ARS) and (2) the creation of the currency swap facility, each considered in turn.

The value of a currency is determined as a function of supply and demand for that currency. When the demand exceeds supply, the currency strengthens (i.e., it gets more expensive); and conversely, when the supply exceeds demand, the currency weakens (i.e., it gets cheaper). We’re going into this policy shift with a history of the ARS weakening, persistently for at least the last 10 years.

We should understand that a persistent trend, such as the one ARS has experienced, reflects a sustained excess supply of their currency over an extended period. Undoubtedly, any one-shot purchase of ARS will support the demand for that currency and either mitigate the decline of the currency, or it might cause the value of the currency to strengthen – which is what we’ve seen in this case. Looking ahead, however, it’s hard to see how a one-shot purchase will successfully arrest the declining value of the ARS. Without any substantive change that would otherwise stimulate future demand or depress future supply for the ARS, it seems more than likely that this respite will be short-lived. In short order, this upward spike in the value of ARS would be reversed and its weakening would resume.

Turning to the currency swap facility, let’s understand what a currency swap is. Unfortunately, this term, “currency swap” could easily be misunderstood. It means something different for the lay person versus the financial professional. The lay person might expect a swap to simply be an exchange of one currency for another. For example, he or she might think that buying ARS with dollars (USD) is the same thing as swapping USD for ARS. In the lingo of financial professionals, however, a currency swap is something different. It’s a two-part transaction, involving an initial currency exchange, followed by a subsequent exchange in the other direction. In effect, the swap is a pair of back-to-back loans. One party is initially making an outlay in USD and getting USD back later, and the other party is doing the same with ARS. With the reversal of the original exchange, both parties essentially get back their original currencies, with interest.

Secretary Bessent would have us believe that the swap facility would be the safeguard, precluding the return of the declining value of the ARS. I doubt it. Presumably, this facility gives the Argentinian central bank USD for the purpose of buying ARS now, but that capacity comes with the obligation to repay the dollars at some later point. Thus, whatever immediate stimulant this effort has to the demand for ARS, this stimulant will be temporary as it will necessarily be reversed. I suppose the hope is that the reversal of the original ARS purchases and the repayment of USD can be timed to coincide with a period when the ARS won’t be under any significant downward pressure, but that would seem to be a tenuous expectation.

The true motivation for embarking on this kind of initiative now is unclear. Whether it’s purely an altruistic effort in pursuit of a stable international order (even in the face of unnecessarily imposing a tariff regime that does exactly the opposite), one intended to bolster the political fortunes of MAGA darling Javier Milei, president of Argentina, or to protect US hedge funds that might be overexposed to Argentina’s country risk is hard to discern. What I do know, however, is that the administration has created conditions that are bound to allow some currency traders to make a huge gain with others realizing a commensurate loss.

Postscript: Moments before I expected to post this blog, I came across this Washington Examiner article reporting that President Trump said the support for the peso would be contingent on President Milei’s success in the coming mid-term election on October 26. “[I]f [Milei] loses, we are not going to be generous with Argentina.”