This week has opened with a lot of concern for the economy of Argentina as you can see from this via the Buenos Aires Times.
Argentine leader Javier Milei announced plans to meet President Donald Trump in New York on Tuesday after hinting his country is in negotiations to halt a market sell-off and avoid a debt crisis.
Let is start by reminding ourselves of where we were when we last looked at Argentina.
The blue dollar is selling for $1,385 this Tuesday, September 9, 2025 ,
The official rate is now $1,474 and the blue dollar is at $1500-1520. So we have a further fall on top of the problem was looked at back on the 9th.
Over the past three months the currency has fallen by some 20% and whilst this is much slower than in the past ( my chart tells me the US Dollar has risen by 1805% over the past five years) there must be fears of a return to the bad old days.
Those fears will not have weakened as the currency is now some 29% weaker than three months ago which also raises concern about the inflation rate. If we look back to the June 9th plan we see issues with all four points now.
1. The stability of the exchange rate and interest rates in the money market.
2. The decrease in the price of financial dollars and the elimination of the exchange rate gap with the official dollar price.
3. A downward trajectory of inflation during the transition period.
4. Private sector inflation expectations are anchored, aligned with the ongoing disinflation process.
So 1 and 2 are clearly in trouble posing risks to 3 and 4.
Currency Intervention
This was supposed not to be necessary but instead we have seen this.
>BUENOS AIRES, Sept 19 (Reuters) – Argentina’s central bank on Friday made its largest daily dollar sale in nearly six years as it continued to use reserves to support the local currency, meeting strong dollar demand from institutional investors wary of political instability.
The bank’s latest intervention totaled $678 million, its largest for a single day since October 2019, bringing the amount sold in the last three sessions to $1.1 billion.
This brings with it more than a few problems. Let me start with a point I made on May 29th.
We can start with a fundamental problem which is that you can pursue a monetary target or a fixed exchange-rate but not both.
So they have just expanded the money supply because when you are defending a peg you may not call it a fixed exchange-rate but in practical terms it is and from the same date we can look at some number crunching.
Argentina has raised $1bn from international investors in a vote of economic confidence for libertarian president Javier Milei seven years after the country last tapped global capital markets.
So what seemed so welcome back then was not quite three days worth of currency intervention and this brings me to one of my rules of currency intervention which is that everything then gets measured in terms of your reserves. That happens even with countries with strong reserves whereas for Argentina the situation is precarious.
While the central bank’s international reserves stand at $39.26 billion, analysts say provisional official data indicates that net foreign exchange reserves for intervention are estimated at just $6 billion. ( Reuters)
The actual situation is complication as it has borrowed money from China for example and as well as this issues around it, how much can be used? But that $6 billion is 18 days worth at the recent rate of use. These times always have stupid political statements and this was particularly stupid.
“We’re going to sell every last dollar (of the central bank’s reserves) at the top of the band,” Economy Minister Luis Caputo said on Thursday night during a livestreamed interview.
That just invites traders to take the currency on when many major players would ignore it as being too small and illiquid.
This is all very different to what I pointed out on November 20th 2023.
and smashing a piñata of the central bank on television on his birthday.
Steve Hanke was having a celebration party.
FLASH: Javier Milei has won the Argentinian presidential election. Peronist candidate Sergio Massa has conceded. It’s time for Milei and Argentina to MOTHBALL the BCRA and the peso and OFFICIALLY DOLLARIZE.
But as I pointed out on the 19th of December of that year.
Yet big challenges remain and a defaut in some form looks pretty much inevitable I think. Also was that the chance to Dollarise?
If we return to now we see that you can do different versions of the Argentinian reserve position.
Argentina simply doesn’t have any non-borrowed reserves. In fact, it owes about $90b to China, the IMF and its domestic banks (in fx) and has only ~ $30b in fx reserves (less now) ( Brad Setser)
The International Monetary Fund
This much be scratching its head on several issues. Firstly for itself as Natalia Gurushina points out.
Does the IMF have a choice given that Argentina now accounts for 34% of all outstanding loans?
Those large loans made to the previous administration are rather coming home to roost. Another example of the track record of the present ECB President Christine Lagarde. Also things have rather changed since this report on the 1st of August.
Tight macroeconomic policies have enabled a smooth transition to a more flexible exchange rate regime and the easing of foreign exchange restrictions.
What is the “right” exchange rate for the Peso?
Robin Brooks has been doing some calculations on this.
The Peso still looks substantially overvalued relative to its own history (it’s far above where it was after the devaluation in Dec. ‘23) and relative to its biggest trading partner (Brazil). Based on all this, I’d put the overvaluation of the Peso – taking into account recent depreciation – around 20 percent at a minimum.
There are two issues that come to mind. Firstly another upwards push for inflation. But more strategically the “right” value for the Peso is always lower. Back when President Milei took power the Blue Dollar was 950 but now it is 1500.
Comment
There have been gains along the way as inflation fell and the official interest-rate was cut to 29% ( a more than 100% fall). The economy is now flatlining with the latest GDP number at -0.1%. President Milei still claims he will run a balanced Budget in spite of these announcements last week.
An unusually conciliatory-sounding Milei said he would increase pension spending by 5 percent, healthcare by 17 percent, education by 8 percent and disability pensions by 5 percent above inflation. ( France 24)
As I pointed out on the 9th can he get the current account into balance as well?
To my mind the particular issue here is the balance of payments. The problem with the trade figures is that a better economic position has been accompanied by a rise in goods imports of 34.3% in the first five months of this year.
Just devaluing seems an endless spiral but there are areas of some hope.
In a few years, Vaca Muerta will overtake the agricultural sector as the main earner of foreign currency, making it the object of desire for those governing the country. Nobody will have more dollars stashed away than those extracting oil and gas. ( Buenos Aires Times)
Can shale oil perform a rescue act? Something is needed as otherwise even if President Trump approves this it is a delaying action.
(From Washington, United States) Argentina and the United States are finalizing details of an extraordinary loan that the Treasury Secretary will deposit in the Central Bank for a tentative amount of $30 billion. ( infobae)
What is needed is for the time to be used to strengthen the Argentine economy and exports in particular.
Podcast
