Will the US bail out Argentina?

Katie Martin (0:06)

Pushkin. The federal US government is shut down and the Trump administration has slashed billions of dollars in aid to projects in the world's poorest countries. But it's still found plenty of money to prop up Argentina or maybe more accurately to prop up its president, the flamboyant, the one and only, the chainsaw-wielding dog whisperer, Javier Milei. This rescue scheme, spearheaded by US Treasury Secretary Scott Bessent, involves buying Argentine pesos, lots of them, to support the currency's value. Well, bad news, Mr. Treasury Secretary, sir. You are badly out of pocket on this. The peso just keeps falling. Today on the show, we found someone in the know to tell us, why on earth is the US doing this? This is Unhedged, the Markets and Finance podcast from the Financial Times. And Pushkin, I'm Katie Martin, a Markets columnist here at FT Towers in slightly soggy London. And I'm joined down the line, yes, by that big taco fella, Robert Armstrong in New York, but also by an FT stalwart who really knows his stuff on Latin America, the FT's man on Latam, Michael Stott, who right now is all the way over there in Brazil. Michael, we owe you big time. Thank you for coming on.

Michael Stott (1:28)

It's a real pleasure, Katie.

Katie Martin (1:30)

Where to start with the drama in Argentina? It's got like a long history of terrible policy, terrible populism. So let's just take it that it's been like a mess financially and politically for decades and fast forward to the election of Javier Milei. These guys are one off, right? Tell us about Javier Milei.

Michael Stott (1:51)

So he's a self-styled anarcho-capitalist, Katie. He is very fond of his pet dogs, his English mastiffs, to whom he speaks regularly for guidance. He's also very fond of his sister, Karina, a former cake seller on Instagram who's now his chief of staff. And he's set up his own political party to try and put his ideas into practice, which involve reducing the state by the largest amount possible, hence the chainsaw. The difficulty with all this is that while Argentines loved the idea of a madman to sort out a mess and he started well, the wheels have started to come off as he's progressed.

Robert Armstrong (2:28)

Let's just pause for a second on the starting well. I was quite sympathetic to what this guy was trying to do, all dogs, chainsaws and wild hairstyles aside. Well, what was his policy platform and why did it work at least at first?

Michael Stott (2:48)

So his policy platform was to slash public spending dramatically and move the budget into surplus and to stop printing money to prop up the peso. And he achieved those two things remarkably quickly, in part because of this unconventional style and through the use of executive decrees. It was one of the most drastic fiscal adjustments ever achieved anywhere.

Katie Martin (3:11)

So in a sense, like hats off to the guy, even organizations like the IMF have said, you know, props to him, strange style, but good results. But in the course of doing this, he's been very much kind of of a mind with people like Elon Musk, people like the kind of libertarian right in the US, and with the Trump administration. So I guess they were his buddies to turn to when, as you say, the wheels came off. Tell us about that, how did the wheels come off and why?

Michael Stott (3:41)

Well, what happened, Katie, was he used the exchange rate as one of the main anchors to bring down inflation. So his big thing was fighting inflation, and he succeeded in avoiding hyperinflation, but at the cost of maintaining an overvalued currency. And that also, of course, hit the economy. So economic activity has been weak, and he's had great difficulty in building up any reserves of dollars, which has been a big problem because Argentina has 17 billion of dollar-denominated debt coming to you next year, not least to the IMF, which is a bit of a problem if you've got empty coffers.

Katie Martin (4:16)

Yes, and if you've got a super weak currency...

Robert Armstrong (4:19)

Depreciating currency, it's becoming harder and harder to pay that debt down every day.

Katie Martin (4:24)

But so, like Michael, you know a lot more about this than I do. So fill me in here. Like the tension has been building for quite a long time on the peso and on Milei, but it just suddenly cracked. And I believe that the trigger for that is a landslide loss at a regional election. This just seems to be where it all just went pear shaped.