Argentine Peso Drops 7% This Week as Markets Demand Written Proof of US Treasury's Promised Swap Line Before October Elections

Argentina Walks a Tightrope as Washington Promises Support

Treasury Secretary Bessent’s pledge to back Buenos Aires now faces its first real test as markets demand action, not words.

BUENOS AIRES — Argentina’s peso slid again this week. By Thursday morning, the currency had dropped another 7.08% against the dollar, forcing the central bank to burn through scarce reserves in a fight it couldn’t win alone. Barely six days had passed since U.S. Treasury Secretary Scott Bessent promised “all stabilization options,” a vow that briefly sent Argentine assets soaring.

The pattern is becoming familiar. A headline sparks a rally, but reality always follows. For investors in New York, London, and São Paulo, the cycle exposes a deeper truth: President Javier Milei’s economic shock therapy has delivered progress, but the scaffolding still looks shaky. With legislative midterms looming on October 26, every policy move doubles as an election signal.

On Thursday, Bessent tried to steady the nerves. Speaking after a call with Economy Minister Luis Caputo, he clarified that U.S. backing would come through swap lines, not direct cash transfers. “We’ll provide swap lines instead of putting the money directly into Argentina,” he said, adding that “America First doesn’t mean America Alone.” He predicted Milei’s coalition would perform well in the midterms and praised the president’s reforms as a beacon for a region still dominated by left-leaning governments.

Markets offered a lukewarm response. Dollar bonds due in 2035 ticked up by 0.25 cents after falling more than five cents in just three sessions. The peso, however, kept sinking.

Doubts That Don’t Fade

This selloff isn’t just the usual emerging-market jitters. Traders are wrestling with a credibility gap. The issue isn’t Milei’s ambition—it’s execution. Argentina’s foreign reserves remain dangerously low in a country where the economy runs on dollars. Every time the central bank intervenes to slow the peso’s fall, it weakens its safety net even further.

As one debt strategist put it, “Until term sheets exist, verbal intervention works for days, not quarters.” In other words, talk is cheap unless it’s written down.

The proposed $20 billion swap line could serve as a buffer, calming exchange rates and buying time for broader reforms. But the fine print—conditions, legal structures, and U.S. politics—matters. Any sign of congressional resistance or budget brinkmanship in Washington could water down the deal before it’s even signed. Investors know this, which is why rallies keep fading.

Milei’s Record: Progress With Pain

Supporters of Milei can point to real wins. Inflation, once roaring at triple digits, has cooled sharply. By mid-2025, monthly figures hovered around 1.5–1.9%, with annual rates falling into the 30s. Argentina also posted its first fiscal surplus in 14 years, thanks to sweeping austerity measures. Poverty has eased from last year’s peak, dipping to about 32%.

But the averages hide the struggles on the ground. Joblessness hit a four-year high before easing slightly, and informal work remains widespread. Real wages lag behind, leaving many families still struggling to make ends meet. The gap between rosy statistics and daily hardship makes Milei’s political footing fragile.

His government has pushed through big reforms—deregulation, privatization, labor law adjustments—yet every win has triggered protests, lawsuits, or union backlash. Each success carries a social cost, and with Congress divided, every next step looks harder.

A Familiar Trap

Argentina faces an old dilemma: tightening belts before shoring up the currency. Pain arrives first, relief much later. For a president who campaigned with a “chainsaw” in hand, it’s a risky sequence.

Despite better trade terms, the country reopened a current-account deficit this year. Without a clear path toward a stable exchange rate and eventual currency unification, pressure on the peso persists. Ambiguity invites speculation, and speculation fuels capital flight.

As one analyst put it bluntly, “Argentina can’t outspend a confidence shock. Rules and reserves matter more than sporadic sales.”

What Investors Are Watching

For investors, several milestones could decide whether Argentine assets recover or slip deeper into trouble.

First, the paperwork. A published term sheet for the swap line—laying out size, terms, collateral, and draw triggers—would shift the game. Sovereign bonds maturing in the 2035–2041 window could rally several points on such news. Without it, rallies will stay short-lived.

Second, a transparent foreign exchange roadmap would calm nerves. Clear reserve targets, timelines for band adjustments, and eventual unification would give markets something solid to hang on to.

Third, the midterms. The October 26 results will show whether Milei gains enough support to speed up reforms or faces gridlock. Coalition math may prove more important than anything Bessent says.

Fourth, the balance sheet. Reserve accumulation and current-account trends will reveal whether Argentina is stabilizing or just burning through its defenses.

Scenarios Ahead

Over the next year, investors see three possible paths.

In the best case, Argentina secures a formal swap line with clear conditions, backed by the IMF and a credible currency plan. Debt spreads narrow, peso volatility eases, and equities—especially banks and energy firms—begin to outperform.

In a muddled middle scenario, talks drag on, political noise dominates, and markets swing wildly with each headline. Bonds stay choppy, equities unpredictable.

The worst case: U.S. politics blocks meaningful support while Argentina’s reserves dwindle. Without a credible plan, bonds could tumble 5–15 percentage points, the peso gap could widen, and local credit markets might shut down altogether.

For now, traders are urged to separate quick headline trades from longer-term bets. Liquidity matters, and the more liquid 2035 and 2041 bonds offer better exits than illiquid long-dated issues during turmoil.

Bigger Picture

Argentina’s drama is about more than pesos and bonds. Washington’s ability to back Milei without spending U.S. taxpayer dollars is also a test of American influence in Latin America, where China has been steadily gaining ground. Swap lines aren’t just finance—they’re foreign policy plumbing.

Right now, Argentina hangs between recovery and relapse, between promises and proof. The peso’s next moves will reveal which way the balance tips.

House Investment Thesis

Category	Summary & Key Metrics	Analysis & Root Causes	Catalysts & Market Impact	Positioning & Scenarios
Macro Snapshot	• Inflation: ~1.9% m/m, ~34% y/y • Unemployment: 7.6% (Q2) • Poverty: 31.6% (H1 2025) • Current Account: Deficit (Q2) • IMF Forecast: 2025 Growth ~5.5%, EoP Inflation 20-25%	Verdict: Macro stabilization achieved but sequencing is incomplete. Root Causes of Fragility: 1. FX Ambiguity: No dated path to unification; thin reserves. 2. Political Capacity: Reform durability depends on post-Oct 26 legislative math & courts. 3. External Gap: Current account deficit creates funding risk.
U.S. Backstop	• Treasury's Signal: U.S. swap line, not direct cash. • Risk: U.S. domestic politics (shutdown) raise delivery risk.	Verbal support is not a term sheet. "Verbal puts decay fast."	Catalyst A: Signed Liquidity Umbrella + FX Path • Deliverables: U.S. swap term sheet, IMF/MDB co-financing, published FX roadmap (narrow band → unification). • Impact: USD bonds +3-8 pts (2035-41), peso vols compress, equities rally (banks/energy first).
Game-Changing Reforms			Catalyst B: Fiscal Rule + Shock-Absorbers • Lock surplus, automate subsidies, protect targeted transfers. • Impact: Builds structural credibility, blunts protest risk.
			Catalyst C: Labor "Flexicurity" • Pair deregulation with portable UI & wage top-ups. • Impact: Converts CPI wins into political capital; sustains equity multiples.
			Catalyst D: FX-Safe Project Finance • Standardize FX pass-through for concessions, use MDB wraps. • Impact: Pulls forward capex, organically builds reserves.
Positioning Playbook			Sovereign USD Curve: Prefer 2035/2041 bonds. Fade rallies without documents. Base: +300-600 bps tighter post-term sheet. Local Rates/FX: Avoid ARS duration without a dated FX roadmap. Avoid naked short-USD ARS. Equities: Banks (high beta to policy), Energy/YPF (structural, use dips), Utilities (asymmetric, but headline risk). Credit: Favor shorter-dated secured exporters with natural FX hedges.	Scenarios & Odds: • Base (50%): Swap line signed, dated FX roadmap (unification by late-2026). Outcome: USD curve +3-8 pts. • Wobbly (30%): Prolonged negotiation, political noise. Outcome: Choppy, two-way price action. • Bear (20%): U.S. support stalls, FX plan slips. Outcome: USD bonds -5 to -15 pts.
Critical P&L Checklist			What Actually Matters: 1. Hard Deliverables: Published swap/IMF term sheets. 2. FX Regime Memo: Dated path to unification. 3. Reserves & CA: Pace of reserve build. 4. Labor & Poverty: Unemployment trend & poverty updates (political sustainability). 5. Politics: Post-Oct 26 reform throughput & court rulings.
Sharp Takeaways		Key Conclusions: • "Rallies that aren't stapled to documents will fade." • The real "pivot" is FX credibility, not another rate hike. • Jobs/poverty are the political stop-loss. Without gains, reform durability caps out.

This article is for informational purposes only. Past performance doesn’t guarantee future results. Investors should seek professional advice before making decisions.