NEW YORK – Heading into Argentina’s legislative elections this month, commentary about the country’s economic and financial prospects was growing increasingly pessimistic. With a significant amount of foreign debt coming due next year, the conventional wisdom was that an exchange-rate-based stabilization program – letting the currency depreciate by less than the inflation rate to push inflation down – had led to a massively overvalued currency and an external deficit that was bound to precipitate a crisis. But having written a book on currency crises in emerging markets, and having followed Argentine policies closely, I thought this consensus was far off the mark.
Breaking from the pattern of past failed economic-stabilization episodes – including those under previous Argentine administrations such as Carlos Saúl Menem (1989-99) and Mauricio Macri (2015-19) – Argentine President Javier Milei used his 2023 election victory to implement the strongest fiscal-austerity and structural-reform policies in the country’s history. In 2024, the primary fiscal adjustment (excluding interest payments) amounted to 5% of GDP, setting the stage for a strong economic rebound after some early softness.
At that point, the Argentine peso may have been modestly overvalued, given the lack of a fully flexible currency regime, but at least the current-account deficit was very small. If the country regained market access, it could roll over its looming external debt liabilities; and if electoral uncertainties could be overcome, Milei’s reforms and the country’s huge natural-resource endowments were bound to attract huge amounts of foreign direct investment (FDI) – possibly as much as $70 billion (including financing for a $25 billion OpenAI data center). Moreover, the inflation rate had already dropped dramatically from over 100% before Milei’s election to around 30%.
Thus, heading into the recent legislative election, Argentina’s problem was about liquidity, not solvency. With electoral uncertainties weighing on growth this year – especially after the Peronist opposition performed better than expected in Buenos Aires’s provincial election in September – investors had grown nervous. Following a couple of corruption scandals and tactical mistakes on Milei’s part, the peso had weakened, despite interventions to keep the exchange rate within a set band. Domestic interest rates surged, Argentina’s sovereign spread widened significantly, and the stock market weakened. If the Peronists could take enough seats to wield an effective veto, Milei’s entire reform program could unravel.
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