{"id":2504088,"date":"2025-11-06T01:35:00","date_gmt":"2025-11-06T06:35:00","guid":{"rendered":"https:\/\/monetizemail.com\/magatoon\/?p=2504088"},"modified":"2025-11-06T06:54:01","modified_gmt":"2025-11-06T11:54:01","slug":"mileis-mandate-argentina-bets-on-austerity-again","status":"publish","type":"post","link":"https:\/\/monetizemail.com\/magatoon\/2025\/11\/06\/mileis-mandate-argentina-bets-on-austerity-again\/","title":{"rendered":"Milei\u2019s Mandate: Argentina Bets on Austerity Again"},"content":{"rendered":"

On Sunday, October 26, Argentine President Javier Milei\u2019s party, La Libertad Avanza, won big in the country\u2019s legislative elections<\/a>. In the lower house, the Chamber of Deputies, it won 50.4 percent of the available seats on a plurality \u2014 40.7 percent \u2014 of the vote. In the upper house, the Senate, it won thirteen of 27 available seats for a net gain of six.\u00a0\u00a0\u00a0\u00a0<\/p>\n

Many doubted such an outcome a month ago when, according to Polymarket<\/a>, the party\u2019s odds of winning most seats fell to a low of 52.5 percent, down from 89.5 percent on August 19. Argentina was, then, in the grip of one of its perennial economic crises, with the peso falling and bond yields rising. The fate of Milei\u2019s bid to right the country\u2019s economy by balancing the budget with deep spending cuts \u2014 which, as Noah Smith noted in July<\/a>, had eliminated the budget deficit and brought inflation down from a monthly<\/em> rate of 25 percent to 2.4 percent \u2014 hung in the balance.\u00a0\u00a0<\/p>\n

The proximate cause of Argentina\u2019s latest economic crisis occurred on September 7, when, with Milei\u2019s sister embroiled in a corruption scandal, Alianza La Libertad Avanza suffered a heavy electoral defeat at the hands of the center-left Fuerza Patria. \u201cMarkets panicked,\u201d The Economist<\/em><\/a> reported, \u201cworried that this signaled the end of popular support for his reforms, and the potential return of spendthrift Peronists. A sharp peso sell-off began, while investors ditched Argentine bonds.\u201d\u00a0<\/p>\n

While Argentina is not alone in feeling the fiscal pain of rising bond yields, few countries nowadays worry very much about their exchange rates. But Argentina is different.\u00a0\u00a0\u00a0<\/p>\n

The Necessity and Peril of Foreign Currency Borrowing\u00a0\u00a0<\/h2>\n

The ultimate cause of Argentina\u2019s crisis is its long history of fiscal and monetary mismanagement<\/a>. It has defaulted on its international sovereign debt nine times, three of those in the past two decades, and suffered repeated bouts of high inflation. As a result, nobody will lend pesos to its government at a remotely affordable interest rate because they either might not get repaid at all (a hard default) or be repaid in currency which is worth much less than when they loaned it (a soft default).\u00a0\u00a0\u00a0<\/p>\n

So, to borrow the pesos it needs to finance its operations, the Argentine government first borrows dollars which it then exchanges for those pesos. But a government which borrows dollars must be able to repay dollars. So how does a government which borrows in a currency it doesn\u2019t issue \u2014 which isn\u2019t a \u201cmonetary sovereign\u201d \u2014 get that currency? It has two sources.\u00a0<\/p>\n

Taxation is the first. The Argentine government could impose taxes on its population payable in dollars, but that merely transfers the problem of getting those dollars in the first place from the government to the taxpayers. To do so, those taxpayers would need to sell more to the United States (or anyone else who is willing to transact with them in dollars) than they buy from it. In short, Argentina would have to run a current-account surplus, something it has done only rarely in recent years<\/a>.\u00a0\u00a0\u00a0<\/p>\n

Borrowing is the second. Here, however, the Argentine government is effectively buying dollars with pesos, and this is why the exchange rate \u2014 the peso price of dollars \u2014 matters. In April, 1,000 pesos bought you 93 cents; on September 21, it bought you just 68 cents. Milei\u2019s government needed more pesos to buy the same amount of dollars, and this, as The Economist<\/em> noted, raised the familiar specter of money printing and inflation, with the consequent flight from pesos and peso denominated debt, like Argentine government bonds, and the resulting fall in the currency and rise in bond yields.\u00a0\u00a0<\/p>\n

The Folly of Fixed Exchange Rates\u00a0\u00a0<\/h2>\n

To protect themselves from such a situation, the Argentine government has tried to fix the exchange rate, but there are limits to this.\u00a0\u00a0\u00a0<\/p>\n

If the peso rises against the dollar, the Argentine central bank, as the issuer of pesos, can print them in unlimited quantity, using them to buy dollars, pushing the relative price of pesos down<\/em> and the relative price of dollars up<\/em>.\u00a0\u00a0<\/p>\n

It is a very different situation when the peso is falling against the dollar. Then, the Argentine central bank must push the price of the dollar down<\/em> relative to pesos by selling dollars for pesos, pushing the relative price of those pesos up<\/em>. But the Argentine central bank only has access to a certain number of dollars so there are limits to how far it can pursue this policy. This is the great asymmetry at the heart of currency pegs like Argentina\u2019s; as the British discovered in 1992<\/a>, it is easy to weaken a relatively strong currency, but not to strengthen a relatively weak one.\u00a0\u00a0\u00a0<\/p>\n

In the run-up to the election, Argentina blew through its dollar reserves attempting to defend the peso\u2019s peg. When it ran out of ammo, President Trump stepped in. However helpful, depending on the president is not a macroeconomic strategy for the long term.\u00a0\u00a0<\/p>\n

The Prospects for Argentina\u00a0\u00a0\u00a0\u00a0<\/h2>\n

Milei aims to get Argentina\u2019s borrowing under control so that it is less vulnerable to swings in the exchange rate. The country\u2019s electorate gave him a vote of confidence this Sunday. Unlike voters in other countries, they might have felt a level of economic pain which has led them to acknowledge the need for Milei\u2019s medicine.\u00a0\u00a0\u00a0<\/p>\n

With this mandate, work remains to be done. \u201cThe main problem is that Argentina has a large welfare state given the size and level of development of its economy, and a highly distorted tax and transfer system that funds it,\u201d political economist Jean-Paul Faguet told Newsweek<\/em><\/a> in September. \u201cIt only manages to remain stable during good times; a bad international economy or specific international shocks throw it out of kilter and into crisis.\u201d Sunday\u2019s election was a positive shock, with the peso and bond prices rising and yields falling on the news<\/a>. But as long as Argentina\u2019s structural problems persist, the economy \u2013 and the country \u2013 will remain vulnerable. Its welfare state must, like that in France<\/a>, for example, be brought into proportion with the economy\u2019s ability to support it and that will mean further cuts. With Milei up for reelection in 2027, much work remains for him to do.\u00a0\u00a0\u00a0\u00a0\u00a0<\/p>\n

The post Milei\u2019s Mandate: Argentina Bets on Austerity Again<\/a> was first published by the American Institute for Economic Research (AIER)<\/a>, and is republished here with permission. Please support their efforts.<\/a><\/p>\n","protected":false},"excerpt":{"rendered":"

On Sunday, October 26, Argentine President Javier Milei\u2019s party, La Libertad Avanza, won big in the country\u2019s legislative elections. In the lower house, the Chamber of Deputies, it won 50.4 percent of the available seats on a plurality \u2014 40.7 percent \u2014 of the vote. In the upper house, the Senate, it won thirteen of …<\/p>\n","protected":false},"author":436,"featured_media":2324418,"comment_status":"close","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[59],"tags":[],"class_list":["post-2504088","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-economics"],"_links":{"self":[{"href":"https:\/\/monetizemail.com\/magatoon\/wp-json\/wp\/v2\/posts\/2504088","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/monetizemail.com\/magatoon\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/monetizemail.com\/magatoon\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/monetizemail.com\/magatoon\/wp-json\/wp\/v2\/users\/436"}],"replies":[{"embeddable":true,"href":"https:\/\/monetizemail.com\/magatoon\/wp-json\/wp\/v2\/comments?post=2504088"}],"version-history":[{"count":1,"href":"https:\/\/monetizemail.com\/magatoon\/wp-json\/wp\/v2\/posts\/2504088\/revisions"}],"predecessor-version":[{"id":2504089,"href":"https:\/\/monetizemail.com\/magatoon\/wp-json\/wp\/v2\/posts\/2504088\/revisions\/2504089"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/monetizemail.com\/magatoon\/wp-json\/wp\/v2\/media\/2324418"}],"wp:attachment":[{"href":"https:\/\/monetizemail.com\/magatoon\/wp-json\/wp\/v2\/media?parent=2504088"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/monetizemail.com\/magatoon\/wp-json\/wp\/v2\/categories?post=2504088"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/monetizemail.com\/magatoon\/wp-json\/wp\/v2\/tags?post=2504088"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}