$20 billion “bailout” for Argentina: Is Bessent saving Milei, or his old hedge fund friends?

A $20 billion aid package to Argentina is putting U.S. Treasury Secretary Besant at the center of a major controversy. As previously mentioned by Wallstreetcn, on October 9, U.S. Treasury Secretary Besant disclosed on social media that the U.S. Treasury had directly purchased Argentine pesos on the spot market, and a $20 billion currency swap framework between the U.S. and the Argentine central bank had been finalized. Besant stated that the move was taken to “act quickly” in support of Argentine President Milei’s ongoing economic reform agenda. However, the motivation behind this huge injection of funds is under strict scrutiny. Critics believe that the real beneficiaries of this move may not be Argentina’s economy itself, but rather the hedge funds that made heavy bets on Argentine assets after Milei took office and are now facing losses as his reform prospects dim. According to the New York Times, before Besant announced the bailout for Argentina, large hedge funds including BlackRock, Fidelity, and Pimco, as well as investors such as Stanley Druckenmiller and Robert Citrone, had all built up significant positions in Argentine assets. Both Citrone and Druckenmiller are said to have close ties with Besant. Paul Krugman’s Sharp Reproach: A “Scam” to Bail Out Hedge Funds Regarding the U.S.’s targeted $20 billion lifeline, renowned American economist Paul Krugman issued sharp criticism. In his latest blog post, Krugman commented that the Trump administration was explicitly opposed to any humanitarian foreign aid, indifferent to the possibility of millions of children in poor countries dying, and yet is willing to provide a $20 billion lifeline to a right-wing government in Argentina which “has no strategic value to the U.S. and has decades of corruption”. Krugman emphasized that the core of Milei’s strategy is “exchange rate-based stabilization”—that is, attempting to curb inflation by supporting the peso. Yet, the American loan is almost certain not to rescue Milei’s “failing” economic strategy. Krugman recalled his personal experience during Argentina’s 2001 financial crisis when the government's "convertibility plan" was strikingly similar to Milei’s current plan in both concept and outcome: an initial burst of optimism, ultimately ending in disaster. He believes that despite Argentina having one of the world’s worst sovereign debt default records, hedge funds in 2024 chose to believe “this time is different” and made big bets on Argentine stocks and bonds after Milei’s election victory. The article also quoted Maurice Obstfeld, former chief economist of the International Monetary Fund, as saying: “Latin America is a museum of failed exchange-rate stabilization attempts.” According to analysis cited by Krugman from Matthew Klein, the aid mechanism is more akin to a “scam”: when external institutions like the U.S. Treasury lend to the Argentine government, the funds quickly flow out again. Domestic and foreign investors use the artificially supported peso as an opportunity to withdraw capital from the country—in other words, capital flight. In other words, U.S. taxpayer money props up the peso’s exchange rate solely to allow hedge funds to sell their Argentine assets at artificially high prices, after which the peso will inevitably fall again. Besant and his Hedge Fund “Old Friends” According to the New York Times, Besant himself has extensive connections to the investors who stand to benefit from the Argentina aid. These include his former colleague, hedge fund billionaire Rob Citrone, and his former mentor, Stanley Druckenmiller. Both had worked with Besant at Soros Fund Management. In 2013, while Citrone worked under Soros alongside Besant, he convinced them to make what became a famous bet against the yen, and most of the bonus Besant earned was due to the risks Citrone took. According to an interview on Goldman Sachs’ website, Citrone mentioned in a podcast: “At the time I convinced Scott Besant to go big. You know, Scott jokes that during that period, 75% of his bonus at Soros was from me.” The report pointed out that previously, Discovery had made Latin America its largest global bet, and Argentina was the largest investment in the region. According to two people familiar with the matter, before the Treasury announced its aid plan last month, Citrone had kept close contact with Besant, arguing that the political future of Milei would end if the Argentine currency collapsed. Citrone also warned Besant that if Milei lost the election, Argentina would look to other countries for more economic aid, and the United States might lose one of its most reliable allies in Latin America. Furthermore, just days before Besant visited Argentina and announced the IMF aid agreement, Citrone flew to Buenos Aires to meet with Milei. Stanley Druckenmiller’s family office is the second largest investor in Argentina’s main ETF. However, Druckenmiller himself said he did not communicate with Besant about Argentina before or after the aid announcement. Strategic Interest or Favoring the Rich? In response to external skepticism, Besant insists the aid plan is not a bailout for investors. In media interviews, Besant stated, “We are safeguarding America’s strategic interests in the Western Hemisphere.” He emphasized, “The claim that we are helping wealthy Americans to profit is completely wrong.” He also said in an official statement, “A strong and stable Argentina helps promote a prosperous Western Hemisphere, which is in America’s strategic interest.” However, this explanation has not quelled the political storm in Washington. Especially given the context of a potential U.S. federal government shutdown and domestic farmers still waiting for economic relief, the move to aid Argentina and wealthy investors seems particularly glaring. Eight Democratic senators, including Elizabeth Warren of Massachusetts, have introduced legislation to try to prevent the Treasury Department from using its Exchange Stabilization Fund to support Argentina. Warren said: “Trump promised ‘America First,’ but is putting himself and his billionaire friends first and letting the American people pay the price.” Monica de Bolle, a senior fellow at the Peterson Institute for International Economics, also commented: “They can call it whatever they want, but this is a bailout. A country is in crisis, out of dollars, and the U.S. is supplying dollars. By definition, that's a bailout.” Risk Warning and Disclaimer The market carries risks; investment should be cautious. This article does not constitute personal investment advice, nor does it take into account the specific investment objectives, financial situation, or needs of any particular user. Users should consider whether any opinions, views or conclusions in this article suit their individual circumstances. Investment accordingly is at your own risk.