Milei’s “Great Defeat”: Forcibly Propping Up a Currency That Should Have Devalued

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According to media reports on Friday, Argentine President Milei's free market reforms have encountered major contradictions regarding the peso exchange rate issue. This radical leader, who once compared his country’s currency to "excrement" and promised to abolish the peso, is now using scarce dollar reserves to support the value of the peso, deviating from the core principles of his free market reforms.

The Milei administration is currently seeking billions of dollars in aid from the Trump administration to prevent the peso from falling. The United States has recently purchased pesos and reached a $20 billion currency swap agreement with Argentina’s central bank. U.S. Treasury Secretary Benson also stated on Wednesday that a $20 billion private financing mechanism will be set up to support Argentina’s debt.

This policy dilemma is eroding Milei's reform results. Although he has successfully cut spending, streamlined regulation, and curbed inflation, the practice of maintaining a strong peso suppresses investment, limits the ability of the export-oriented agricultural sector to generate foreign exchange, and consumes foreign reserves needed to cope with economic shocks and repay external debt. Economists generally believe the peso is overvalued by 20% to 35%.

Milei’s approval rating has dropped from nearly 50% last year to 35%. Before the October 26th midterm elections, unemployment has surpassed inflation as voters’ primary concern, making any policy that could devalue the peso and fuel inflation politically risky.

Free Market Ideals Encounter Real-World Dilemma

Milei now faces a dilemma: continuing to use dollar reserves to support the peso can control inflation, but in the long run will suppress investment and exports. The other option is to let the market decide the peso’s value—this aligns with his free-market claims and can increase foreign reserves, but will drive up inflation and erode middle-class wealth.

Martín Rapetti, an economist at the University of Buenos Aires, said, “From an economic point of view, the right approach is to let the peso float freely, but the Milei government has fallen in love with a strong peso, which is common among Argentine politicians.”

The Milei administration defends its policy, insisting the peso’s value is reasonable and that it will continue to defend the currency. Last month, Milei said it was clear the solution was not to return to the disastrous path of repeated depreciation.

A Mess Left by Predecessors

Milei inherited a chaotic situation from his left-wing predecessor. The previous government created over a dozen different exchange rates for the peso against the dollar, a complex system that allowed them to maintain a strong peso and print money to cover rising public expenses, but also depleted central bank reserves.

On his first day in office, Milei devalued the peso by 50%, causing monthly inflation to soar above 25%. He then allowed the peso to depreciate against the dollar at a monthly rate of 2%, rather than letting it float freely, to avoid hyperinflation. In April of this year, after receiving $20 billion in aid from the IMF, Milei changed this system to allow the peso to trade freely within a set range.

Even though economists believe the peso is overvalued, it remains the worst performer out of the 52 currencies tracked by Dow Jones this year, with a depreciation of 26%. Currently, $1 is equal to about 1,405 pesos.

Economic Stagnation Sparks Political Crisis

The strong peso combined with sharp spending cuts has helped Milei reduce the inflation rate from nearly 300% last year to 32% in September. But the economy has not rebounded, and unemployment has overtaken inflation as the public's main concern. According to pollster Zuban Córdoba, the Milei government's approval rating has dropped to 35%.

Former IMF Executive Director Héctor Torres said Milei’s peso policy has created an "expensive illusion" in the Argentine economy. Maintaining a strong peso is consuming scarce dollar reserves and weakening the country’s ability to access private capital markets. Torres warns that Argentina may be "perilously close to a new round of debt defaults."

Conditions Attached to U.S. Aid

When Trump met with Milei on Tuesday, he said that the bailout depended on Milei’s performance in the midterm elections, causing Argentine stocks to fall. Benson clarified on Wednesday that as long as Argentina continues to implement good economic policies, U.S. support will continue.

Former Biden administration Treasury official Brent Neiman said the United States is providing strong support hoping to stem investor pressure to sell the peso. "Is that enough? The psychological reaction of the market to these statements is important," Neiman said. If Benson’s comments convince the market that the U.S. will do whatever it takes to help, then not much money may be needed. But given Argentina’s history, that’s a big "if."

Brookings Institution economist Robin Brooks pointed out that after decades of depreciation and hyperinflation, Argentines habitually sell pesos to buy dollars, with tens of billions of dollars hidden overseas or under mattresses. He said, "The whole situation has become unsustainable and is very bad for the economy because people are not putting money into business and job creation but moving capital to protect their wealth."

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