If madness is repeating the same action and expecting a different result, then a central pillar of Argentina’s economic policy borders on the insane. Libertarian President Javier Milei is attempting to defend a pegged exchange rate, which has controlled inflation, at the cost of keeping the peso artificially strong. His government argues that a devaluation has never worked before and Argentina should compete by cutting taxes and bureaucracy.
Clinging to an overvalued currency may slow price rises but it also stunts economic growth. In Argentina’s case, it has depleted valuable reserves and fuelled capital flight. Ultimately it is unsustainable. Milei’s latest partner in this risky venture is US Treasury secretary Scott Bessent. Arguing that the South American nation is a “systemically important ally” — news to many — the US intervened in the foreign exchange market last week to buy pesos and agreed a $20bn emergency credit line for Buenos Aires.
Bessent has said that Argentina’s currency is undervalued and the government-fixed bands in which it floats are “fit for purpose”. Investors who have dumped Argentine assets might disagree with both propositions. The US Treasury secretary should understand the folly of defending exchange rate bands against the market better than most. At the age of 30, his work for George Soros helped the financier “break” the Bank of England and force the pound’s exit from the European Exchange Rate Mechanism in 1992.