The Economist: Javier Milei faces his most dangerous moment yet

Key topics:Milei faces crucial midterms that could make or break his reforms.Peso struggles threaten growth despite US financial support.A floating peso and broader coalition could save Milei’s agenda..Sign up for your early morning brew of the BizNews Insider to keep you up to speed with the content that matters. The newsletter will land in your inbox at 5:30am weekdays. Register here.Support South Africa’s bastion of independent journalism, offering balanced insights on investments, business, and the political economy, by joining BizNews Premium. Register here.If you prefer WhatsApp for updates, sign up to the BizNews channel here..From The Economist, published under licence. The original article can be found on www.economist.com© 2025 The Economist Newspaper Limited. All rights reserved..The Economist.Two years after his election as Argentina’s president, Javier Milei faces a make-or-break moment. A close-fought midterm election on October 26th could spell disaster for his radical reform programme if his party performs poorly in congressional ballots. Argentina’s currency, the peso, is overvalued and under heavy strain. Despite generous offers of help from America, it threatens to crash out of the band set for it by Mr Milei’s government. The bad news is that blowing any more cash defending the currency is pointless. The good news is that even if the peso is devalued there is a pathway for Mr Milei to continue his admirable effort to tame Argentina’s bloated state and end its decades of decline.That effort has already had considerable success. Monthly inflation has fallen from 13% in 2023 to about 2%. The country’s poverty rate is at its lowest since 2018. Mr Milei has taken an axe to Argentina’s out-of-control public spending and culture of patronage. Yet the Milei mission has always had a flaw. To stop prices from spiralling in a country where few trust the government or the central bank to deliver sound money, Mr Milei relied on keeping the peso strong. The idea was to provide an anchor for inflation and that voters would reward this stability in the midterms..Read more:.The Economist: From hyperinflation to hope - Argentina's Milei bets big on reform.Yet instead of being a transitory tool, the policy of managing the currency has become a trap. Even after he partially floated the peso in April alongside an IMF bailout, he has sought to maintain its level artificially high. Defending the exchange rate has cost Argentina billions of dollars in scarce foreign-currency reserves and has pushed interest rates sky-high, creating a drag on growth. Jobs, rather than inflation, are what now worry voters the most. Allegations of corruption around Mr Milei’s inner circle have further soured the mood.President Donald Trump views Mr Milei as an ideological soul-mate and has offered unprecedented financial support. On October 21st Scott Bessent, America’s Treasury Secretary, said he had signed an “economic stabilisation” agreement with Argentina. Already team Trump has offered Argentina a $20bn swap line, spent up to $750m buying Argentinian pesos and tried to corral Wall Street banks to put together a $20bn support package. Despite this the markets remain unconvinced. The peso has continued to weaken and Argentina’s bonds trade at just under 60 cents on the dollar.From here two nightmare scenarios are possible. One is that Mr Milei’s government performs badly in the election, and he is unable to veto legislation in the lower house even as Argentina is forced into a chaotic devaluation. That would mean financial mayhem and political paralysis. The other bleak scenario is that regardless of the election result the government clings to the strong peso policy, blowing more scarce dollars to prop up the peso, and keeping interest rates exorbitantly high, damaging growth. Either scenario would probably spell the end of Mr Milei’s bold reform experiment.Yet there is a third way. If Mr Milei’s party wins a third of the seats in the lower house it will be able to defend his presidential veto. Opinion polls suggest this is possible. Mr Milei should then signal that a new chapter of his project has begun. He should immediately remove the currency band and float the peso—a hefty drop is possible. To avoid chaos he should announce a new framework for setting domestic interest rates to control inflation, providing the economy with an anchor. Argentina has tried something like this many times before, but alongside Mr Milei’s revolutionary fiscal discipline it could be enough to ride out a temporary inflation spike. American support could help the central bank to reduce volatility as the peso finds a new level, at far less risk of loss for American taxpayers than the interventions being made by the Treasury now. A floating peso would also boost competitiveness and growth..Read more:. Argentina and the IMF: Cautious steps toward a new deal – Juan Pablo Spinetto.At the same time as this financial reset, Mr Milei must announce a political reset on election night, making clear he will seek to build a broader coalition to back reforms. Laws passed by a majority in Congress have far more weight than the presidential decrees that he has largely relied on so far. For Argentina the script is all too familiar: an exchange-rate crisis suffered by a government that is unable to marshal adequate public support. For decades this story has always hurtled towards disaster. Yet there is still a chance for Mr Milei’s project to have a different ending.

The Economist: Javier Milei faces his most dangerous moment yet

Key topics:

From The Economist, published under licence. The original article can be found on www.economist.com

© 2025 The Economist Newspaper Limited. All rights reserved.

The Economist

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