Brad Setser is a senior fellow at the Council on Foreign Relations and a former US Treasury official. Stephen Paduano is a postdoctoral fellow at the University of Oxford, an economist at the Finance for Development Lab, and a former US Treasury official.
As the saying goes, there are no atheists in foxholes. And there aren’t many libertarians in a financial crisis.
Javier Milei has taken a chainsaw to his own government’s spending, but he has shown no objections to tapping the public funds of others. The Argentine president has now secured two big financial support packages in 2025: a $20bn loan from the IMF (with the generous frontloading of $14bn) and a $20bn swap line from the US Exchange Stabilization Fund. To top it off, the US has put pressure on the IMF, World Bank, and Inter-American Development Bank to speed up $12bn in disbursements in the next few months.
Self reliance this is not. It may also not be enough to not solve Argentina’s problems.
When Milei came to power, he framed Argentina’s problems primarily as rampant fiscal deficits and inflation. Yet Argentina has also long struggled to generate the foreign exchange needed to rebuild reserves and repay external debts. Milei’s fiscal adjustment hasn’t improved Argentina’s external position. Instead, Milei’s affection for a strong peso — intended to be an inflation anchor — has led to a deterioration in Argentina’s trade accounts and an erosion of Argentina’s reserves. That is how he ended up selling down Argentina’s limited remaining reserves and calling the US over the weekend for a new lifeline.
The US rescue loan is now in the works. But unless it comes with a condition that Argentina allow for exchange rate flexibility, it is likely that Milei will return to the foxhole, praying again for other people’s money.
Can the ESF make Argentina great again?
Before announcing the $20bn swap line negotiations and that the US Treasury “stands ready to purchase Argentina’s USD bonds”, Secretary Bessent said that US support would be unconditional. That is, for lack of a kinder word, unique.
Past Treasury lifelines have come with extensive conditionality, intrusive scrutiny, and pledged resources for repayment. The last time the ESF was used for a foreign partner in a significant way — to provide a $20bn credit line for Mexico — the terms were demanding. The US got Mexico to agree on concrete policy targets, to provide details about the use of US financing, and to grant Treasury a veto over any disbursements if Mexico was not meeting certain conditions. In addition, Mexico would route its oil export revenues to an account of the Bank of Mexico at the New York Fed to assure future repayment.
Bessent asked for none of this. The ESF has legal authority to support Argentina more or less however the Secretary chooses. It is authorised to “deal in gold, foreign exchange, and other instruments of credit and securities”, and ESF-funded swap lines of the sort Bessent has mentioned have long-standing precedent. But there are still significant complications to using the ESF to provide Argentina’s central bank with a $20bn swap (in effect a dollar credit line) and to using the ESF to make additional purchases of Argentine bonds in the primary and the secondary market.
Another idea — using the ESF to directly buy pesos — no longer seems under discussion for the obvious reasons that it exposes the ESF to losses if Argentina’s defence of the current band falters after the October 28 legislative elections.
The primary difficulty is that the ESF doesn’t have that much cash. The functional dollar liquidity of the ESF is tiny: $21.9bn in liquid dollar securities. The fund has another $3.5bn in yen and $2.2bn in Euros that could be deployed, but that is it. The ESF’s pool of foreign exchange is less than Argentina’s $32bn in gross foreign-exchange reserves. A $20bn swap facility would consume 95 per cent of the US’s dollar reserves and 72 per cent of the US’s total foreign-currency reserves.
The ESF does hold $173bn worth of Special Drawing Rights. Yet Argentina doesn’t want or need SDRs — it wants and needs usable foreign-exchange reserves. As demands on Argentina’s reserves tend to peak after the harvest has been sold (Argentina’s harvest ships out during the northern hemisphere’s summer), around the time of elections (and there is a big one coming up in October) and at the turn of the year (as Argentina now pays its external bonds in January and July), it is likely Argentina will actually need to make use of the swap line — not just use the swap to bolster reported reserves and maintain confidence. For that, it needs real foreign currency.
The Treasury does have the ability to get additional foreign currency by swapping its SDRs for dollars with the Federal Reserve. Though this gets complicated, as the Federal Reserve technically cannot hold SDRs outright; The Treasury is the authorised holder for the United States. So the Treasury would issue SDR Certificates (SDRCs) to the Federal Reserve, which would buy them with dollars. The dollars become an asset of the ESF, and the SDRCs become a liability of the ESF. It’s clever financial alchemy, but not a route an SDR-phobic administration would want to go down in any but the most exceptional circumstances.
The second difficulty for the ESF is that it is not set up to be a long-term lender. Through the end of next year it is facing $14.6bn in principal and interest on its external debt. Its capacity to generate sufficient foreign exchange to cover those payments, repay the ESF, and rebuild Argentina’s already depleted reserves is modest at best
The ESF can extend credit for six months in a 12 month window without procedural and political hurdles. To lend beyond six months, President Trump will have to provide a report to Congress on the extraordinary circumstances of the situation. He could very well do this, although he risks setting off all the accompanying political fireworks. Congress may not be thrilled to discover that all of the US’s liquid foreign exchange reserves have been committed without condition to Argentina.
There is a third issue, of sorts: Argentina’s $18bn swap line with the People’s Bank of China. Of this, $5bn has been used and the other $13bn sits on the PBoC’s balance sheet providing expensive window dressing to mask the limited scale of Argentina’s own reserves. The PBoC has committed not to ask for the $5bn back during the course of the existing IMF programme. Keeping that line outstanding is actually helpful to the financial and political interests of the US Treasury.
Should the ESF credit line fail and the Treasury be left with long-term exposure to Argentina, the Treasury swap and the Chinese swap would provide the IMF’s two most important members a common interest in protecting swap lines to the central bank from any haircut in a future external debt restructuring. We doubt Argentina really wants to use $5bn of the $20bn to let the PBoC exit either, as that reduces the amount of foreign exchange currently available for Argentina to use.
So what can be done?
Unconditional bailouts incentivise bad policy. As the $20bn swap facility moves forward, Treasury should press Argentina — loudly or, more likely, privately — to get on a sustainable path. The path forward is financially straightforward though politically difficult: Argentina needs to allow for greater exchange rate flexibility to help it rebuild reserves and work towards a current account surplus.
This is precisely what Argentina was meant to do when the IMF took the extraordinary step of frontloading its financing and giving Milei $14bn of a $20bn package earlier this year. Instead, Milei spent over $10bn of Argentina’s reserves making external debt payments and supporting the overvaluation of the peso.
That has left Argentina’s foreign-exchange reserves precariously low. Argentina’s reported foreign exchange reserves of $32bn (after netting out $6-7bn in gold) are also misleading. Of that figure, $13bn are Chinese yuan that can only be used with the PBoC’s approval and $12bn are the required reserves of Argentina’s banks. Argentina’s central bank holds only $7bn that it could easily use.
Despite Milei’s tough talk, he has taken Argentina dangerously off track of its IMF programme. The August IMF disbursement of $2bn was only possible because the board agreed to his “waiver of non-observance” on the program’s reserve accumulation criterion.
Treasury cannot afford for Argentina to miss its policy targets and blow through this swap line as easily — particularly with a known $4.5bn draw on the reserves to cover external debt payments in January.
Moving forward with the swap line in the absence of clear reserve accumulation targets and a clear repayment source would be a policy error. To do it right will almost certainly require abandoning the peso’s current peg, and a reworked IMF programme built around a much weaker peso. That is how Treasury did it right with the Mexico bailout — which was repaid early, with $580mn in interest. Treasury funds were made available after a significant peso depreciation had more or less assured the needed adjustment in Mexico’s trade accounts.
The ESF lifeline will make a difference, but with insufficient policy conditions to generate the hard currency that Argentina needs, the risk of blowing through the new infusion of funds is real. Implementing those policy conditions is the only viable future for Milei’s government. The IMF may already be tapped out. The ESF soon will be too.
Without real external adjustment it will soon become clear, to paraphrase one of the Argentine president’s idols, that the problem with Mileism is you eventually run out of other people’s money.
