The "Bessent effect" is a game changer, but not for the reasons some people think

ARGENTINA - In Brief 21 Oct 2025 by Joaquin Cottani

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Economy Minister Luis Caputo has described recent U.S. financial assistance as a “game changer” for Argentina. That characterization is accurate — though not for the reasons many government supporters claim. The U.S. aid package does not provide a shortcut to peso stabilization or pave the way for dollarization. Rather, it gives the Milei administration a crucial window to correct policy imbalances — particularly in exchange rate management, monetary policy, and the coordination of long-delayed structural reforms. Before U.S. involvement, a fully floating exchange rate would have required a sharp devaluation of the peso, likely triggering another inflationary surge and deep recession. Even if fiscal balance were preserved — which is doubtful given the potential revenue loss from recession and higher dollar-denominated interest costs — monetary expansion would have been inevitable. The Treasury and Central Bank (BCRA) would have needed to issue pesos to buy the dollars required for external debt service, amplifying pressure on the currency, particularly if the remaining exchange controls (on firms) were lifted. The peso has been “floating” since April, though under strict constraints: corporate access to FX remains limited, and the government is effectively absent from the free FX market (MLC). Under these artificial conditions, the observed exchange rate does not reflect a true market equilibrium. The so-called “Bessent effect” -- named after U.S. Treasury Secretary Scott Bessent -- changes Argentina’s short-term financial outlook in a fundamental way. Contrary to some interpretations, the U.S. is not offering $40 billion in direct financing. Rather, the package involv...