The basic issue, as I saw, it was that Milei and his team wanted a stronger peso (to help contain inflation) than Argentina's economy could sustain -- hence the pressure on Argentina's fx reserves over the course of this year, and the widening current account deficit 2/

There will be temptation among Argentina's policy makers to now think that the market will reward them for their electoral success, and market inflows (+ the expected continued support of the US) will support an organically strong peso 3/

I disagree; a country with no non-borrowed reserves, significant external debts and a decent amount of fx debt coming due (relative to gross reserves) cannot afford sustained current account deficits -- the priority needs to be on rebuilding reserves 4/

Argentina's external balance sheet is still week. It owes $50b plus to the IMF, $`18b to China ($5b used) and needs to add to its own reserves even as it repays its external creditors 5/

That is a lot of fx that needs to be generated/ borrowed -- even setting aside the external debt amortizations ... (week = weak above) 6/

And the underlying public debt dynamics actually aren't yet stable either -- a 1.5 pp of GDP primary surplus is impressive, but it only has generated a balanced budget b/c interest expenses are artificially low 7/

positive real interest rates on peso debt will push up domestic interest expenses, and the 2020 restructuring didn't lock in low external interest rates for ever -- interest spending won't remain lower than the US forever ... 8/

So I agree with the Economist -- this is the time for Argentina to have a realistic exchange rate, one that limits import expenditure and allows for reserves to be rebuilt ... the BCRA should be buying fx as the peso rallies tomorrow 9/ https://www.economist.com/lead...

The risk is, of course, that Argentina's policy makers will think that the combination of Milei's political victory and (unconditional?) US support will allow them to continue with a strong peso policy, even though Argentina lacks the external balance sheet to support it 10/10

@Brad_Setser Brad, if the peso gains 5%-10% tomorrow as it looks likely, what other proof you need that the recent turmoil was due to political uncertainty?

@JPSpinetto A bounce tomorrow is totally to be expected -- if that bounced is sustained even as the BCRA starts buying fx and the US Treasury starts selling back the pesos it has bought i would be more impressed ... 1/2

@Brad_Setser Smart bet from Bessent for marginal $400M ARS purchase, which might even make a profit.

@Tanc23466065 buoght way more than that, and let's see if he actually sells to capture the profit on the rally tomorrow (i would get no)

@Brad_Setser Is it wanting a strong peso, or just a controlled decline of its value to normal market levels? A sharp drop would be far more detrimental than a slow decline

@Brad_Setser That hasn't passed at all, we are seeing confirmation that the recent turmoil was the result of reasonable fear that Peronists were making a comeback.

@Brad_Setser You deserve a lot of kudos for clearly articulating your view. The current debate that the pre-election fall in the Peso was just due to a risk premium and not due to overvaluation is a red herring. Devaluation would never have become an issue if the Peso weren't overvalued...

@Brad_Setser Milei is well aware of the problem. Ideally, he would prefer to default and dollarise and stick it to those nutcases that lent to Argentina, but in the real world, that would kick him out of office immediately (as it would force even more austerity on Argentina's legion of net

@Brad_Setser @threadreaderapp unroll

@Brad_Setser Who the heck know this isn't a huge loss?

@Brad_Setser Well now that trump oh sorry now that trump has stolen $40 billion from Americans they were able to rig the election for a win. Is this what you voted for?

@Brad_Setser Mr. Setser, the outcome of the election is political: the alternative is a political movement that rejects economic rationality and has a bias to the extreme left in political and cultural issues. Your economic analysis is correct, but voters don’t care. We have other priorities

@Brad_Setser @robin_j_brooks Well keep thinking that he won, it will strengthen democrazy!!!!!!!!!

@Brad_Setser Anyone who thought Argentina was on the right path with Milei’s policies should not be viewed as a serious person.

@Brad_Setser We literally bought him that election.

@Brad_Setser Full CIA elections effort helped.

@Brad_Setser we will see

@Brad_Setser There is nothing more predictable than a bankrupt Argentina. This country has been a fruitcase for more than 2 generations. If you want to lose money, either invest in an airline or in Argentina.