The Peso Trap: Learning From Argentina's Endless Crisis Loop
Through September and October of 2025, global financial markets’ confidence in Argentina’s economic policies died. After Milei’s party lost midterm elections in the Buenos Aires Province, major international investors triggered a run on the Argentinian Peso, moved by the belief that the government was incapable of maintaining the peso exchange rate within the band it established in April. It took an unprecedented show of support from the U.S. Treasury to calm down the situation.
Maintaining control of the exchange rate requires confidence in the government. In Argentina’s case, the plan was for Argentina’s International Monetary Program to restore the government’s credibility and bring back the necessary foreign funding, to both stabilize the peso and repay the billions of accumulated debts from its crises-riddled, economically dysfunctional history.
Various attempts to stabilize the country’s hyperinflation have failed to cure Argentina’s chronic economic problems.
In the 90s, President Menem overvalued the peso while pegging it to the U.S. dollar. The failure of Argentina’s central Bank to maintain the peg during the 2001 recession caused the largest sovereign default in history, $95 billion USD. The country never found its path after that. A series of inflation spikes, chronic fiscal deficits, and painful debt restructuring transformed a once-rich and promising Latin American country into a place where a third of the population lives in poverty. What can we learn from these struggles?
Lesson One: There are no substitutes for structural reforms
Over the past 30 years, Argentina has repeatedly postponed deep structural reforms—such as comprehensive tax restructuring, labor market flexibility, and reducing state intervention.
Successive governments choose heterodox measures– like currency and capital controls, subsidies, and protectionism– that only temporarily stabilize the nation.
For example, Argentina experienced meaningful growth during the Kirchner governments, driven by their interventionist policies and capital controls. Nonetheless, growth eventually declined by escalating the country’s public debt and failing to address those same structural issues.
Neoliberalism, by their successor, Mauricio Macri, brought optimism with its promises to cut the budget deficit, control inflation, and bring economic deregulation. But the implementation of these much-needed reforms failed, resulting in a $57 billion USD International Monetary Fund (IMF) bailout.
Throughout Argentina’s economic history, we notice similar patterns:
Persistent fiscal deficits, evident in the last 57 of 65 years, largely financed by monetary expansion that fueled chronic inflation.
Recurring debt crises curse Argentina. The country has defaulted on sovereign debt nine times, three of which occurred since 2001, reflecting unsustainable debt dynamics and a lack of investor confidence.
Policy oscillation, or in other words, a failure to maintain a consistent course of action, prevents Argentina from progressing. The country swung between neoliberal reforms during Menem and interventionist populism during Kirchner, creating instability and discouraging long-term investment.
Without the much-needed structural reforms, no amount of heterodox policy can create a sustainable path for prosperity and prevent its economy from falling into future crises.
Lesson Two: Even heterodox inflation-fighting measures will be accepted in sufficiently dire situations.
In 2023, Argentina’s inflation had reached more than 130%, disorganizing the economy, eroding the purchasing power of salaries, creating social instability, sparking protests and strikes, and, of course, discouraging investments and economic growth. Milei’s government sought to respond with harsh “austerity measures.” Unsurprisingly, his “shock therapy agenda” has been criticized by large segments of the population.
The government slashed public spending by roughly 30%, cut subsidies, froze public works, and reduced ministries by half.
The cuts hit pensions, healthcare, education, and public sector jobs hard. Poverty and unemployment spiked during the first months of his term, and real wages fell sharply, leaving many Argentines unable to afford basic goods. During the same time, private sector wages recovered, indicating that the economy started to rebalance.
Nonetheless, these measures helped deliver Argentina’s first fiscal surplus in over a decade and brought monthly inflation down from 25% in December 2023 to around 1.6–2.7% by mid-2025.
Despite the social costs and unrest from Milei’s methods, his coalition won the October 2025 midterm elections with over 40% of the vote, as voters prioritized inflation control and stability.
Lesson Three: Exchange rate manipulation is unsustainable.
The third lesson from Argentina’s recent crises is that no government, even with external support, can indefinitely manipulate exchange rates.
After taking office, Milei began his stabilization plan by devaluing the peso by about 50% to align the official rate with market realities. Subsequently, a “crawling peg” system– steadying depreciation to roughly 2% per month— was introduced.
The peg proved successful in helping stabilize inflation expectations. However, in 2025, the strategy began revealing its limits: the goal of 2% controlled devaluation was lower than the inflation rate, leading to an effective appreciation of the peso that undermined Argentina’s industrial competitiveness.
Simultaneously, Milei removed most of the restrictive currency and capital controls that had existed since 2011, restoring confidence and attracting IMF support. But this also meant that the country was operating with meaningful capital mobility.
In April, Milei substituted the peg for a foreign exchange band. While the band provided some room for the peso to float and absorb market pressures, the flexibility is still limited. Furthermore, the government is keeping its policy of low interest rates, which does not support a strong peso.
However, we know free capital mobility, fixed exchange rates, and independent monetary policy cannot co-exist. Argentina is attempting to hold all three. Soon, markets will notice the government’s inability to sustain its currency’s over appreciation and bet against it.
Currently, Argentina’s government is ahead of the mounting pressure on the peso. Still, this is due to unprecedented support from the United States—the U.S. Treasury announced a combined $40 billion currency swap to increase Argentina’s fighting power. It’s simply a matter of time until pressure on the central bank is too great, and the government is forced to let the peso float.
Conclusion:
Argentina’s turmoil reveals the simple pattern: short-term fixes, whether heterodox controls, fiscal absurdity, or exchange-rate manipulation, cannot substitute long-delayed structural reforms. Until those foundations are rebuilt, periods of optimism will continue to be followed by instability, and simply delay, instead of preventing the next crisis.
Sources:
https://www.bbc.com/news/articles/c4g3mdvle78o
https://www.bbc.com/news/articles/c4gw8qpyvqdo
https://www.realinstitutoelcano.org/en/analyses/argentina-under-currency-competition-the-future-of-exchange-rate-policy-and-dollarisation/
https://www.cfr.org/backgrounder/argentinas-struggle-stability
https://www.brookings.edu/articles/lessons-learned-from-the-argentine-economy-under-macri/
https://data.worldbank.org/indicator/FP.CPI.TOTL.ZG?locations=AR
https://www.weforum.org/stories/2025/05/argentina-radical-reform-unlock-economic-recovery/
https://www.europarl.europa.eu/RegData/etudes/BRIE/2023/753938/EPRS_BRI%282023%29753938_EN.pdf