$20 billion "blood transfusion" to Argentina, is Bessent saving Milei, or saving his hedge fund old friend?

A $20 billion aid package directed towards Argentina is placing U.S. Treasury Secretary Janet Yellen at the center of a significant controversy.

As previously mentioned by Wall Street Journal, on October 9, U.S. Treasury Secretary Yellen disclosed via social media that the U.S. Treasury had directly purchased Argentine pesos in the spot market, and a $20 billion currency swap framework between the U.S. and Argentine central banks has been finalized. Yellen stated that this move is to "act swiftly" in support of the economic reform agenda being pursued by Argentine President Javier Milei.

However, the motives behind this massive "blood transfusion" are under severe scrutiny. Critics argue that the real beneficiaries of this move may not be the Argentine economy itself, but rather the hedge funds that heavily bet on Argentine assets after Milei took office, which are now facing losses due to the bleak outlook of his reforms.

According to The New York Times, before Yellen announced the aid to Argentina, large hedge funds including BlackRock, Fidelity, and Pimco, as well as investors like Stanley Druckenmiller and Robert Citrone, had already heavily invested in Argentine assets, with both Citrone and Druckenmiller having "close ties" to Yellen.

Krugman Criticizes: A "Scam" to Bail Out Hedge Funds

In response to the U.S. $20 billion targeted "blood transfusion," renowned American economist Paul Krugman has offered sharp criticism.

In his latest personal blog, Krugman commented that the Trump administration explicitly opposed any humanitarian foreign aid, remaining indifferent to the potential deaths of millions of impoverished children, yet is willing to provide a $20 billion lifeline to Argentina, a right-wing government "with no strategic value to the U.S. and a decades-long history of corruption."

Krugman emphasized that the core of Milei's strategy is "based on exchange rate stabilization," attempting to curb inflation by supporting the peso. He believes that this U.S. loan is unlikely to save Milei's "failing" economic strategy.

Krugman recalled his personal experience during the 2001 Argentine financial crisis, noting that the "convertibility plan" introduced by the Argentine government was conceptually and result-wise strikingly similar to Milei's current plan: initially brief optimism leading to disaster. He argued that despite Argentina having one of the worst sovereign debt default records globally, hedge funds are choosing to believe "this time is different" in 2024, heavily betting on Argentine stocks and bonds after Milei won the election.

The article also cited former International Monetary Fund chief economist Maurice Obstfeld's view that "Latin America is a museum of failed exchange rate stabilization efforts."

According to Krugman's reference to Matthew Klein's analysis, the operational mechanism of this aid resembles a "scam": when external institutions like the U.S. Treasury lend to the Argentine government, these funds quickly flow out again. Domestic and foreign investors will take advantage of the artificially supported peso to withdraw their funds from the country, leading to capital flight In other words, American taxpayers' money supports the exchange rate of the peso, merely to allow hedge funds to sell their Argentine assets at inflated prices, after which the peso will inevitably fall again.

Bessent and His Hedge Fund "Friends"

According to The New York Times, Bessent has numerous connections with investment moguls who will benefit from the aid to Argentina.

These include his former colleague, hedge fund billionaire Rob Citrone, and his mentor Stanley Druckenmiller. They all worked with Bessent at Soros Fund Management.

In 2013, when Citrone worked with Bessent under Soros, he persuaded them to make the now-famous bet on the yen, and most of the bonuses Bessent earned were due to his efforts. According to an interview published on Goldman Sachs' website, Citrone stated in a Goldman podcast interview:

"At that time, I convinced Scott Bessent to invest heavily. You know, Scott jokingly said that 75% of his bonuses at Soros during that period were due to me."

The report noted that Discovery had previously viewed Latin America as its largest global bet, with Argentina being its biggest investment in the region. According to two insiders, before the Treasury announced the aid plan last month, Citrone had been in close contact with Bessent, arguing that if the Argentine currency collapsed, Milei's political future would also end.

Citrone also warned Bessent that if Milei lost the election, Argentina would turn to other countries for more economic aid, and the U.S. might lose one of its staunchest allies in Latin America.

Additionally, just days before Bessent visited Argentina and announced the IMF aid agreement, Citrone flew to Buenos Aires to meet with Milei. Stanley Druckenmiller's family office is the second-largest investor in Argentina's major ETFs. However, Druckenmiller himself stated that he had not communicated with Bessent regarding Argentina before or after the aid announcement.

"Strategic Interests" or "Rich First"?

In the face of external doubts, Bessent insists that the aid plan is not meant to bail out investors.

In a media interview, Bessent stated, "We are safeguarding America's strategic interests in the Western Hemisphere." He emphasized, "The claim that we are helping wealthy Americans profit is completely wrong." He also stated in an official announcement, "A strong and stable Argentina helps consolidate a prosperous Western Hemisphere, which aligns with America's strategic interests."

However, this statement has not quelled the political storm in Washington. Especially against the backdrop of the U.S. federal government shutdown and domestic farmers still waiting for economic relief, the act of aiding Argentina and wealthy investors appears particularly glaring.

Massachusetts Senator Elizabeth Warren and seven other Democrats have proposed a bill to try to prevent the Treasury from using its foreign exchange stabilization fund to support Argentina. Warren bluntly stated:

"Trump promised 'America First,' but he put himself and his billionaire friends first, making the American people foot the bill."

Monica de Bolle, a senior researcher at the Peterson Institute for International Economics, also commented on this:

"They can call it whatever they want, but this is a bailout. A country is in crisis, the dollar is in short supply, and the U.S. is providing dollars to this country. By definition, this is a bailout."