Since Javier Milei took office on 10 December 2023, Argentina's central bank has been diligently buying reserves. However, this trend has now reversed. In June – a month typically favourable for reserve accumulation – the government faced its first run against the peso, forcing the Banco Central de la República Argentina to shed some of the reserves it had accumulated since May.

The trigger may have been the BCRA's eagerness to 'deflate' its liabilities by pushing interest rates into negative territory. However, after decades of struggling with inflation, Argentines have developed agile defences. Savings moved quickly into dollars, widening the gap between the official and the 'free' (market) exchange rates to close to 60%. Argentina's country risk premium rose from 1,200 basis points to 1,500, signalling a looming balance-of-payments crisis.

The government responded to these warning signs by digging in its heels. It ruled out any changes to the official exchange rate policy, committing to a monthly 'crawling peg' depreciation of 2% – a rate that is only a fraction of the country's falling, yet still high, inflation. It also refrained from outlining a roadmap for the elimination of multiple currency practices despite the International Monetary Fund's recommendation to do both.

Rather, in a joint press conference held on the evening of 5 July (Friday evenings are normally used to announce important changes in economic policy), the minister of economy, Luis 'Toto' Caputo, and the president of the central bank, Santiago Bausili, formally declared the initiation of the 'second stage' of the economic programme.

More noise than substance

Their grand announcement boiled down to transferring the central bank's short-term liabilities with commercial banks to the Treasury. Moving liabilities from one pocket to another strengthens central bank balance by weakening the Treasury's. Markets were disappointed and with good reason.