By Libby George
LONDON (Reuters) -Argentina's "whatever it takes" moment with the United States this week may have given the country its best chance to escape decades of chaotic debt defaults and bailouts, investors say. But everything hinges on October's nationwide election.
Argentine assets soared after U.S. Treasury Secretary Scott Bessent said "all options" were on the table to stabilize the country and support President Javier Milei, an ideological ally whose chainsaw-style austerity drive has
been politically costly - as his September 7 provincial Buenos Aires election drubbing showed.
Washington's intervention partially reversed the market nosedive triggered by the underperformance of Milei's party in the provincial vote, a stumble that fanned fears of a broader loss in the October 26 nationwide ballot that could slow or block his reform agenda.
"This is an unprecedented support from the United States," said Gustavo Medeiros, head of research at Ashmore Group.
Milei's radical reforms since becoming president in December 2023 had helped address the solvency issue Argentina had, Medeiros said, but concerns over a cashflow crunch persisted.
"(Argentina) had a liquidity problem until the announcement... Now it doesn't have either," he said.
But whether the U.S. pledges augur a lasting change in direction hinges on how Milei's party and its allies perform in October.
"It really comes back to the outcome of the elections and whether you have the domestic support to continue the reforms they need," said Joyce Chang, global head of research at JPMorgan.
SWAPLINES AND BOND SUPPORT
Bessent on Wednesday outlined a package that included a $20 billion swap line, U.S. purchases of Argentina's dollar-denominated bonds in primary and secondary markets, and significant standby credit from the Exchange Stabilization Fund.
The infusion of U.S. support is the latest - albeit brightest - glimmer of hope for the Latin American behemoth to change its reputation as a byword for sovereign financial mismanagement.
While terms and conditions remain unclear, the might of the U.S. signal alone is helping bridge a tricky period, investors say.
"It's more about being forceful with the rhetoric so that the number matters less," said Carmen Altenkirch, emerging markets sovereign analyst with Aviva Investors.
Argentina has burned investors with false breakthroughs before. In 2017, investors - lured by faith in then-president Mauricio Macri to implement reforms - snapped up a $2.75 billion century bond. Two years later, he lost power and by 2020 the country had defaulted again.
That history has left households and companies with the "muscle memory" to hoard dollars at the first hint of turbulence, Medeiros said, a reflex that can drain reserves and amplify stress.
Frayed nerves resurfaced after the provincial Buenos Aires elections. Markets slid, and last week the central bank burned through roughly $1.1 billion of its scarce reserves in just three days to shore up the peso.
KEY TEST IN OCTOBER
Supporters of Milei's reform push argue that 2025 looks different.
They point to fiscal consolidation, cooling inflation and a 2024 fiscal surplus, the first in decades, which together have lured investors back. The promised swap line and potential U.S. dollar inflows are expected to steady the currency - potentially boosting the electoral prospects for Milei's coalition.
A suspension of export taxes on key grains hit its goal of boosting dollar inflows ahead of schedule, allowing the government to reimpose the taxes after just two days.
If Milei's La Libertad Avanza (LLA) and center-right allies the Propuesta Republicana (PRO) secure at least the expected one-third of seats in the Lower House, the government will likely keep the centre-left opposition at bay and retain leverage to keep reforms moving.
"It's hard not to be constructive here," said Thierry Larose, a portfolio manager with Vontobel.
"This announcement is a victory that can restore some confidence in the government and help LLA+PRO maintain their lead in the polls ahead of next month's midterms."
Citi, keeping its overweight on Argentina through the rally, said "governability risks" would persist, but argued that Milei could continue to push through reforms, with his coalition set to retain the numbers it needs to sustain a presidential veto even under the least favourable outcome.
IMF KEEPING UP REFORM PRESSURE
Argentina's other key backer, the International Monetary Fund, will also keep up pressure for painful reforms. Argentina's total credit outstanding to the Fund stood at just under $60 billion by late September - nearly four times the amount of its next-biggest debtor, Ukraine.
The IMF has a laundry list for Milei including rebuilding foreign exchange reserves, moving towards a more flexible exchange rate, overhauling labour rules and advancing privatizations.
The reforms could be painful for a population of 46 million scarred by repeated inflation spikes and currency crises. But any slippage risks triggering yet another market backlash.
"It's worth noting that this bailout package is probably the government's last 'Get out of jail free' card," Larose said. "Investors haven't forgotten the fiscal mismanagement of the past."
(Reporting by Libby George, Canan Sevgili and in London, Rodrigo Campos in New York, editing by Christian Plumb, Karin Strohecker and Hugh Lawson)
