How Javier Milei’s shock therapy could not save Argentina

Argentina’s economy, recently hailed by some as a poster child for radical free-market reform, has suddenly plunged into a new crisis. In 2024, the Economist Intelligence Unit offered the following optimistic forecast of the Argentine economy: “Looking ahead to 2025, we forecast a robust economic recovery on the back of a more supportive business environment. Moreover, a gradual lifting of currency controls will boost investment, and disinflation will spur a recovery in private consumption. Milei’s more radical plans, such as dollarisation and the closure of the central bank, are unlikely to materialise.”

The Chainsaw Effect

What was the key reason behind the above optimism from the Economist Intelligence Unit? I posit it was rooted in the symbolic chainsaw effect of Javier Milei—a leather jacket-wearing supporter of free-market capitalism, who swept into power as Argentine President in December 2023 on a platform of price stabilisation, debt reduction, and slashing what he called a bloated state.

Milei brandished a chainsaw during his campaign—symbolic, he said, of his ruthless desire to cut public spending and federal bureaucracy.

Darling of the Bourse

After years of inflationary chaos had crippled South America’s second-largest economy, Milei’s bold approach to free-market reforms made him the darling of the markets. Argentina’s Merval Index soared by a whopping 170 per cent in peso terms in 2024, dwarfing the modest 23 per cent gain of the S&P 500 during the same period.

The international community took notice as well.

Flying High

A former TV personality and self-proclaimed ‘anarcho-capitalist’, Milei rose to power with promises to shrink Argentina’s bloated bureaucracy, end spiraling inflation, open the economy to global markets, and attract foreign investors after years of stagnation and isolation.

Less than a year into his presidency, Milei was flying high—Trump’s favourite and Musk’s inspiration.

US President Donald Trump dubbed Milei his “favourite president”—Milei was even the first foreign leader to meet Trump in his new Trump 2.0 avatar.

Milei also inspired Elon Musk during his brief symbolic tenure as head of the Department of Government Efficiency (DOGE).

Miracle Unfurled

But what made Milei, Trump’s favourite and Musk’s muse?

After assuming office in December 2023, Milei surfed a wave of optimism. For much of the next 20 months, he appeared on the brink of delivering an economic miracle in Argentina—the second-largest economy in South America, which has repeatedly plunged into crisis over the last five decades.

I will return to that. First, a look at Milei’s achievements.

The spirited Milei—a self-proclaimed radical libertarian—ruthlessly delivered on his campaign promises: taming out-of-control inflation and slashing a bloated budget. For a moment, it seemed he might succeed where his predecessors had stumbled time and again—pulling Argentina out of chronic economic dysfunction.

Brutal and Controversial

Unlike politicians of yesteryear who avoided angering the masses, Milei embraced austerity head-on. He wielded his symbolic chainsaw against the state—firing tens of thousands of public employees, dissolving or downgrading a dozen ministries, gutting the education sector, cutting inflation adjustments for pensions, freezing public works projects, lifting price controls, and slashing subsidies.

A Costly Correction

Milei’s crowning achievement was bringing inflation down to 1.9 per cent in August 2025, from 25.5 per cent when he took office.

This was achieved through the aforementioned brutal cost-cutting measures, which not only controlled inflation but also brought Argentina’s budget back into surplus.

But that very success became his undoing.

In Turmoil Again

Once again, Argentina finds itself in the throes of fresh economic turmoil. Here’s the story in brief:

Its currency, the peso, is under serious attack;

Foreign reserves have dropped to dangerously low levels;

Debt has ballooned, making Argentina the largest borrower from the IMF;

The country’s benchmark index has fallen over 30 per cent year-to-date.

The Twin-Track Crisis

I posit that the current crisis is rooted in twin-track problems—deep-seated structural flaws and contemporary triggers.

Here’s how the American weekly Newsweek summarised it in an article dated September 26, 2025, citing expert analysis:

Firstly, political economist Jean Paul Faguet observed:

“The main problem is that Argentina has a large welfare state given the size and level of development of its economy, and a highly distorted tax and transfer system that funds it.”

“Argentina only manages to remain stable during good times; a bad international economy or specific shocks throw it out of kilter and into crisis.”

Secondly, Anahí Wiedenbrüg, senior policy adviser at the International Institute for Sustainable Development, remarked:

“Milei’s main political achievement—bringing down Argentina’s runaway inflation—has come at a steep cost.”

“In Argentina, fiscal consolidation has historically fallen disproportionately on the most vulnerable: cuts to social spending, reductions in transfers to provinces, and an erosion of real wages.”

“Far from correcting structural asymmetries, these adjustments tend to deepen them.”

Argentine Debt: A Case Study

One of Argentina’s deepest structural problems is its chronic debt—a cycle dating back to 1958, the year I was born.

According to Trading Economics, Argentina’s total external debt stood at USD 278 billion as of March 31, 2025. This includes public, publicly guaranteed, and private non-guaranteed long-term debt, as well as IMF credit and short-term debt owed to non-residents.

Among its creditors, the International Monetary Fund (IMF) has played a particularly significant—and controversial—role.

Since 1958, Argentina has signed 22 IMF loan agreements and currently owes the Fund over $40 billion (€36.2bn). Ironically, much of that debt has been used to repay the IMF itself, leading to the institution’s fraught reputation among Argentines, many of whom blame it for the 2001 economic implosion and debt default.

Yet, on April 11, 2025, the IMF Executive Board approved a new 48-month extended arrangement under the Extended Fund Facility (EFF) for Argentina, amounting to SDR 15.267 billion (about US$20 billion, or 479 per cent of quota). This included an immediate disbursement of SDR 9.2 billion (about US$12 billion), followed by a planned review in June 2025, with another US$2 billion to be released.

The program is expected to catalyse further official financing from multilateral sources like the World Bank Group and IDB, as well as bilateral sources, in a bid to facilitate Argentina’s return to international capital markets.

With this, Argentina earns the dubious distinction of being one of the most indebted countries in the world—frequently defaulting on its loans.

‘Doing Fantastic’

Milei is not the first to be hailed as a poster boy of radical economic reform. That title was first reserved for Carlos Menem, Argentina’s president in the 1990s, whose Thatcherian reforms won applause globally.

President Bill Clinton was a huge admirer of Menem—just as Donald Trump has now become a great fan of Milei. And, like past US administrations that backed Argentine reforms, the Trump White House has again rallied support.

But the timing and depth of Trump’s support for Milei—as Buenos Aires stumbles into yet another financial crisis—is unparalleled.

Deep-Seated Woes

Argentina’s economic troubles are deep-rooted, stretching back over decades. The country has seen a recurrent cycle of crises and reforms, marked by fiscal profligacy, hyperinflation, temporary fixes, external shocks, populist expansions, and most recently, radical market reforms.

Here’s a brief chronology of how Buenos Aires reached where it stands today:

1. 1975–1985: Severe Stagnation and Inflation

• The 1975 “Rodrigazo” crisis unleashed runaway inflation (averaging over 300% annually).

• The military regime under Martínez de Hoz (1976–81) pursued financial liberalization, foreign borrowing, and trade opening—but kept an overvalued currency and weakened industrial competitiveness.

• Rising deficits and loss of access to external credit forced money-printing, fueling hyperinflation.

• The 1982 debt default cut off Argentina from global markets, deepening the crisis.

2. 1986–1995: Hyperinflation, the Austral Plan, and Convertibility

• The 1985 “Austral Plan” introduced fiscal controls and a fixed exchange rate, briefly reducing inflation.

• But spending spikes returned, leading to renewed hyperinflation in 1989.

• The 1991 Convertibility Plan pegged the peso 1:1 to the U.S. dollar, curbing inflation, liberalizing markets, and fueling GDP growth.

• However, the rigid peg made Argentina vulnerable to external shocks and capital flight.

3. 1996–2005: Crash, Default, and Recovery

• Late 1990s global crises (Tequila, Asian, Russian) exposed Argentina’s external fragility.

• 2001–02: Sovereign default, peso collapse, banking crisis, and soaring poverty and unemployment.

• Post-2002: Argentina adopted a floating exchange rate, boosted commodity exports, embraced selective state intervention, and restructured its debt.

4. 2006–2015: Populism, Controls, and Recurrent Crisis

• Post-Kirchner administrations ramped up social spending, subsidies, and state controls.

• Chronic deficits, capital controls, and inflation (20–30% annually) plagued the economy.

• Repeated attempts at stabilization—including inflation targeting—failed.

5. 2016–2025: Liberalisation, Shock Reforms, and the Milei Era

• Mauricio Macri (2015–19): Liberalised trade, cut export taxes, and floated the exchange rate—but deficits and inflation persisted.

• Alberto Fernández (2019–23): Returned to controls and populism, but instability worsened.

• Javier Milei (2023– ): Unleashed radical “chainsaw” reforms—deep cuts, deregulation, monetary tightening.

• Achieved budget surplus and reduced inflation, but triggered recession and social pain.

• Poverty spiked before stabilising in 2025.

Over to Trump

Last week in New York, when Trump met Milei, he declared:

“We’re backing him 100 per cent. We think he’s done a fantastic job. Like us, he inherited a mess.”

It was a full-throated endorsement of Milei’s radical economic experiment.

Trump, along with Treasury Secretary Scott Bessent, pledged a $20 billion financial rescue package to stabilize Argentina’s economy ahead of the October midterm elections—seen as critical for Milei to retain power and continue reforms.

Bessent has been aggressively promoting the package across social media and television, insisting it’s necessary to keep Argentina’s economy from collapsing.

But the deal has met growing opposition—from Democrats, Republicans, and farm groups—who argue it risks US taxpayer money and could harm domestic agriculture by stabilizing a foreign competitor.

Till Miracle Happens

Despite renewed faith from the IMF and Donald Trump in Milei’s shock therapy, Argentina continues to bleed.

Even with fresh economic lifelines, the country struggles to repay its international creditors and rein in unsustainable spending.

Argentina remains caught in a cycle of big-bang busts, repeatedly thrown into economic disarray, with astronomical inflation and structural instability that drags the economy, the government, and the people back into crisis—again, and again, and again. Until a miracle happens situation is not going to be better. But, given the current ground reality, the chance of such a miracle happening anytime soon appears slim.

The author is a multi-disciplinary thought leader with Action Bias and an India based impact consultant. He is a keen watcher of changing national and international scenarios. He works as President Advisory Services of Consulting Company BARSYL. Views expressed in the above piece are personal and solely those of the author. They do not necessarily reflect Firstpost’s views.