The Mirage of Fiscal Rectitude:

Why Argentina’s Inflation Persists Amidst Austerity.

For the global investment community and the architects of multilateral policy, the Argentine narrative of 2024 and 2025 has been framed as a masterclass in libertarian shock therapy. The Milei administration has achieved what many deemed impossible: a sustained primary fiscal surplus and a radical dismantling of the bloated state apparatus. To the casual observer or the headline-driven trader, the data appears triumphant. Yet, for the institutional investor performing due diligence on the ground in Buenos Aires, a dissonant chord remains. Despite the elimination of overspending, the specter of inflation continues to haunt the Republic.

At The SAVI Group, we believe in looking beyond the "fiscal facade" to the underlying monetary architecture. The persistence of price instability is not an anomaly of the Milei model but rather a direct consequence of the sophisticated, yet perilous, financial engineering employed to bridge the gap between stabilization and growth. To understand why inflation remains entrenched, one must dissect the mechanics of the 2025 carry trade, the evolution of the Central Bank (BCRA) balance sheet, and the structural "hidden" drivers of the money supply.

The Carry Trade of 2025: Engineering a Fragile Stability

To comprehend the current inflationary environment, we must revisit the strategic "capitalization" of the carry trade that defined the latter half of 2025. In a bid to anchor expectations and suppress the exchange rate gap (brecha), the administration incentivized a massive influx of short term speculative capital. By maintaining the "crawling peg" at a rate significantly below the prevailing interest rates, the government effectively subsidized a "carry trade" environment where investors sold dollars for pesos to capture high local yields.

While this successfully "mopped up" excess liquidity in the short term and provided a veneer of currency stability, the systemic cost was deferred rather than deleted. The carry trade acted as a high interest loan from the market to the Central Bank. The capitalization of these returns, specifically the astronomical interest paid on Treasury instruments and the now-defunct LEFIs, created a self-fulfilling prophecy of monetary expansion. Every basis point of yield earned by carry traders represented a future peso that the BCRA would eventually have to fulfill.

The "Hidden" Money Supply: Beyond the Printing Press

The administration often claims that "the printing press is off." In a narrow fiscal sense, this is accurate: the BCRA no longer prints pesos to fund the Treasury's daily operations. However, the money supply (M2) has continued to expand through more opaque channels that are "hidden in plain sight."

1. The Endogenous Interest Trap:

   The transition from BCRA debt (Leliqs) to Treasury debt did not eliminate the "quasi-fiscal" deficit; it merely relocated it. The interest payments on these new instruments, necessary to keep banks from fleeing to the dollar, still generate massive amounts of liquidity. When the Treasury pays interest on its bonds, it often does so by utilizing BCRA credits or accounting maneuvers that effectively expand the monetary base.

   
   

2. The Reserve Accumulation Dilemma:

   Paradoxically, the government’s success in rebuilding reserves is an inflationary driver. When the BCRA buys dollars from the agricultural sector to bolster its thin net reserves, it must issue new pesos to pay for them. In a healthy economy, this would be offset by an increase in money demand. In Argentina, where the peso remains a "hot potato," this issuance puts immediate pressure on price levels.

   
   

3. The October 2025 Volatility and the Swap Injection The mid-term election cycle of late 2025 revealed the fragility of this model. The "run on the peso" in September and October required a $20 billion US Treasury swap line to prevent a total collapse of the exchange rate regime. While the intervention was successful in stabilizing the market, the subsequent "re-monetization" phase announced in early 2026 has essentially formalized the injection of liquidity back into the system under the guise of "satisfying money demand."

Structural Inertia: The Price of "Relative Price" Corrections

Inflation is not merely a monetary phenomenon in the current Argentine context; it is also a corrective one. For decades, the Argentine economy functioned on a system of "repressed prices", subsidized energy, transport, and artificially capped utility rates.

As the Milei administration aggressively dismantles these subsidies, the "headline" inflation remains high. This is what economists call "relative price realignment." Even if the money supply were perfectly fixed, the massive upward adjustment of utility tariffs (some rising by over 500% in real terms) forces the CPI higher. For the global leader evaluating the social stability of the country, this "sincere" pricing is necessary but creates a feedback loop of wage demands and cost-push inflation that the government’s austerity measures cannot easily dampen.

The SAVI Group Analysis: Is a Positive Outcome Plausible?

The end result of the current trajectory is far more precarious than the official "victory" narrative suggests. We identify three critical risks that could derail the administration’s plans in 2026:

• The Exit Risk: The carry trade of 2025 created a massive "overhang" of speculative pesos. Should global risk appetite shift or the "inflation-indexed band" (introduced in January 2026) fail to provide sufficient real returns, an exodus of these funds would trigger a massive devaluation-inflation spiral.

  
  

• The Maturity Wall: Argentina faces over $20 billion in debt obligations in 2026. Without a return to voluntary credit markets, which currently remains blocked by high country risk, the government may be forced back to the very monetary financing it has spent two years denouncing.

  
  

• The Negative Reserve Reality: Despite the $20 billion swap, net usable reserves remain near zero. The "cushion" is made of borrowed money, not earned surplus.

Proposed Strategic Solutions: A Path Toward True Stability

To move beyond the mirage of fiscal surplus and into genuine price stability, the following steps are, in our view, non-negotiable:

1. Unification and Liberalization:

   The "inflation-indexed band" system must be a transition to a truly unified, floating exchange rate. The current "controlled crawl" continues to distort signals and encourages the very speculative carry trade that threatens long term stability.

   
   

2. Institutionalized Monetary Independence:

   The "independence" of the BCRA must be codified in law, preventing any future administration from using the balance sheet as a backdoor for the Treasury. This includes a hard cap on the expansion of the monetary base, regardless of reserve accumulation needs.

   
   

3. Debt Reprofiling via Market Confidence:

   The administration must leverage its political capital from the 2025 mid-term victories to secure a long term, "Fresh Money" agreement with the IMF and private creditors that specifically targets the retirement of the short term peso debt overhang.

The Path Forward: From Fiscal Accounting to Monetary Reality

The "Milei Miracle" is currently a triumph of fiscal accounting, not yet a triumph of monetary reality. For the institutional investor, Argentina represents a high-alpha opportunity, but one that is fraught with "hidden" monetary risks. The 2025 carry trade provided the government with time, but it did not provide a cure. Until the "quasi-fiscal" drivers of the money supply are addressed with the same ruthlessness as the public sector layoffs, inflation will remain a persistent feature of the Argentine landscape.

At The SAVI Group, we continue to monitor the Delta between official rhetoric and the BCRA’s daily balance sheet. True stability is not found in a surplus on paper, but in a currency that people are actually willing to hold.