President Donald Trump’s $40 billion bailout plan for Argentina represents a resurrection of dollar diplomacy—a term describing the practice of using US financial power to influence foreign politics. Over the 20th century, the dollar became increasingly influential, granting the US Federal Reserve enormous power over geopolitical outcomes, particularly in Latin America. The Trump administration seeks to return to this strategy with Treasury Secretary Scott Bessent calling the proposed bailout an “economic Monroe Doctrine.” Trump’s plan, however, has already hit roadblocks: It failed to secure backing by private banks who recently “shelved” the proposal. More importantly, the Trump administration’s politicization of swap lines risks making a bet on Argentina that will ultimately fail.
Unlike traditional swap lines where central banks—including the US Federal Reserve—exchange currency, the Trump administration’s proposed bailout took the unconventional form of a Treasury swap: The United States would buy Argentine pesos with US dollars, essentially betting on pesos becoming more valuable in the future—a risky move in a country haunted by decades of chronic fiscal and macroeconomic instability. Concerningly, the bailout appears to have been motivated largely by the administration’s political calculus, a sharp contrast from previous credit swap lines that used rigorous economic analysis when determining how to influence the consequential world of global currencies.
In July 1944, the Bretton Woods Conference brought together global powers to establish a new post-World War II economic order, including measures preventing countries from manipulating currencies in ways that jeopardized global stability. American dominance as a postwar economy and key financial benefactor secured the dollar’s role as the system’s anchor currency. Over time, this framework evolved into a system of international lending to protect countries from crises, positioning the Federal Reserve as the lender of last resort. A key part of this arrangement involved swap lines—agreements lending US dollars to foreign central banks, who would repay with interest. During the 2008 financial crisis, these swap lines expanded dramatically. At their peak, the outstanding swap drawings—that is, the amount of swaps issued by the federal government—accounted for over 25 percent of the Federal Reserve’s total assets.
By deciding which countries receive swap lines and under what terms, the Federal Reserve determines which economies can access stabilizing dollar liquidity. Accordingly, the foreign exchange market (FX) has always been politicized. For example, countries granted swap lines during the 2008 financial crisis, like Mexico, Brazil, and Japan, aligned strongly with the US policy preferences in capital account openness. Still, ensuring repayment has historically taken precedence over political considerations. The Federal Reserve has been highly selective, requiring that borrowers have significant economic mass (such as high GDP and a robust financial sector), prudent fiscal policy, and substantial holdings of US assets (such as FX reserves and US Treasury securities). Argentina falls short of these criteria, with its volatile economy, fragile institutions, and chronically depleted reserves.
The bailout would likely prove neither a prodigy of bilateral rescue nor a successful revival of dollar diplomacy. Argentina has been marked by chronic fiscal and macroeconomic instability since 1950, cycling through four failed stabilization regimes: from the hyperinflation and closed markets of the 1960s to the peso-dollar peg and subsequent crises of the 1990s. Each experiment collapsed due to deficits that the government could not finance through tax revenue, monetary expansion to fund spending, and the rapid depletion of reserves. Simultaneously, foreign lending has repeatedly failed to address the country’s structural weaknesses, such as its overdependence on the dollar and boom-bust cycles marked by political instability and overspending.
On its face, buying Argentine pesos with taxpayer money was meant to project US confidence in Argentina’s economic trajectory and, as Bessent stated, prevent it from becoming another “failed or China-led country in Latin America.” Yet, this precaution is undermined by Argentina’s lack of a credible long-term economic strategy and the high likelihood that the policy would be ineffective. Meanwhile, the United States would be assuming a great deal of risk: If the swap failed, taxpayer dollars would be vacuumed into a personalist experiment. Swap lines are normally run by the Federal Reserve to provide temporary liquidity, not by the Treasury to place a speculative bet on a foreign currency. The Treasury has never intervened in the global FX market by unilaterally purchasing foreign currency, and the fact that private banks were so skeptical further proves how risky this unprecedented action is.
The proposed bailout of Argentina has exposed the erosion of institutional credibility in US financial diplomacy. The signal on the global stage is that American currency policy is an extension of the president’s political personality, redoubling the Trump administration’s attacks on the Federal Reserve’s independence. This kind of erratic intervention threatens US financial soft power, turning the Treasury and FX markets into yet another stage for the administration’s shift from technocratic realpolitik into personality politics.