Milei fails to boost lending as banks load up on government debt

A push by President Javier Milei’s administration to get Argentine banks “banking again” is losing momentum, with lenders once again leaning on government bonds for profit as a slowing economy and high delinquency rates weigh on their traditional business.

Earnings from government securities at commercial banks accounted for about 56 percent of operating income in July, according to the latest financial-system data published by Argentina’s Central Bank. That’s more than three times the 17 percent generated by net interest income on private-sector lending, meaning the interest earned on loans minus the interest paid on deposits and the loss provisions set aside for nonperforming loans.

“Banks are still prioritising liquidity,” said Juan José Vázquez, head of research at local brokerage Cohen. “In an uncertain environment, holding liquid financial instruments allows them to react much faster than a loan portfolio.”

It’s another worrying sign for Milei a year out from Argentina’s next presidential election, as uneven economic growth and high unemployment weigh on his popularity despite successfully reining in triple-digit annual inflation. The President’s tight monetary policy and high interest rates – tools to contain inflation and currency losses – are driving banks back into government debt as the economy slows, partly due to a lack of credit.

The promising trend in banking that emerged during the first part of Milei’s administration has stalled over the past year. Private-sector credit rose sharply after the libertarian took office, but lenders still derived a much larger share of their operating income from public-sector securities than from the traditional spread between interest earned and paid.

At the end of 2023, traditional banking was barely a business. Net interest income was negative, while earnings from government securities regularly exceeded total operating income.

The turnaround from 2024 was remarkable. Bank credit to the private sector more than doubled as a share of the economy, rising to roughly 12.5 percent of gross domestic product today from about 5.3 percent at the end of 2023, according to Central Bank data.

Economy Minister Luis Caputo celebrated that transformation in a May 2025 speech in Buenos Aires. “Banks are starting to work as banks again,” he said. “For years, they took deposits and lent the money to the public sector. Now they see a better business in financing the private sector again.”

But that virtuous dynamic has hit a wall. Hit by higher losses as delinquencies surged, net interest income fell to just three percent of operating income in January and was hovering at 17 percent in July. Securities, by contrast, have generated more than half of operating income throughout all of 2026 so far.

“Credit is stagnant,” said Marcelo de Gruttola, a vice-president and banking analyst at Moody’s Ratings. “There are factors on both the supply and demand sides: Banks have tightened lending standards, while demand has also weakened.”

The credit boom is also starting to show signs of fatigue as economic activity slows and household incomes struggle to keep pace with prices. High interest rates, meanwhile, are discouraging stronger borrowers while increasing the risk that those most eager to borrow are under financial pressure.

Against that backdrop, government securities offer banks an attractive and readily available alternative – one that the government itself has increasingly encouraged. With access to international capital markets still difficult and expensive for Argentina, the Treasury has preferred to fund itself domestically and relies heavily on banks to refinance its peso debt.

The Central Bank has at times reinforced that demand. In August 2025, it raised reserve requirements and allowed banks to meet part of the additional requirement with government securities purchased at Treasury auctions. Regulators later broadened the range of public bonds that can be used to satisfy those requirements.

While those measures help create a captive source of demand for government debt, they also raise the cost of money domestically and add another obstacle to credit expansion. For banks, they provide yet another reason to keep pesos parked in public-sector securities.

That strategy may become more appealing as Argentina approaches next year’s presidential election. Loans remain on banks’ balance sheets until borrowers repay them, while liquid securities can be sold quickly if conditions change.

“The peso can be extremely volatile. We saw that even around last year’s midterm election,” Vázquez said, referring to the surge in investor anxiety that preceded Milei’s decisive victory in the October 2025 congressional vote. “Ahead of a presidential election like the one we expect in 2027, it makes sense for banks to be even more cautious.”