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Emerging Markets

Change no one can believe in

The market reaction to early elections confirms fears held by many that the economic predicament is getting worse by the day

The market reaction to early elections confirms fears held by many that the economic predicament is getting worse by the day

Assuming the political forecasters are on target, by the end of March Argentina will have reset its electoral clock and moved mid-term elections forward by four months.

If the elections had taken place on the day of the announcement – and if the votes were measured by the markets – Argentina would be heading inexorably towards an institutional crisis.

The benchmark peso-denominated bond fell 1.14% in price terms to ARS43.50, to yield 23.68%. The dollar-denominated Boden 2012 fell 3.15% in price terms to ARS195.50. Yield was at the implied default level of 51.05%. And the peso fell to 3.66 to the dollar from 3.6475.

The market reaction confirms fears held by many Argentina observers that the economic predicament is getting worse by the day.

As Pedro Lacoste, economic adviser to opposition leader Elisa Carrio, puts it: “Attempting to advance the election date sends a strong signal that the situation is, in fact, worse than currently felt.”

The fact that neighbouring Uruguay and Chile will both hold presidential elections as planned this autumn has not been lost on those who oppose moving the mid-term election date forward. Senator Maria Eugenia Estenssoro, who represents Carrio’s Civic Coalition party says: “This makes it clear that this attempt is not the result of the international financial crisis, as the president claimed, but the consequence of a local political crisis.”

The elections – for half of the lower house and a third of the Senate – are a big test for Fernandez, who has seen her popularity plunge since she succeeded her husband to the presidency 15 months ago. But what perplexes analysts is that the surprise announcement – widely thought to be former president Nestor Kirchner’s idea – is making his wife’s ability to control the political situation even more difficult.

Whatever the result of a June 28 election, the government looks likely to lose a significant number of seats in the Lower House and even in the Senate, denying them the double majority they have held since 2003.

The first hurdle is a Senate vote on the election date change, due by March 28. If the government loses that vote, the entire strategy will be thrown into doubt. The government is expected to push Congress hard for rapid passage of the election-date change.

Assuming that barrier is passed, most likely by a narrow margin, the question will turn to the electoral map, where the key battle will take place in the industrial areas of the Province of Buenos Aires.

A protracted farming dispute has weakened Fernandez’s administration, and Argentina’s economy has been slowing sharply after six years of robust growth, though it has yet to experience the mass layoffs and financial turmoil seen elsewhere.

But given the ongoing battle with the agricultural sectors, the Kirchners’ support could be sapped in the most important provinces – Santa Fe, Cordoba, Mendoza and Entre Rios. That leaves them only the smallest and impoverished provinces in the northern part of the country – and the most working-class areas of the Province of Buenos Aires, traditionally a stronghold of the Peronist Party.

Win or lose, that leaves the Kirchners with two challenges. First they would have to develop a new governing style that would make it possible to forge alliances in Congress, in order to make any kind of progress. Second is the threat – reportedly made by Nestor Kirchner a year ago when the government lost the battle over export taxes – that he and his wife would both retire to their native province. This possibility has remained a major component in subsequent political calculations.

According to political scientist Ana Maria Mustapic of the Di Tella University, should the president step down, the Constitution mandates the office be assumed by the vice-president. Julio Cobos, a sworn enemy of the pair since his tie-breaking vote sealed the defeat of the commodities tax revision, currently occupies that post.—J.E.

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