Financial Implications of Argentina’s Return to Peronism

The long-awaited results from Argentina’s elections on October 27, 2019, have significant implications both for the future of Argentina and the international community. Peronist candidate Alberto Fernandez defeated incumbent Mauricio Macri in the election, with Cristina Fernandez de Kirchner, President Macri’s predecessor, as his running mate. Mr. Fernandez won with approximately 48% of the vote, while President Macri lagged behind with approximately 40%. The difference was narrower than had been predicted in polls but was above the 45% required to declare a winner in the first round. The current president and the future president have agreed to convene and cooperate on creating transition measures for when Mr. Fernandez will assume office on December 10, 2019 - putting the importance of Argentina’s future and well-being ahead of political differences.

While many Argentines support Fernandez’s “Frente de Todos” party for its emphasis on helping the masses with increased public spending, investors are wary of a return to Peronism. The populist movement has swung between left and right ideologies, remaining centered around social justice, economic independence, and political sovereignty. Peronism, dedicated to the preservation of its own power, has always been popular especially with Argentina’s working class. While higher wages, greater pensions, subsidized transportation, and lower utility bills are all socio-politically attractive measures, they are unsustainable in the long term. Nearly a century of spending that exceeds available country reserves has caused Argentina to remain trapped in a cycle of economic booms and busts. President Macri undeniably made serious blunders over the course of his presidency that contributed to the country’s current economic turmoil.  Nonetheless, it is the longstanding history of Peronism, characterized by overly generous spending, that has established a culture wherein people expect government paternalism and accept enormous fiscal debt as a consequence. Argentina now has inflation of 55% a year, its economy is in recession, poverty is rising, billions of dollars have fled the country, the Argentine peso (ARS) is plunging, and the country owes $100 billion (5.94 trillion ARS) in foreign debt.  Although the dire economic conditions temper the incoming administration’s ability to pursue typical Peronist policies to the full extent, Mr. Fernandez will likely have an interventionist government with protectionist measures. Most hope that Mr. Fernandez will put forth a plan to stabilize the economy without burdening the Argentine people to the extent that President Macri has been criticized of doing.

Mauricio Macri was elected in 2015 because people believed his pro-business, market-friendly policies would reverse the years of economic misfortune that Argentina had endured under Peronism. At the beginning of his presidency, Macri was successful in implementing reforms such as eliminating capital restrictions, removing taxes on exports, and promoting international cooperation and integration, that, considering traditional economic theories, should have put Argentina on the right path for economic recovery. President Macri’s inability to handle external shocks caused by hikes in interest rates and increased uncertainty from trade conflicts, however, led to a dramatic fall in the peso’s value, a spike in inflation levels, and further economic woes. To the simultaneous relief of foreign markets and dismay of Argentinians, President Macri turned to the International Monetary Fund (IMF) for help. The IMF placed large bets on Argentina, providing a loan of $57 billion (3.38 trillion ARS) – its largest package to date. One major area of focus following this Presidential election will be for the leaders of the transitioning governments to negotiate the deal with the IMF in a way that will place the fragile economy back on a path to stability and sustainable growth.

Investors are not optimistic about the country’s potential to turn around its economic situation and are wary of a situation similar to that following Argentina’s default in 2001. Shortly after taking office, Nestor Fernandez de Kirchner, husband of and predecessor to Cristina Fernandez de Kirchner, decided to restructure Argentina’s external debt following the 2001 economic crisis. In 2003, the Argentine government made an offer to investors to exchange defaulted bonds for new ones, where there was an average reduction of the face value of the debt by approximately 75%. Creditors were astonished and pushed to negotiate the terms, with little success. The decision made by the administration tarnished Argentina’s reputation in the global financial community, and the country consequently became considered a pariah state, isolated and shunned from foreign markets. Haircuts today remain likely for Argentina’s bondholders, even if the new administration is able to strike a deal with the IMF. Much of Argentina’s bond curve is trading at 40 cents on the dollar, so analysts estimate that a 30% to 65% haircut is likely. Investors will walk away with less severe losses, largely thanks to the establishment of Collective Action Clauses (CACs) which give investors greater leverage to lessen the default’s impact. Markets will be intently anticipating how negotiations between the IMF and Argentina pan out; it is in the interest of all parties involved to prevent what would be Argentina’s 9th default.

Argentina’s Central Bank has already imposed a stricter control on the amount of foreign currency that Argentines can buy, imposing a limit of $200 (11,874 ARS) a month via banks or $100 (5,937 ARS) in cash, down from $10,000 (593,700 ARS). The measure is designed to stop capital flight and prevent further devaluation of the peso, which would trigger further inflation: arguably the country’s largest single issue. All eyes are on the arriving administration as they prepare a framework for tackling the economic problems at hand. Negotiations between the IMF and the Argentine government are fundamental for all involved. The focus of these talks should be on renegotiating the terms of the deal to position Argentina on a trajectory for stability and growth imperative to the country’s future, the IMF’s reputation, and the world economy’s prospects.

About the Author

Anna Spiro

Anna Spiro is a Research Analyst at Global Risk Intelligence. She earned her BSc in International Politics and Government with a focus on economics from Bocconi University in Milan, Italy. Anna is fluent in English and Hungarian with advanced command of Spanish as well as an intermediate command of Italian.

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