Argentina’s stocks, bonds and currency tumbled on Monday after President Javier Milei’s party lost by a landslide in elections for the country’s largest province, ahead of midterm national polls that will be pivotal for his reform drive.

Dollar bonds dropped about five cents on the dollar, some of the biggest losses since before Milei secured a $20bn IMF bailout this April.

Argentina’s Merval stock index, already the worst performing market in dollar terms among almost a hundred major global bourses this year, fell more than 11 per cent in early trading on Monday.

The peso’s official exchange rate fell 5 per cent in initial trading on Monday from its value on Friday, to 1,460 to the dollar, the lower limit of its currency band. It had already fallen 8 per cent in the last two months.

Milei’s La Libertad Avanza coalition won 34 per cent of the vote in Buenos Aires province, which has almost 40 per cent of the population, or 13 points less than the leftwing Peronist party.

The larger than expected loss could be a sign that Milei will struggle to maintain public support for an austerity agenda that had been popular with international investors, and could derail his plans to return to global markets to refinance dollar debts in the months ahead.

Yields on Argentine dollar debt are more than 9 percentage points above those on equivalent US Treasuries, a premium that investors have seen as too costly for Argentina to re-enter dollar bond markets.

A corruption scandal involving Milei’s top advisers has battered his image, on top of an uptick in unemployment and high-profile presidential vetoes of spending increases for pensioners and disabled people.

While Buenos Aires province typically leans further left than the rest of Argentina, the vote was seen as a bellwether for October’s midterms, where Milei must expand a congressional minority to continue austerity reforms that have tamed severe inflation.

“We have suffered a clear defeat,” Milei said in an unusually contrite speech on Sunday. “We are going to correct all the things where we have made mistakes.”

However, he pledged not to abandon his free market reforms. “We won’t step back even a millimetre. We won’t just continue on our path but accelerate.”

After a blistering rally in 2024, Argentina’s dollar bonds have mostly lost investors money this year, compared with returns of nearly 10 per cent on a JPMorgan benchmark for emerging market dollar debt.

The peso had already slid 8 per cent in the two months to Friday as businesses and households bought dollars, prompting Argentina’s central bank to announce last week that it would begin intervening in currency markets.

Intervention is technically allowed under the IMF bailout but will strain fund directives to build up FX reserves that remain heavily negative.

The IMF has dropped a target for these reserves to come out of the red this year, but is expecting them to be almost $23bn in the black by 2027. These forecasts have assumed that Argentina will achieve sustainable market access in the years ahead.

“The government’s recent policy choices, notably its focus on defending the peso at all costs and its systematic vetoes of congressional initiatives to increase social benefits, have generated growing public frustration,” said Thierry Larose, emerging markets debt manager at Vontobel.

“While heavy interventions and tighter liquidity conditions would be the expected policy response to contain peso depreciation, such measures risk deepening the economic slowdown and further fuelling public discontent,” Larose added.

Buenos Aires-based think-tank Equilibra warned the market volatility would shake investors’ faith in Milei’s ability to maintain his currency policy.

“If there are no announcements or changes in the economic programme or political management, it will be difficult to contain expectations of a currency devaluation,” director Martin Rapetti said in a note. “Without changes, the central bank is destined to lose this battle.”

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fuente: Google News