Argentina bond investors cheer Mire victory; peso likely to fall

(Bloomberg) — Argentinian investors cheered liberal economist Javier Millay’s larger-than-expected victory in Sunday’s presidential election and his promise to overhaul South America’s second-largest economy.

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The country’s offshore bonds due in July 2035 gained 0.6 cents against the dollar in early European trading on Monday, as two other securities joined the top 20 emerging market performers as traders weighed the maverick outsider’s reversal of the country’s policy. possibility. The economy is in its sixth recession in a decade, with inflation at 140%.

“This is an opportunity for a new beginning,” said Jorge Piedrahita, founder of Gear Capital Management in New York.

The peso will weaken in the parallel market used to circumvent currency controls, reflecting Milei’s plan to replace the peso with dollars. The peso fell to around $1,000 on local cryptocurrency exchanges on Sunday. That’s down 8% from Friday’s peso price of about $920 per dollar. Local markets were closed on Monday for a national holiday.

Read more: Milley’s challenge begins before inauguration

Milley’s victory capped a bombastic campaign in which he promised a fundamental overhaul of what he said were decades of misguided government policies. He has promised to cut public spending and close central banks to curb inflation and shore up fiscal accounts, policies that could become a problem. That’s good news for bond investors who already expected another default to be coming.

In his victory speech on Sunday night, Milley avoided mentioning these radical solutions, instead striking a softer tone and emphasizing the dire state of the economy.

“Today is the beginning of the end of Argentina’s decadence,” he said. “We will start doing what history has proven to work, and in 35 years we will be a world power again.”

In a second speech to supporters outside his campaign headquarters, Milley launched into his signature slogan of “Long live freedom, damn it!” However, he walked back his remarks about closing the central bank, instead referring to the need to “solve its problems.” ”.

With 98% of votes counted, Milai won nearly 56% of the support, compared with 44% for Economy Minister Sergio Massa, who represents a continuation of the existing Peronist government. Opinion polls showed Milley only slightly ahead ahead of the election. , so investors have a feeling that a strong mandate might make it easier to implement his policies.

“Milei’s lead is much larger than expected. This should be positive for price action,” said Juan Manuel Pazos, chief economist at Buenos Aires brokerage TPCG. .”

While Mire drew attention for his atypical eccentricities as a potential head of state — his unusual haircut, his love of cloned dogs and his penchant for campaigning with a chainsaw — he won over investors with his promise to usher in a business-friendly era support. Argentina: Economic growth is elusive, the peso has lost more than 90% of its value in four years, and about 40% of the population lives in poverty.

“This is a vote in favor of reform, but there are huge execution risks,” said Patrick Esteruelas, head of research at Emso Asset Management. “With limited support in Congress, doubts about whether he can politically weather the adjustment limit the Upside.” “.

Milley’s Freedom Vanguard Party controls only a handful of seats in Congress, and even with broad political support, policies such as dollarization will be an extremely complex task. Cuts to government spending will burden Argentina’s poorest citizens.

What does Bloomberg Economics say?

Mire’s Dec. 10 inauguration may be difficult. The outgoing government can still make adjustments to the currency, reserve levels and public spending. Markets will be closely watching his cabinet announcement. Asset price movements – especially in parallel exchange rates – may help shape the near-term inflation outlook.

— Adriana Dupita, Brazilian and Argentinian economist

— Click here to read the full report.

Still, some investors believe Milley is the best bet to save the economy after years of market pain. Since its restructuring in 2020, the country’s overseas bonds have caused investors more than 40% of losses, making it one of the worst performers in emerging markets.

“The question is more about Milei’s ability to get the job done,” said Diego Ferro, founder of M2M Capital in New York. “That’s where I think there’s still a big question mark. But the near-term forecast should be for higher bond prices.” “price. “

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