Demise of Kirchner Era Seen as Bondholders Win: Argentina Credit

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A man holds a banner with the portrait of Argentine President Cristina Fernandez de Kirchner, reading "Cristina 2015 - The people's strength" during a rally at Plaza de Mayo square in Buenos Aires. Photographer: Juan Mabromata/AFP via Getty Images

President Cristina Fernandez de Kirchner failed to secure enough votes to seek a third term in yesterday’s mid-term election, ensuring the end of her rule in 2015 and validating investor optimism a more market-friendly government will emerge. Bonds rallied.

Fernandez’s Victory Front alliance received 33 percent of nationwide votes while her main candidate in Buenos Aires province lost to former Cabinet Chief and opposition leader Sergio Massa by 12 percentage points. Argentine dollar debt rose today, adding to a 14 percent jump since Aug. 11 primaries that is five times the average in emerging markets, on speculation Fernandez’s waning popularity would dash any chance her coalition would capture enough votes to push through a constitutional change and enable her to seek four more years in office.

The decade-long hold that Fernandez and her predecessor and husband Nestor Kirchner have had on presidential power in Argentina led to currency controls, government takeovers of private companies and annual inflation that’s now estimated at 25 percent. Barclays Plc says yesterday’s results may bolster confidence that the next administration will roll back some of the economic policies that pushed the country’s borrowing costs to 11.6 percent -- among the highest in developing nations.

“These elections are a very important departure point for the markets,” Sebastian Vargas, an economist at Barclays, said in a telephone interview from New York. “It’s very important to know that there will be a change in policy in the future.”

Succession Race

While Fernandez maintained her alliance’s majority in Congress, her candidates lost in the city of Buenos Aires and the populous provinces of Cordoba, Mendoza and Santa Fe.

Attention will soon turn to who Fernandez, 60, who is still recuperating after surgery this month to remove a blood clot close to her brain, may designate as her successor in 2015.

Daniel Scioli, the governor of Buenos Aires province who has been the most visible official in her absence, leads as the most-prepared politician to replace Fernandez with 21 percent, according to a Management & Fit survey. He was vice president under her husband and predecessor Nestor Kirchner.

The 40-year-old Massa, who is currently the mayor of the Tigre municipality north of Buenos Aires, was second in the survey with 19 percent. Mauricio Macri, the mayor of Buenos Aires city, who said last night he will be a presidential candidate, had 11 percent in the poll taken Oct. 11-18.

Bond Rally

Any talk of transition is premature and Fernandez will finish out her constitutional term that ends in December 2015, Defense Minister Agustin Rossi said yesterday. Fernandez who was absent from the campaign and election, will be back soon, her Vice President Amado Boudou said yesterday.

This year, Argentine’s dollar-denominated bonds have returned 13.6 percent even as a legal dispute with disgruntled creditors left from the nation’s $95 billion default in 2001 has pushed the cost to protect against non-payment to the highest in the world.

Stocks in the Merval benchmark index, which have jumped 53 percent since Aug. 11, fell 1 percent at 5 p.m. in Buenos Aires. The Merval has gained 60 percent this year.

Argentina, South America’s second-biggest economy, hasn’t borrowed internationally from bond investors since its default.

Investors demand 8.81 percentage points of extra yield to hold Argentine debt instead of U.S. Treasuries, according to JPMorgan Chase & Co. The gap has narrowed 1.55 percentage points since the primaries.

‘Open Higher’

“This result marks the beginning of a transition to a new government,” Hernan Yellati, head of research at BancTrust & Co. in Miami said in an e-mail. “Markets should open higher reflecting the coming changes.”

Before investors can focus on a new government in 2015, Argentina will have to find a way to stem a plummet in the nation’s foreign-currency reserves, which the government relies on to pay its debt. In October 2011, two days after Fernandez won re-election by a landslide, she began requiring Argentines to obtain approval from the tax agency to buy dollars before banning purchases for savings in July 2012.

Argentines are bracing for a new wave of economic measures as early as today as the government looks to preserve depleted reserves by tightening currency controls and accelerating the pace of peso depreciation, according to BancTrust.

“Yes, she’s weaker, yes, she’ll face more opposition, but she’ll still be in control until 2015,” Daniel Kerner, director of Latin America research at Eurasia Group Ltd., said in a telephone interview from Washington. “Assuming that her health doesn’t deteriorate she’ll still be in charge of policy agenda. I don’t see her backing down.”

Currency Gap

Argentines rushed to buy dollars last week before the election, pushing up the cost to buy foreign currency in a black market to 10.05 per dollar, 70 percent more than the official rate of 5.8906. Investors pay as much as 9.24 pesos to obtain dollars in a financial transaction market known as the blue-chip swap, where peso-denominated bonds or shares are exchanged for dollar-based assets abroad.

To safeguard reserves and persuade Argentines to keep their pesos in savings accounts, the government may speed up the pace of depreciation of the peso and raise interest rates, according to an Oct. 25 report from JPMorgan.

Central bank reserves have tumbled 21 percent this year to a six-year low of $34 billion as the nation’s energy import demands surge and Argentines spend more abroad to skirt the controls.

In the last month, the government agreed to settle arbitration claims with five companies and is in talks with the World Bank to tap $3 billion of loans. Those steps show more moderation in policy, Barclays’s Vargas said.

“We’re going to see more moderation in economic decision-making,” he said. “We’ve already had some confirmation of that direction given the government’s actions after the primary elections.”

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