Fernandez Strives to Hold Argentine Congress as Transition Nears

Argentine President Cristina Fernandez de Kirchner is battling to retain a majority in Congress to maintain policies that have spooked investors as support for her coalition plunges to a 10-year low.

Fernandez’s candidates in Oct. 27 mid-term congressional elections are set to replicate results of an August primary in which support for her Victory Front coalition fell to 26 percent from 54 percent when she was re-elected in 2011, according to a survey by Management & Fit. Her leading candidate in Buenos Aires province, Martin Insaurralde, had 33.3 percent support against 40.5 percent for former Cabinet Chief Sergio Massa, according to the Oct. 11-17 poll of 800 people, which had a margin of error of 2.3 percentage points.

While dwindling support makes it unlikely that Fernandez will secure enough seats to push through a constitutional change to allow her to seek a third term in 2015, the composition of Congress won’t change significantly, said political analyst Carlos Fara. Control of parliament will enable Fernandez to extend policies that included the seizure of private pension funds and the country’s biggest energy company, increased limits on imports and a clampdown on foreign currency purchases.

“She won’t be weakened very much,” Fara said in an interview from Buenos Aires. “The balance of power in the two houses won’t be changed enough to complicate things for her.”

The constitution bans presidents from serving more than two consecutive terms. Fernandez would need two-thirds backing in both houses of Congress to modify the constitution.

Election Losses

Fernandez’s coalition stands to lose three seats in both the Senate and lower house, according Rosendo Fraga, director of the New Majority consulting company in Buenos Aires.

“In both cases, if you include other allies, it will maintain a slight majority,” Fraga wrote on his company’s website. Argentina’s 31 million voters will choose 127 of 257 lower house congressmen and 24 of the 72 senators. The Victory Front currently holds 111 seats in the lower house and 32 in the Senate.

Since her re-election, Fernandez, 60, has won congressional backing for all her initiatives, including the April 2012 expropriation of oil producer YPF SA from Spain’s Repsol SA. More recently, the 2014 budget bill was approved by 40 senators, three more than required, and 134 deputies, five more than needed.

With average yields of 11.62 percent, South America’s second-largest economy has been unwilling to borrow internationally since defaulting on a record $95 billion in 2001. Investors pay the highest price in the world to insure Argentine debt against non-payment with five year credit-default swaps. The contracts rose 41 basis points to 1,735 basis points yesterday, according to data compiled by CMA Ltd.

Crime, Inflation

As crime surged and inflation quickened, Fernandez’s approval rating plunged to a three-year low of 29.8 percent in December 2012. The latest survey, taken by Management & Fit Oct. 11-18 following her Oct. 8 surgery to remove a blood clot near her brain, showed approval recovering to 44.4 percent. Fernandez was ordered to rest for 30 days after the operation.

Investors, who bought into a 14 percent rally in Argentine bonds since the Aug. 11 primaries on expectations that Fernandez will be replaced by a more market-friendly government in 2015, aren’t taking account of the more immediate risks of rising inflation, dwindling reserves and the possibility the country may default for a second time in 12 years, said Jorge Piedrahita, chief executive officer at Torino Capital LLC.

“I see the government making some small adjustments here and there but I don’t see a fundamental change,” Piedrahita said in a telephone interview from New York.

Declining Reserves

International reserves have dropped at a pace of about $1 billion a month this year to a six-year low of $34 billion, raising fears among investors the government may run out of funds to pay international creditors.

Fernandez has used $39 billion of central bank reserves since her March 2010 decree authorizing the use of the funds to pay foreign debt. A further $9.9 billion will be used in 2014, according to Economy Minister Hernan Lorenzino.

Fernandez may respond to a poor showing in elections by increasing spending or cutting taxes as she tries to recoup support, according to Morgan Stanley. Such measures may stoke inflation that’s already the fastest in the region after Venezuela, Morgan Stanley said in an Oct. 11 note to clients.

Consumer prices rose 10.5 percent in September from a year earlier, according to the government. That compares with a 25.4 percent increase estimated by private economists in a report issued by opposition lawmakers. In February, Argentina became the first country to be censured by the International Monetary Fund for reporting inaccurate economic data.

Increased Spending

Fernandez has already increased spending on social programs in the run-up to the election. In July, she boosted pensions by 14 percent and raised minimum wages 25 percent. Increased public spending contributed to 8.3 percent economic expansion in the second quarter, the fastest pace in about two years, according to the national statistics agency.

Fernandez will begin the final two years of her mandate locked in a U.S. court battle with owners of bonds left over from the 2001 default. The holdouts, whom Fernandez and her senior officials call “vultures,” refused to enter debt restructurings in 2005 and 2010 that gave creditors new bonds at 30 cents on the dollar for their defaulted securities, the harshest sovereign restructuring since World War II.

Default Speculation

Fernandez’s insistence that she will pay holdouts no more than in previous restructurings has spurred speculation by investors the country would opt to default rather than obey U.S. court rulings in favor of creditors, including billionaire investor Paul Singer’s Elliott Management Corp. Argentina is appealing the rulings.

In 2009, Fernandez lost control of Congress in the aftermath of a strike by farmers protesting plans to raise taxes on agricultural exports. The dispute caused food shortages and roadblocks across the country. She bounced back to win a second term in 2011 with the biggest electoral victory since Juan Domingo Peron returned from exile in 1973.

Emboldened by her success, Fernandez introduced currency controls and tightened import restrictions to stem capital outflows. Foreign exchange controls have spawned a parallel market where Argentines pay more than 70 percent above the official rate to obtain dollars.

Far from being a lame duck in her final two years, Fernandez will command the strongest alliance in Argentina, capable of mustering between a quarter and a third of votes in any election, said Mario Toer, a professor of politics at the University of Buenos Aires.

Kirchnerism, the movement spearheaded by Fernandez and her late husband and predecessor Nestor Kirchner, who died of a heart attack in 2010, is still strong, Toer said. Even with a change of government in 2015, Fernandez may look to consolidate support in her final two years with a view to returning to power in 2019, he said.

“This is still an open game - Kirchnerism arrived on the political scene to stay,” Toer said.

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