In Argentina: Total Meltdown

Argentina’s bonds collapsed on Monday following a “shocking” landslide loss for President Mauricio Macri in a primary election.

The Kirchner-allied Alberto Fernandez garnered nearly 48% of the vote to Macri’s 32%, a result that bodes ill for the president’s chances in October. If the same result plays out, there won’t even be a runoff. 45% of the vote (or 40% and a margin of 10 points), wins the presidency outright.

The (much)wider-than-expected 15.5 percentage point margin is generally seen as insurmountable and the vote is a rejection of Macri’s policies. “This election is over”, Lucas Romero, director of polling firm Synopsis, remarked.

The most recent opinion polls had the margin in the 2-8% range and 7% is generally seen as impossible to overcome.

Obviously, market participants aren’t thrilled about the prospects of a Fernandez/Kirchner economy. The peso crashed, as expected.

“[The win] by Peronists Fernandez and Kirchner paves the way for the return to left-wing populism that many investors fear”, Capital Economics said in a note.

“The probable deterioration of sentiment and the resulting tightening of financial conditions in coming days and weeks may pose yet another headwind to the still fragile recovery of the Argentine economy”, Goldman wrote of the results. The bank went on to warn that “from a political standpoint, renewed depreciation pressures on the Peso may delay and perhaps even reverse the incipient decline in consumer price inflation, harming the image of the Macri administration and weighing further on the president’s reelection bid”.

Argentina’s eurobonds plunged. It looks to me like yields have risen by something like 4 percentage points.

(Bloomberg)

The country’s overtly silly (and infamous) “century bonds” collapsed too.

(Bloomberg)

This almost surely means markets for anything to do with Argentina will return to (at least) the type of panic witnessed last year, when Argentina and Turkey suffered meltdowns that presaged a tough summer for EM amid a recalcitrant Fed. Argentina was forced to resort to draconian rate hikes amid the drama.

Read our Argentina archive to relive 2018’s drama

“[Any] FX intervention could see markets test the central bank’s resolve, forcing it to run down its reserves [and] that would have echoes of last year’s currency crisis”, Capital Economics said, in the same note mentioned above.

“Our scenario now includes a complicated transition period [and] we do not rule out the eventual announcement of FX controls to avoid financial chaos and guard off international reserves”, BNP remarked on Monday. “ARS will be under pressure and so the sovereign debt”.

The Argentina ETF is in full-on meltdown mode, falling nearly 30%.

BofA isn’t mincing any words either. Here’s an excerpt from something the bank’s GEM FI & FX Strategy LatAm team put out Monday called “Investors should brace for impact”:

We expect strong pressure in the FX market, given default concerns next year and as Fernandez has emphasized the peso is extremely overvalued and needs a correction. Also, he proposed the return to capital controls on hot money similar to the one used during Kirchners’ government (30% unremunerated reserve requirements and 1 year holding periods). Anticipation of ARS devaluation and controls would add severe pressure on the FX market in coming days.

It’s entirely possible that there will be some contagion (albeit short-lived) to the rest of the EM complex. “The market will now need to factor in a substantially higher probability of negative debt dynamics, capital controls and some kind of forced debt re-profiling”, Pimco warned Monday.

“Recognizing that we have had a bad election, we are forced, starting tomorrow, to redouble our efforts so that in October we will get the support that is needed to continue the change”, a hapless Macri told supporters. “This is something that nobody expected. Nobody had these numbers. All the pollsters have failed”.