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Ten Weeks of Torment to Know if Argentina Crisis Was Justified

Ten Weeks of Torment to Know if Argentina Crisis Was Justified

(Bloomberg) -- Voters in Argentina face at least ten more weeks of uncertainty before they find out whether the latest market meltdown had any basis in reality.

Investors reacted with alarm to President Mauricio Macri’s stunning defeat by Alberto Fernandez in last weekend’s primary. But that was just the start of the political process: campaigning is still under way for the presidential elections on Oct. 27, and few believe the two main candidates’ mutual commitment to work together to allay the risk of more turmoil.

Ten Weeks of Torment to Know if Argentina Crisis Was Justified

“It’s very difficult for them to compete and collaborate at the same time,” said Miguel Kiguel, a former Argentine policy maker in the 1990s who also served at the World Bank. “I don’t think it’s enough to talk with Macri and show good intentions.”

The upshot is no immediate end in sight to Argentina’s fractured political reality -- nor its parlous economic and financial situation -- until there is electoral clarity. The situation is heightened by a vacuum where Fernandez’s economic team and policies should be; he has said it’s too early to give those details.

Peso Drop

Without Fernandez’s detailed plan, “he can’t give the market what it wants,” said Kiguel.

Neither does Macri appear to have the answers: With the peso down 25% this week, he made a last ditch effort to win back recession-weary voters with a slew of economic band-aids. Still, the chances of a default in the next five years are at 83%, up from 49% last week, though slightly better after bonds rebounded a bit on Thursday.

The political impasse leaves Argentines fearing for the worst, scrambling to buy dollars and bracing for price hikes on food, medicine and other essentials. They know crises all too well. In 1989, the nation suffered hyperinflation, with prices rising 50% per month, forcing the president at the time to hand over power sooner than planned. Argentina next fell off a cliff in 2001, defaulting on $95 billion of debt.

Former Argentine policy veterans don’t see hyperinflation or a sovereign default on the immediate horizon. They also see the onus on Fernandez to try and soothe investors as it’s not in his interests to inherit a crisis that would make governing impossible.

Political Suicide

“We aren’t in 2001 and Alberto Fernandez isn’t thinking about how good a restructuring would be for him,” said Pablo Guidotti, a former central bank director and deputy economy minister in the 1990s. “It doesn’t benefit them to commit political suicide; nobody wants a crisis.”

Guidotti considers this week’s panic to be overblown, and expects political clarity within two weeks and for markets to then calm down. Kiguel, his former colleague, agrees that things are nowhere near as bad as 2001, but sees a greater risk of inflation today. That’s because a free-floating exchange rate means when the peso falls, there’s a more direct impact on prices for food and other necessities. For him, that dynamic raises the risk of panic in the streets.

Looming price hikes would be another blow to Argentines dealing with annual inflation above 50% and an economy that had just begun to emerge from a sharp downturn. Now economists say Argentina could be heading back into recession after this week’s peso plunge.

Ten Weeks of Torment to Know if Argentina Crisis Was Justified

In the election run-up, it remains unclear how Macri and Fernandez might join hands to assuage concerns. Fernandez isn’t in any rush: He said he was too busy teaching a college class Wednesday to quickly respond to Macri’s initial Whatsapp message reaching out. In any case, a mutual understanding between them may not be enough to stave off financial chaos.

“People are focusing on this as a communications issue, ‘what words can he say to calm markets?’” said Benjamin Gedan, former South America director on President Barack Obama’s National Security Council. “The reality is, what policies is he proposing? A reasonable response to address these jitters is to propose policies that don’t terrify investors.”

Some former policy makers feel Fernandez isn’t doing his part to soothe markets. For Claudio Loser, an Argentine and former International Monetary Fund director during the 2001 crisis, Fernandez “hasn’t been totally convincing with his message.”

“So far he hasn’t acted responsibly in terms of calming the economy,” said Loser. The lack of clarity “may please his constituency, but the markets will remain distressed.”

To contact the reporter on this story: Patrick Gillespie in Buenos Aires at pgillespie29@bloomberg.net

To contact the editors responsible for this story: Juan Pablo Spinetto at jspinetto@bloomberg.net, Alan Crawford

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