Argentina’s Bonds Climb on President’s Reforms. What Could Stop Him.
Bondholders are keeping faith with Javier Milei’s radical reforms as Argentina’s chainsaw-wielding president wraps up his first 100 days. Benchmark 2030 bonds have climbed to 50 cents on the dollar from less than 40 cents when Milei took office on Dec. 10.
Argentine legislators are less enthused. The Senate voted down Milei’s wide-ranging Decree of Necessity and Urgency 42-25 last week. The Chamber of Deputies will probably follow suit, killing the president’s Plan A for overhauling his country’s floundering economy. Milei withdrew a still more ambitious “omnibus bill” from the lower chamber for lack of support last month.
Investors applaud Milei’s unilateral actions, like slashing fuel subsidies and transfers from the central government to Argentina’s 23 provinces. He cut the peso’s official exchange rate in half, boosting key agriculture exports and easing currency flows.
Argentina reached a primary budget surplus (excluding debt service) in January and February for the first time since 2011, says Thierry Larose, portfolio manager for emerging markets local debt at Vontobel Asset Management. Inflation has halved to a still vicious 13% monthly on Milei’s brief watch. “From a pure financial perspective, he has been quite successful,” Larose notes.
Lawmakers are watching a different metric: poverty, which by some measures has soared from 40% to 60% in Argentina since last autumn. Milei needs Congress, where his Freedom Advances coalition holds a tiny minority, to push through structural reforms to pensions, labor, and state-owned enterprises, among other sclerotic sectors.
“If all Milei achieves is budget cuts, he will bring economic pain without fixing the source of recurring crises,” says Benjamin Gedan, director of the Wilson Center’s Latin America Program.
Milei has unveiled a political Plan B, end-running Congress to conclude a “May Pact” with the nation’s governors. While details are vague, cash-strapped regional leaders will probably sign on to something, which could make Congress more malleable, says Alejo Czerwonko, chief investment officer, emerging markets Americas, at UBS Global Wealth Management.
The key structural reform to watch is pensions, agree Czerwonko and Larose. The current system is inequitably tilted toward state employees and indexed in a way that embeds inflation. “You need to update the pension formula so that it doesn’t become a very strong headwind as inflation moderates,” Czerwonko says.
Milei may also find a relatively soft target in the “social movements” and unions that Peronist predecessors set up as middlemen for welfare payments to the population, Gedan says. “He could try to circumvent these patronage networks,” he adds.
Argentines seem willing to bear Milei’s painful reforms so far, judging by relatively muted popular protests. “After 100 days, the honeymoon is still more or less there,” Vontobel’s Larose says.
Nonetheless, Milei’s landslide defeat in the Senate marks the end of any expectations that he could wave a magic wand over Argentina’s manifold difficulties. “It is unlikely in one presidential term to undo 70 years of decline,” Czerwonko concludes.
Milei’s personal transition from firebrand maverick to horse-trading executive playing an exceedingly weak legislative hand looks imperfect at best. After withdrawing his omnibus bill, Milei declared he “wouldn’t negotiate with traitors” who had “swindled” their congressional seats.
The good news for bond traders is they don’t need Milei to succeed—with a capital “S”—for Argentine bonds to be worth 50% of par. The bull run reflects assumptions that the country’s next restructuring will be delayed by a year, Larose says.
Not exactly an achievement for the history books.