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Why 75% Of Argentina Doesn’t Care About Candidate’s Corruption Or Honesty

Listen to anyone who has had it up to here with the likes of Cristina Kirchner and they will tell you she is corrupt to high heaven and her economic policies have destroyed Argentina. So what?

They’ll mention last year’s Notebooks scandal, which the Argentines like to say is bigger than Brazil’s Car Wash scandal involving Petrobras and ex-president Luiz Inacio Lula da Silva. Lula is in jail. If Cristina wasn’t a politician, she’d be in jail too. This is what you would hear.

Yet Cristina is far from a prison cell. She is running as vice president to Alberto Fernandez, a former chief of staff of hers and the man widely expected to beat incumbent president Mauricio Macri.

Why do a substantial portion of the electorate not care that Cristina is on the ticket or that anyone framed as a dishonest, corrupt politician does not deserve their vote this year? Based on an August 19 poll by political risk consultancy Frederico Gonzalez & Associates, only 25% of survey respondents said that a candidate’s honesty and position on corruption even matters. Law? Order? Justice? Only 25% give a damn.

The reason is simple: The economy is in a shambles. Inflation is over 55%. Interest rates are over 60%. The peso is garbage. Argentina’s official unemployment rate is over 10%. And Macri brought in the International Monetary Fund, to which the Argentine economy is now on the hook for a whopping $56 billion, the IMF’s biggest ever loan.

Macri can’t win when 58.8% of the country, based on the Frederico survey, say they are basing their vote on economic matters. The reason no one is worried about corruption scandals in Argentina, a concern that wiped out Lula’s Workers’ Party in Brazil in their elections last year, is because the economy is so bad and people blame Macri for their troubles.

As a result, Macri’s numbers were abysmally low in the August 11 preliminary voting round. It suggests that Fernandez could beat Macri in the first round of voting in October.

Macri only has his supporters left, and many of them deserted him a year ago.

New President, Same Old Crisis

Mauricio Macri might be better off losing anyway.

The next president is running out of cash at the central bank, with around $18 billion left to speak of. That gives them less ammo to starve a short-selling frenzy of the peso. In theory, the IMF could finagle something to keep the peso in check, but that’s not what the money was supposed to be used for.

Argentina’s next president might default again.

Their 100-year bonds are trading at 40, meaning 60% off par value. Once again, Argentina is a distressed asset.

See: Argentina Has A New Finance Minister, Again — BBC

Wall Street knows Argentina has to resort to some sort of capital control to stop another default.

Finance Minister Nicolas Dujovne resigned over the recent holiday weekend, and the Ministry reshuffled its staff, but that won’t be enough. Maybe the peso strengthens to 52 in the short run. It won’t last long.  

The more important focus for the market right now, as well as for Macri voters, is how the government handles the economy over the next two months in order to minimize the inflation impacts of a weak peso.

Prior to the August 11 prelim, the peso was trading at 45 to the dollar. The day after, it sank to 55 to the dollar and has been trading in the 50s since.

The only reason it hasn’t hit above 60 is because of Argentina’s Central Bank.

They rifled through $3.3 billion last week and over $5 billion total in August to pay ludicrous interest rates on its short-term lending notes. 

The local headlines suggest risk of another $3.8 billion being tapped this week for the early repayment of a currency repurchase agreement, or “repo” in market lingo. 

That puts net reserves at around $13 billion by the end of August.

Argentina also has China swap lines, U.S. Treasury deposits and private sector bank deposit reserves it could use.

Still, the amount of money in Argentina’s “rainy day” fund is less than that of Ukraine and Kazakhstan. By comparison, Brazil has over $380 billion in foreign currency reserves.

Debtor nations like Argentina use foreign currency reserves as a source to keep their currency in check but are mainly used to provide lenders with a sense of security that the country has enough money to make interest payments.

Siobhan Morden, head of fixed income for Amherst Pierpont Securities, says she suspects Macri’s team might have to rely on a combination of peso weakness, more reserve loss, high interest rates and regulatory controls. But only “as a last resort” to avoid an outright default before election day.

It’ll also be important to maintain stable IMF relations ahead of the $5.4 billion disbursement scheduled for September 15 and to show investors that the IMF has Argentina’s back.

The IMF is in a difficult position here. Its leader, Christine Lagarde, may be ready to move on as her Argentina mega-bailout experiment is looking more futile by the day. Lagarde is next in line to become president of the European Central Bank in October, where the curious world of negative interest rates require a lot of explaining. She’ll be busy preparing for her new job.

Moreover, there is a chance that the IMF may not release September funds unless it feels confident Fernandez would follow the rules that come with it.

If the IMF withholds or delays the September disbursement, it could cause other lenders to bail on Argentina in a move not seen since 2001.

“The Macri administration will likely prioritize debt repayment to avoid default through the interim period,” says Morden, assuming Macri is not reelected.

The electorate can care less about the IMF, and Fernandez and Cristina know it. A vote for them might as well be a vote against the IMF. Paying them back, or any foreign lender for that matter, is not high on their electorate’s wish list.

A bond renegotiation is getting priced in, and it’s a huge discount.

Outside of the securities market, Argentinians are busy trading in pesos for dollars whenever they can. Wealthy Argentinians are buying real estate, in dollars of course. Some are taking money out of the country assuming deeper peso devaluations. That means people earning in pesos and buying dollars are working harder to buy fewer dollars, all the while watching inflation eat away their income.

Fernandez will have to reassure investors ahead of the October elections by appointing a well-respected economic team with market chops. They will find its a delicate balance between pleasing the voters and pleasing the investors who, for the last four years, have been funding Argentina’s government.

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