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An opinion poll suggesting that Cristina Kirchner, former president and current leader of the centre-left Citizen’s Unity party, would beat Macri in the second round of the October election by a margin of 9 points threw the markets into a spiral of negative sentiment that pushed Argentinian bond spreads to levels not seen since the pre-Macri era. Other Latin American countries were among the worst hit in the emerging markets contagion that followed.
The question now is whether Macri can prevent the peso weakening against the dollar and hyperinflation. His credibility is damaged and hopes are fading that his government is capable of pulling Argentina back from another economic brink. All the while Kirchner is firmly placing the blame for the instability at the president’s door.
The elections on 27 October are still some way off. As uncertainty mounts, the pressure on Argentina’s currency and bonds will continue to build. And with the government’s hands tied by IMF conditions, it cannot intervene in the foreign exchange market until the peso reaches 51.44 to the US dollar, the top of its band.
Macri still has some options open to him before risking emptying the public coffers with an unsuccessful currency market intervention. Firstly, the government could announce dollar-denominated debt buy-backs to reassure the market that a default is not imminent. A second possibility is to pay maturing peso-denominated debt in dollars to avoid another run against the domestic currency.
Finally, clarifying whether Macri himself will run as a candidate or whether his party will replace him with Maria Eugenia Vidal, currently the governor of the Province of Buenos Aires and more popular than Macri, would bring some relief to the markets.
All in all, the economic and political forecast for Argentina is very cloudy. However it is too soon to say if this is the last tango for Macri or his government. With credit default swaps pricing in at least 50 per cent probability of default, the sell-off seems to be overblown and remaining invested in a country with a small overweight in local and external debt makes sense.