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Hedge funds boosted bets on Argentine bonds as the emergence of radical-right candidate Javier Mire sparked investor concern that the country would elect a leader who would struggle to govern in the throes of the economic crisis .
The total value of Argentine bonds borrowed by investors has risen 65 percent since Milley, a self-described “anarcho-capitalist,” won last month’s primary election ahead of October’s presidential election.
His plans to slash public spending and dollarize the country’s struggling economy have shaken the country’s fixed income and currency markets. The value of short positions in Argentine bonds lent by international custodian banks is now $41 million, up sharply from $25 million before the mid-August vote, according to S&P Global Market Intelligence.
Although small compared to the total value of Argentina’s debt, the surge comes even as bonds have been traded in the deeply troubled region.
International investors have turned cautious after a period of turmoil in Argentina’s faltering economy. Inflation is over 113%, foreign exchange reserves are dangerously low and the peso has lost more than half its value against the dollar in the past 12 months.
“Given Argentina’s dire macroeconomic situation, there is no room for error,” said Alejandro Arevalo, head of emerging markets debt at Jupiter Asset Management.
He added that investors were concerned that Mire would struggle to implement much-needed reform policies without the support of a congressional majority or Argentina’s powerful unions, and that Mire was an inexperienced and radical leader, posing an execution risk.
“The question is not whether the proposed cuts in public spending will spark social protests, but how Millais will respond to those protests,” Arevalo said.
Investors said the most market-friendly candidate was the more moderate right-wing Patricia Bullrich, who also proposed a fiscal consolidation plan. Although Murray said he would slash government spending, his stance has raised concerns about the viability of his proposals.
“Leader candidate Javier Mire’s dollarization plan is aggressive and questionable, and it’s unclear whether it’s achievable or worthwhile,” said Paul Greer, portfolio manager for emerging markets debt and FX at Fidelity International. “If he tries to do that, the market will have a hard time dealing with that.”
The primary election results also prolong the period of political paralysis. With voters roughly divided into three factions: Millais voters, mainstream centre-right parties and incumbent populist Peronists, the October election is in jeopardy and analysts say a November runoff is all but certain.
Investors are worried about what will happen in Argentina between now and November, as the currency depreciation puts more pressure on the country’s rising inflation problem.
“A dire situation could become dire in the short term,” said Peter West, economic adviser at EM Funding. “I’m not predicting that will happen, but there is a possibility that Argentina may be stuck in a Hyperinflation – monthly inflation is likely to be in the double digits for the next few months.”
Immediately after Milley won more than 30 percent of the vote on Aug. 13, Argentine dollar bond prices fell 15 percent, weakening the value of the peso on unofficial exchange rates. The central bank reacted quickly, devaluing the official exchange rate by 18 percent to 350 pesos to the dollar, helping bonds recoup some of their losses.
The blue-chip swap rate, a free-floating exchange rate for international investors buying stocks and bonds, continued to weaken to above 780 pesos to the dollar on Friday.