Argentine political twist could provide balm for troubled markets

[May 20, 2019]  By Cassandra Garrison

BUENOS AIRES (Reuters) - Argentine markets, rattled during recent months by rising political uncertainty, could get a reprieve after the populist ex-leader seen as challenger No. 1 in this year's presidential elections said she would instead run on someone else's ticket.

Cristina Fernandez de Kirchner – a former president who has an ardent support base but is unloved by global investors – surprised locals and international observers alike on Saturday by saying she would run as vice president alongside former cabinet chief, Alberto Fernandez, a veteran political operator who has both backed and criticized her in the past.

Economists said the move could temper the self-styled populist's more contentious policies, even if it was also a clever ploy to return to power after struggling to win over the more moderate wing of the broad Peronist opposition.

That would likely be a balm for markets ahead of elections in October. The reemergence of the divisive ex-president, who had been climbing in the polls as incumbent Mauricio Macri stumbled over a biting recession and high inflation, had hammered the peso currency and caused bond yields to spike.

"I think the market will react well because this is basically a recognition of weakness on the part of Cristina Kirchner," said Ilya Gofshteyn, a senior emerging markets strategist at Standard Chartered Bank in New York.

"She wouldn't be running as a vice president if she thought she could win as president."

Cristina Fernandez is considered by investors to be a riskier prospect because of her past populist policies. She introduced currency controls and tax increases on farm exports while in office between 2007 and 2015.

Alberto Fernandez criticized her management after he resigned from her administration in 2008 and forged ties with other factions of Peronism opposed to her ruling party.

J.P. Morgan said in a note that past criticism could actually help the running pair if it assuaged people's fears that the lower-profile Alberto Fernandez would simply be a figurehead with his deputy holding the real power.

"In a government it is the president who makes the decisions," Alberto Fernandez told local media on Saturday, responding to suggestions he would be a puppet of the former leader who still commands raucous crowds.

Argentina's former President Cristina Fernandez de Kirchner waves to supporters after the presentation of her book "Sinceramente", at the Buenos Aires book fair, in Buenos Aires, Argentina May 9, 2019. REUTERS/Agustin Marcarian/File Photo

Others, however, said that if markets sensed a political upheaval, even one without Cristina Fernandez at the helm, it could create volatility.

"There will be some negative reaction with an upward exchange rate and some stocks and bonds dropping," said Argentine economic analyst Gustavo Neffa at Research for Traders. "However, the election race is still very open so there can be changes."

The unexpected ticket could also win support from more moderate Peronists who may not have voted for Cristina Fernandez herself. And with annual inflation at above 55%, job losses mounting and a tumbling peso, hard-hit voters are open to change.

"[Cristina Fernandez] is aiming to capture that more moderate segment that does not approve of Macri's management," Mariel Fornoni, a political analyst for Argentinian consultancy Management and Fit, told Reuters.

Macri, a free-market advocate, has worked to boost economic activity in the previously closed economy, but is struggling to reverse an economic crisis. He negotiated a $56.3 billion financing deal with the International Monetary Fund last year.

The crisis has contributed to uncertainty among investors, who feared political upheaval if Macri lost to Cristina Fernandez, opening the door to defaults and debt restructuring.

Gofshteyn said there was still time for a strong third candidate to emerge, but he didn't believe investors would give the same weight to Cristina Fernandez's vice presidential candidacy as they would to her as a potential president.

"There is this idea that you can somehow transfer your popularity to another candidate, but that's just not the way it works. Name recognition matters a lot," he said.

(Reporting by Cassandra Garrison; Additional reporting by Gabriel Burin and Nicolas Misculin; Editing by Adam Jourdan and Daniel Wallis)

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