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Hedge funds have increased their bets against Argentina’s bonds following the emergence of a radical rightwing candidate, Javier Milei. Investors are concerned that if Milei becomes Argentina’s leader during an economic crisis, he will struggle to govern effectively.
The value of Argentina’s bonds borrowed by investors for shorting purposes has risen by 65% since Milei won the primary poll last month. Milei, a self-proclaimed “anarcho-capitalist,” has proposed radical measures such as substantial cuts in public spending and the dollarization of the country’s struggling economy. These plans have unsettled Argentina’s fixed income and currency markets. International custodian banks currently hold $41 million worth of short positions against Argentine bonds, a significant increase from $25 million prior to the mid-August vote, according to S&P Global Market Intelligence data.
Although the numbers may seem small in comparison to Argentina’s overall debt value, this surge is notable since the bonds are already trading in deeply distressed territory.
International investors are cautious due to the ongoing turmoil in Argentina’s fragile economy. The country is facing inflation of over 113%, dangerously low foreign exchange reserves, and the peso has lost more than half of its value against the dollar in the past year.
“Given Argentina’s dire macroeconomic situation, there is no room for errors,” said Alejandro Arevalo, head of emerging markets debt at Jupiter Asset Management.
Investors are concerned about the challenges Milei may face in implementing much-needed reform policies without a majority in Congress or support from powerful labor unions. Additionally, Milei’s inexperience and radicalism pose execution risks.
“The question is not whether the proposed reductions in public spending will trigger social protests, but rather how Milei will respond to these protests,” Arevalo added.
Among the candidates, Patricia Bullrich, a more moderate rightwing politician, is considered the most market-friendly. Bullrich also advocates for fiscal consolidation. Milei’s plans to drastically reduce government spending have raised concerns about the feasibility of his proposals.
“The dollarization plan of the leading candidate, Javier Milei, is radical and problematic, and it is unclear if it is achievable or worthwhile,” said Paul Greer, emerging markets debt and FX portfolio manager at Fidelity International. “The market will face significant challenges if he attempts to implement it.”
The primary election result has compounded Argentina’s ongoing political deadlock. With the electorate divided between Milei voters, the mainstream center-right party, and the incumbent populist Peronists, analysts predict that a runoff in November is highly likely.
Investors are concerned about the potential consequences in Argentina between now and November, as the devaluation of the exchange rate adds further pressure to
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