(Bloomberg) -- Argentine dollar bonds reversed earlier losses as investors digested the surprise news that former populist leader Cristina Fernandez de Kirchner will run as a vice president with a more moderate candidate in October’s election, rather than seek the top job herself.
After falling as much as 0.8 cents early Monday, bonds pared most of their losses by the end of trading with some securities even gaining a cent. The yield spread over U.S. Treasuries narrowed 30 basis points. Bonds issued under Argentine law underperformed, while New York-law debt ended higher. The peso closed 0.4% lower and stocks ended higher.
While some investors stressed that the opposition Peronist movement was now more likely to win the election, others argued Kirchner’s decision is a slight positive because it reduces the odds she’d reverse President Mauricio Macri’s market-friendly policies if she won the vote.
"It takes away the risk that you have a problem with a more aggressive Cristina," said Andres Vilella Weisz, portfolio manager at Balanz Capital in Buenos Aires. "Any move by Cristina distancing herself from the presidency is marginally positive for Argentine assets."
Kirchner’s running mate, Alberto Fernandez, is a career politician with no experience on the national ballot. Still, he has broader appeal in the amorphous Peronist movement, where Kirchner’s left-wing, polarizing positions created divisions and the possibility of rival candidates.
Govern by Proxy
Kirchner’s move is a push to convince voters that with Fernandez heading the ticket, the pair would be more moderate, giving them a better chance of beating Macri, said Daniel Kerner, managing director for Latin America at Eurasia Group.
The announcement took markets by surprise. Kirchner was already leading Macri by a razor-thin margin in presidential polls. In theory, she had a chance to win on her own. It also raised questions as to how much influence Kirchner would yield if her ticket wins and whether or not she would govern by proxy.
To some, Kirchner’s decision to run as a vice-presidential candidate acknowledges the limits of her presidential bid. She faces multiple corruption cases, and top officials from her former government are behind bars on graft charges. Her second term, which finished in late 2015, was also marked by a default, high inflation and unpopular economic policies.
"Nobody resigns to a presidential future out of strength, but out of weakness: the announcement is a sign of weakness by Cristina Kirchner," said Marcos Buscaglia, an economist at consulting firm Alberdi Partners in Buenos Aires.
In Argentina, there’s a first round of voting on Oct. 27. To win outright, the top candidate must receive 45% of the vote or 40% with more than a 10 percentage-point difference over the second-place contender. If not, there’s a runoff vote on Nov. 24. With several polls showing a dead heat between Macri and Kirchner, analysts had thought the most likely scenario would be a runoff vote between the two.
Fernandez, 60, served as cabinet chief to Kirchner’s late husband Nestor, who was president from 2003 to 2007.
“His main advantage is his moderate speech: he is market-friendly and anti-default,” said Sergio Berensztein, an Argentine political analyst.
The next government’s top economic priorities should be the country’s debt, inflation, and the fiscal deficit, Fernandez said in an interview with local newspaper Ambito Financiero. He said that entering debt talks with private bondholders was seen as a more feasible scenario than doing so with the International Monetary Fund, which gave Argentina a $56 billion credit line.
Fernandez added that capital controls were not a "good solution" because they blocked dollar inflows.
Roberto Lavagna, an economist who was preparing to run for president under another Peronist group, confirmed that he will continue his push despite Kirchner’s announcement.
Macri faces a tough decision because he counted on Kirchner being the presidential candidate with Peronists divided. His top campaign strategist, Jaime Duran Barba, told Bloomberg in April that “the people who think Kirchner is not going to be a candidate are crazy.”
For now, Macri’s team is treating Kirchner’s announcement as a cosmetic change and still plans to campaign against her as if she were the main candidate. Investors still seem to be digesting the news.
"Everything is up in the air," said Patrick Esteruelas, head of research at EMSO Asset Management. There’s "more questions than answers. Cristina has kicked the table but we don’t exactly know how the pieces will fall."
(Updates to reflect market rally late in the day.)
--With assistance from Carolina Millan and Philip Sanders.
To contact the reporters on this story: Patrick Gillespie in Buenos Aires at firstname.lastname@example.org;Jorgelina do Rosario in Buenos Aires at email@example.com
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