Argentine President Milei suffered a crushing defeat in the crucial Buenos Aires province election, losing by 13 percentage points - far exceeding market expectations and sparking investor concerns about the prospects for his reform agenda. Argentine financial markets collapsed across the board, experiencing a "triple kill" in stocks, bonds, and currency.
In the Buenos Aires province election, Milei's Liberty Advances party secured only 34% of the vote, trailing the left-wing "Peronist" party by 13 percentage points, far exceeding market expectations of a narrow defeat.
This unexpected election result immediately impacted financial markets. On Monday, Argentine dollar bonds fell approximately 5 cents, marking the largest decline since Milei secured a $20 billion IMF bailout in April. The Merval stock index plummeted nearly 13%, on track for its largest single-day drop since March 2020.
The peso weakened nearly 4% against the dollar to 1,418 pesos. Over the past two months, the peso has cumulatively declined 8%, prompting Argentina's central bank to announce last week that it would begin intervening in the foreign exchange market.
Analysts noted that this electoral defeat could signal greater challenges for Milei in the October midterm elections, which are crucial for advancing his austerity reform agenda. Investors worry that public support for his fiscal austerity policies may be waning.
**Election Results Far Exceed Expected Margin of Defeat**
Buenos Aires province holds a key position in Argentina's political landscape, containing nearly 40% of the country's population and votes. After more than 90% of votes were counted, the Peronist "Unión por la Patria" alliance secured 47% of votes, significantly leading Milei's Liberty Advances party's 33.9%.
Pre-election polls and market observers had previously expected this to be a closely contested race, or a narrow defeat for Milei's government. However, the 13 percentage point defeat margin far exceeded market expectations, catching investors off guard.
Milei delivered a rare humble speech on Sunday: "We suffered a clear defeat. We will correct all the places where we made mistakes." However, he simultaneously pledged not to abandon free-market reforms: "We will not retreat even a millimeter. We will not only continue our path, but accelerate forward."
Beyond the electoral defeat, Milei's government faces multiple political pressures. In Congress, his fiscal agenda implementation has been obstructed, with his first presidential veto being overturned by Congress last week, while opposition lawmakers are pushing new spending bills.
A corruption scandal involving Milei's core advisor has severely damaged his image, combined with rising unemployment and the president's high-profile veto of increased pension and disability benefit spending, causing Milei's approval rating to fall below 40% for the first time.
Analysis suggests that while Buenos Aires province has historically leaned more left than other regions of Argentina, this election is viewed as a barometer for the October midterm elections. Milei must expand his minority position in Congress during the midterm elections to continue advancing austerity reforms that have successfully curbed severe inflation.
**Financial Markets Collapse Across the Board**
The electoral defeat immediately triggered comprehensive selling of Argentine financial assets. Dollar bond yields showed a premium of over 9 percentage points compared to U.S. Treasuries, with investors considering this cost too high, making it difficult for Argentina to return to dollar bond markets.
In comparison, the JPMorgan Emerging Markets Dollar Bond Index has delivered nearly 10% returns this year, while Argentine dollar bonds, after surging in 2024, have mostly resulted in losses for investors this year.
The Merval index, measured in dollars, has already become one of the worst-performing among nearly 100 major global stock markets this year, with Monday's crash further exacerbating its decline.
The peso's weak performance forced the central bank to announce foreign exchange market intervention last week. While the IMF bailout agreement technically allows such intervention, this will pressure the IMF's mandate for Argentina to build foreign exchange reserves. The country's foreign exchange reserves remain severely negative.
Emerging market debt manager Thierry Larose stated: "The government's recent policy choices, particularly its approach of defending the peso at all costs, and systematic vetoing of congressional initiatives to increase social benefits, have sparked growing public frustration."
Buenos Aires think tank Equilibra warned that market volatility would shake investor confidence in Milei's ability to maintain exchange rate policy. Institution director Martin Rapetti stated in a report: "If there are no announcements or changes in economic planning or political management, it will be difficult to contain currency devaluation expectations. Without changes, the central bank is destined to lose the battle."
The IMF has abandoned its target for Argentina's foreign exchange reserves to turn positive this year, but expects nearly $23 billion in positive reserves by 2027. These projections assume Argentina can achieve sustainable market access in the coming years.
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