Argentina crisis deepens as finance minister leaves

Argentina has plunged into further crisis after Finance Minister Martín Guzmán suddenly resigned amid a split within the ruling Peronist coalition, unnerving investors already concerned about rising inflation and poor public finances.

Guzmán, who had led negotiations with the IMF and private sector debtors, announced his resignation on Twitter on Saturday night. He published a seven-page letter in which he cited “political agreement within the governing coalition” as a key factor his successor needed – a reference to infighting between the governments.

Guzmán, an ally of President Alberto Fernández, is the newest and oldest of four cabinet members who have resigned in recent months. His departure is another blow to the president, who faces bleak opinion polls, inflation expected to top 70 percent this year and government bond prices in distressed territory.

The minister had come under heavy pressure from the more radical wing of the Peronist coalition, led by Cristina Fernández de Kirchner, Argentina’s powerful vice president and former leader. The Kirchnerists have repeatedly criticized a deal with the IMF to restructure $44 billion in debt that Guzmán negotiated. They instead want higher spending and more government intervention to fight inflation and poverty.

Political commentators noted that Guzmán announced his departure when Fernández de Kirchner spoke at a rally in memory of Juan Domingo Perón, the general who founded the political movement of the same name. “Perón used his pen to help the people,” she said, praising his signature wellness programs. She also denied that the budget deficit was causing high inflation and called on Argentina to consider a universal basic income.

Guzmán had hailed the IMF deal in March this year as a compromise that would reduce $44 billion in debt and allow him to continue to gradually increase spending in real terms. But Fernández de Kirchner wanted him to spend more and drop a pledge to cut subsidies on energy bills.

The open divisions within the ruling coalition raise questions about the future of the IMF program, which has been criticized by some economists as being too lax for failing to address fundamental structural problems in Argentina’s economy.

Investors are skeptical that a divided and unpopular government facing elections in 2023 could keep the IMF settlement on track, fueling fears of further restructuring and a damaging wage-price spiral.

Argentina is in “great uncertainty,” said Ignacio Labaqui, senior analyst at Medley Global Advisors. Whoever replaced Guzmán would have to “bridge the gap” in the ruling coalition or face the same problems, he said.

Nicolás Dujovne, former finance minister of the center-right opposition, said the problems of Argentina’s economy are deep-seated. “Government has far more problems than the [political] divisiveness: high deficit, printing excessive money and they have lost the confidence of the market,” he said.

Despite complaints about budget cuts by the Kirchnerist bloc, Guzmán “had no fiscal discipline, he did not make the necessary adjustments and he has lost investor confidence,” Dujovne added.

Economists from Citi warned last month that the Argentine authorities are not handling the problems properly. “We believe that a spiral of inflation in the style of the 1980s is a real risk to the Argentine economy, and the likelihood of it is increasing,” they concluded in a customer note.

Alberto Ramos, chief economist for Latin America at Goldman Sachs, wrote in a note to clients: “Given the low political capital of the current administration, there is a risk that the quality of [its] policy mix could weaken further.”

The country’s government bonds have fallen to new lows, hovering above 20 cents on the dollar. Despite exchange controls, local currency pressures are mounting and an expensive energy import bill is preventing Argentina from building dollar reserves.

In the first five months of the year, energy import costs rose 205 percent compared to the same period in 2021, totaling $4.6 billion as a result of rising international fuel prices.

Guzmán would travel to France next week to renegotiate more than $2 billion owed to the Paris Club of 22 countries, including the US, Germany and Japan. The Paris Club gave Argentina more time last year to pay off the debt, giving it time to negotiate a separate IMF deal.

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