Javier Milei’s ‘Shock Therapy’ Is Suffering a Stinging Rejection

Manuela Tobias and Kevin Simauchi
·5 min read
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(Bloomberg) -- Two months into Javier Milei’s presidency, his quest to overhaul Argentina’s economy and tame triple-digit inflation has swerved off track.

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It isn’t just that Congress rejected his administration’s request for expanded executive powers — a key element of his plan — but it’s the way he responded, hastily shelving the bill and then lashing out at those who voted against him as government bonds plunged in international markets. Milei’s press office sent out a list of 61 legislators who undermined his bill with the label “those who voted against the people.”

It’s a move, political analysts say, that will only further strain the rapidly deteriorating relations between Milei and the parties he needs to push through his agenda.

It all “speaks volumes about the government’s political inexperience,” said Jimena Blanco, the chief analyst at consulting risk firm Verisk Maplecroft. “The initial willingness of certain opposition blocs to negotiate and collaborate with the executive has been eroded.”

To be clear, Milei’s plan for a quick and drastic overhaul — “shock therapy,” as he called it — was always something of a long shot; he’s a political newbie and his coalition only has a minority of seats on Congress. But the first couple months of his administration had kindled optimism that Milei, who was much more composed and diplomatic in those first weeks than he was as an outsider candidate with a bad boy image, would be able to push through some, if not all, of his reform package.

Read more: Argentina Bonds Slump as Milei Reforms Go Back to Square One

The prospects for reviving the bill are uncertain, especially now that Milei has seemed to pick a fight with opponents, according to two members of congress involved in the debate who asked not to be identified discussing sensitive matters. Milei’s lack of dialogue with moderate wings of Congress was a mistake, and he did further damage to his cause by publishing the list of enemies that included key allies who had previously supported the bill, they added.

Argentina’s bonds, already well into distressed territory, posted the worst performance in emerging markets and their biggest drop since Milei took office Dec. 10, with benchmark notes due 2041 slumping 1.8 cents to 32.7 cents on the dollar. The peso, down 32% this year in parallel markets used to skirt currency controls, posted another day of losses too. It was a particularly painful reversal for investors who followed advice from Goldman Sachs Group Inc., Bank of America Corp. and others to snap up the bonds in the weeks after Milei was elected.

Milei, a former TV pundit who only became a politician two years ago, catapulted to the presidency in November, winning 56% of votes in a landslide election as his party trumped Argentina’s established blocs. He captured votes by pledging to eradicate inflation and political elitism once and for all. He also proposed economic reforms that he’s repeatedly warned would be grueling for Argentines as he unwinds decades of state controls.

Blanco and other analysts see a government without a clear strategy or backup plan to rescue Argentina from one of the world’s most severe economic crises, marked by recession and 200% inflation. In that context, powerful governors and moderate lawmakers in congress “are reluctant to give Milei a blank check extending his power and share the political costs of unpopular adjustments,” said Luciano Sigalov, a researcher at consulting firm Eurasia Group.

Milei’s team has withdrawn the bill from consideration for now, and insists it still has options to push through the president’s priorities. One idea making the rounds is calling a referendum that could apply pressure to lawmakers if it went the government’s way, though some advisers cautioned against the idea.

While last week Economy Minister Luis Caputo described the bill’s importance as “an inflection point in Argentina’s history,” that would provide “backbone for future growth and development,” late Feb. 6 he tweaked his tone, writing on social media “let’s not dramatize this.”

“We are not improvising here,” Caputo told TV station LN+ Wednesday morning. “We may not be politicians, as many say, but we’re not idiots. Clearly we know we are fighting against a group of legislators that don’t want any change in Argentina.”

Investor Meeting

On Wednesday morning, Goldman Sachs convened a call between its clients and Federico Sturzenegger, an economic adviser to Milei, according to people familiar with the matter. Sturzenegger insisted that Milei is committed to fixing Argentina’s fiscal issues and urged patience, according to a person with direct knowledge of the call. A Goldman Sachs spokesperson declined to comment. Sturzenegger didn’t respond to a request for comment.

Caputo and Milei’s strategy to rush the bill through congress without consulting powerful governors or key legislators received push back from the beginning. When the bill was first sent to congress, lawmakers called out Caputo for not attending a committee hearing, to which he replied “I had more important things to do,” like negotiating Argentina’s program with the International Monetary Fund.

Caputo and Milei eventually made major concessions, reducing the original 700 articles by half and withdrawing key aspects, including a series of fiscal policy measures and the privatization of state-run oil company YPF SA.

The lower house of congress actually approved the bill in a general vote last week following three days of marathon debate. But in Argentina, such legislation requires a second vote for each individual article. When legislators sat down on the afternoon of Feb. 6, they rejected seven of the first 13 parts, forcing Milei’s party to withdraw it.

Referendum

Milei routinely warned on the campaign trail that he could utilize popular referendums to get his reforms passed should congress impede his efforts. His spokesman, Manuel Adorni, recirculated a video Wednesday of Milei laying out his legislative strategy from last year, although he clarified by text message he didn’t believe a referendum would be necessary. Wall Street isn’t convinced that’s the best path forward, either.

“A potential non-binding referendum on the bill would increase political uncertainty significantly,” Pilar Tavella, an economist at Barclays Plc, wrote in a note to clients Wednesday. “Market pressure could possibly push the government to show that it has a path forward with a revised fiscal package sooner rather than later.”

--With assistance from Ignacio Olivera Doll.

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