Is it all over for Milei?

A landslide election defeat for Argentine President Javier Milei’s Libertad Avanza party has made money markets doubt whether he will be able to push through his radical economic reforms.

The Argentine peso lost 5.6 percent to the dollar and the Merval stock index plunged by 13 points on Monday after the flamboyant President’s party trailed the leftist opposition Peronist party of former President Cristina Kirchner by 13 points (47 percent to 34 percent) in local elections in Buenos Aires province – which, with 40 percent of the country’s voters, is the country’s biggest and most populous area.

Bond markets also reacted negatively to the shock result, posting their biggest daily falls since they recommenced trading in 2021 after a debt reconstruction deal. The markets are worried that the heavy defeat for Milei means that he is also heading for a beating next month in midterm Senate and congressional elections that he needs to win decisively in order to override constitutional bars on his ambitious libertarian plans to reform Argentina’s antiquated statist economy.

Milei, a political outsider who revels in the label “anarcho-capitalist,” came from nowhere in November 2023 to win the Presidency in a shock result on a platform of radical right-wing economic transformation to rescue the country from decades of stagnation and decline. He took to waving a chainsaw at public rallies to symbolise his plans to slash jobs in the government’s bureaucracy.

Milei appeared on stage with Donald Trump and Elon Musk after the U.S. President won his second term in the White House a year after Milei’s victory on a similar promise to cut government jobs and save huge amounts in state spending. But this surprise electoral defeat raises the possibility that Argentina’s voters are experiencing buyers’ remorse when faced with the harsh reality of Milei’s job cuts.

Milei reacted to what he admitted was a “clear defeat” with defiance. While acknowledging that he would need to “process” the setback he said he would not retreat from his policy by “even a millimetre”. On the contrary, he pledged to accelerate and even deepen the cutbacks.

Public worries about an economic slowdown have been compounded recently by rumors of a corruption scandal involving Milei’s sister. Audio clips were released of an official in a disability charity claiming that Karina Milei – who is secretary in the presidency – was accepting half a million dollars in bribes in exchange for awarding government pharmaceutical contracts. Milei and his sister have denied the claims, but since Milei won the Presidency partly by denouncing Peronist corruption, the allegations are to say the least, embarrassing.

In his first year in office, Milei certainly made a determined start in fulfilling his campaign promises to curb inflation and begin his drive to reduce government spending. He devalued the peso by 50 percent, cut the number of ministries by half, and dramatically slashed state subsidies on fuel and transport. He also fired tens of thousands of civil servants who he deemed surplus to requirements.

Despite initial jitters about the wild-haired President’s freewheeling style, the markets liked what they saw and inflation did start to fall, while Argentina’s bank reserves reached record levels. But as Sunday’s electoral setback proved, the Argentine people – especially those in and around the capital, a long time Peronist stronghold have grown increasingly frustrated that their economic situation has not improved more rapidly.

Argentines have grown comfortable after decades of relying on handouts from a bloated state sector, so Milei’s ruthless austerity has come as an unwelcome dose of reality.

The reliance on support and subsidies from a state that couldn’t really afford the handouts fuelled hyperinflation and bred unhealthy habits of dependence, as well as stifling free enterprise and initiatives.

If Milei is now unable to force through his libertarian reforms in the teeth of opposition from the powerful Argentine establishment, and second thoughts by the voters, the clear danger must be that the country will revert to the bad old ways under which it was misruled for so long.