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No merci for Macri

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      By Emerging Markets Debt TeamEaton Vance Management

      Boston - New questions about Argentina's political direction loom large, as incumbent Argentina President Mauricio Macri was defeated in Sunday's primary election in a landslide by Alberto Fernandez and his running mate, former President Cristina Fernandez de Kirchner.

      Macri, who is widely viewed as market-friendly, forged a deal with the IMF in 2018 that involved increased funding in return for accelerated fiscal reform. Despite poor approval ratings prior to the election, both the Macri administration and the central bank have largely stuck with the policy tightening prescribed by the IMF deal.

      While the scale of defeat was a bit of a surprise, it reflects just how frustrated the public had become with the faltering economy, austerity and inflation (one of the highest rates in the world).

      On Tuesday, with about 99% of the vote counted, Fernandez had received 47%, compared with 32.7% for Macri, while former economy minister Roberto Lavagna was in third place with 8.5%. Under Argentine election rules, if a candidate wins at least 45% of the vote, or gains 40% with a 10 percentage point lead, that candidate is declared the winner. If no outright winner is decided in the first round of elections on October 27, a runoff will be held on November 24 between the top two candidates only.

      Sunday's primary election is a follow-on twist to Kirchner's surprise announcement last May that she would not be a candidate for president, and instead would be running for vice president. She asked Fernandez (no relation), a relative unknown, to run as president.

      Kirchner's tenure as president from 2007 to 2015 was widely viewed as a disaster by the markets, as the country was plagued by inflation and defaults on its debt. Macri succeeded Kirchner in 2015 and did a credible job patching things up with bondholders, who fought with Kirchner over terms of debt restructuring. He has also restored relations with the business community and cooperated with the IMF's loan program. Argentina even managed to float a 100-year bond in 2017, after having been cut off from the international capital markets for 14 years.

      Little is known about what set of policies Fernandez will champion. He spent the better part of the last decade criticizing Kirchner, though they are both associated with the Peronist Party. Prior to briefly serving Kirchner, Fernandez was chief of staff to Kirchner's late husband, President Nestor Kirchner. His only elected public service was in the Buenos Aires city legislature.

      Macri could make up a little ground, but it appears likely that Fernandez will be the next president. Fernandez only spoke for a few minutes on Sunday after results came out. No one really knows the extent to which he might reflect Kirchner's policies, and/or strike an independent course that maintains some of Macri's reforms.

      The initial take by investors was negative, with Argentine bonds and stocks falling at Monday's opening. The Argentine peso was also under pressure, with concern over potential for devaluation in the near future.

      It's a truism that markets hate uncertainty, but at least there is the hope that the bad old days of Kirchner will stay in the past. There is evidence that Macri's reforms are beginning to have a positive impact, with growth falling less sharply and the fiscal deficit narrowing.

      Bottom line: Macri ultimately couldn't convince the electorate to hold down tough medicine. Now we will see if Fernandez even tries.