Argentina crisis deepens as finance minister quits

Argentina has been plunged into further crisis after finance minister Martín Guzmán quit suddenly amid a split within the ruling Peronist coalition, unnerving investors already concerned about spiralling inflation and dire public finances.

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

An ally of President Alberto Fernández, Guzmán is the latest and most senior of four cabinet members to step down in recent months. His departure deals a further blow to the president, who is facing dismal poll ratings, inflation forecast to exceed 70 per cent this year and sovereign 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 Kirchneristas have repeatedly criticised a deal with the IMF to restructure $44bn of debt, which Guzmán negotiated. They instead want higher spending and more government intervention to combat inflation and poverty.

Political commentators noted that Guzmán announced his departure as Fernández de Kirchner was speaking at a rally in memory of Juan Domingo Perón, the general who founded the eponymous political movement. “Perón used his pen to help the people,” she said, hailing his signature welfare programmes. She also denied the budget deficit was causing high inflation and called for Argentina to consider a universal basic income.

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

The open split within the ruling coalition raises questions about the future of the IMF programme, which has been criticised as over-lax by some economists for not addressing fundamental structural problems in the Argentine economy.

Investors are sceptical that a divided and unpopular government facing elections in 2023 can keep the IMF arrangement on track, stoking fears of yet more restructurings and of a damaging wage-price spiral.

Argentina has been left in “great uncertainty” said Ignacio Labaqui, senior analyst at Medley Global Advisors. Whoever replaced Guzmán would “need to bridge the divide” in the ruling coalition or would face the same problems, he said.

Given the low political capital of the current administration, there is the risk that the quality of [its] policy mix could weaken further.

Nicolás Dujovne, former finance minister for the centre-right opposition, said the Argentine economy’s problems were deep-seated. “The government has far more problems than the [political] divide: a high deficit, excessive money printing and they’ve lost market confidence,” he said.

Despite complaints about spending cuts made by the Kirchnerista bloc, Guzmán “had no fiscal discipline, he wasn’t making the necessary adjustments and he’s lost investor confidence”, Dujovne added.

Economists at Citi last month warned Argentina’s authorities were not properly addressing its problems. “We believe that a 1980s-style spiralling of inflation is a real risk for the Argentine economy, and the probability attached to it is rising,” they concluded in a client note.

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

The country’s sovereign bonds have fallen to fresh lows, hovering above 20 cents on the dollar. Pressure on the local currency is building despite exchange controls and a costly energy import bill is preventing Argentina from building dollar reserves.

In the first five months of the year, energy import costs surged 205 per cent compared with the same period in 2021, totalling $4.6bn because of rising international fuel prices.

Guzmán had been due to travel to France next week to renegotiate more than $2bn owed to the Paris Club of 22 countries, which includes the US, Germany and Japan. The Paris Club granted Argentina more time last year to pay off the debt, allowing time to negotiate a separate IMF deal.