The Argentine crisis worsens with the departure of the Minister of Finance

Argentina has been plunged into a new crisis after Finance Minister Martín Guzmán suddenly resigned amid a split in the ruling Peronist coalition, confusing investors already concerned about spiraling inflation and disastrous 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 ruling coalition” as a key factor his successor needed – a reference to government infighting.

An ally of President Alberto Fernández, Guzmán is the latest and oldest of four cabinet members to resign in recent months. His departure deals another blow to the president, who is facing dismal polls, inflation expected to top 70% this year and sovereign bond prices in troubled territory.

The minister had come under heavy pressure from the most radical wing of the Peronist coalition, led by Cristina Fernández de Kirchner, a powerful vice president and former Argentine leader. The Kirchneristas have repeatedly criticized a deal with the IMF to restructure $44 billion in debt, which Guzmán brokered. Instead, they want higher spending and more government intervention to fight inflation and poverty.

Political commentators noted that Guzmán announced his departure as Fernández de Kirchner spoke at a rally in memory of Juan Domingo Perón, the general who founded the eponymous political movement. “Perón used his pen to help people,” she said, praising his welfare 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 refinance $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 his promise to cut subsidies on energy bills.

The open split within the ruling coalition raises questions about the future of the IMF program, which has been criticized as too lax by some economists for not addressing the fundamental structural problems of Argentina’s economy.

Investors doubt that a divided and unpopular government in the face of the 2023 election can keep the IMF deal on track, fueling fears of more restructuring and a damaging wage and price spiral.

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

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

Despite complaints about spending cuts made by the Kirchnerista bloc, Guzmán “had no budgetary discipline, he was not making the necessary adjustments and he lost the confidence of investors,” Dujovne added.

Citi economists warned last month that authorities in Argentina were not properly addressing its problems. “We believe that an 1980s-style inflation spiral is a real risk for the Argentine economy, and the likelihood attached to it is growing,” they concluded in a client note.

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

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

In the first five months of the year, energy import costs jumped 205% compared to the same period in 2021, totaling $4.6 billion due to rising international fuel prices.

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

Julio V. Miller