Libertarian bliss and Macri’s shadow

Initial surprise at the unexpected electoral victory for Javier Milei’s libertarians has turned into full blown euphoria. Economy Minister Luis ‘Toto’ Caputo has been making the rounds, once again promising a boatload of US dollars in terms of productive investments while defending the government’s economic policy scheme – particularly the questioned exchange rate “bands” that limit the strength and weakness of the peso. 

We’ve seen this story before. On the political front, President Milei seems to have taken a back seat, with Presidential Chief-of-Staff Karina Milei in charge of everything, empowered after the widespread victory in national midterm elections a few weeks ago. Having elevated presidential spokesperson Manuel Adorni to the role of Cabinet Chief, while bringing on Diego Santilli as Interior minister, Karina is trying to secure the trifecta of reforms her brother needs to supposedly put Argentina on an inexorable path to economic greatness. Adorni and Santilli are already negotiating with provincial governors and other political sectors in order to secure votes for labour and tax reforms. They appear less pressed to push pension reform, probably remembering widespread protests and the beginning of the end of Mauricio Macri’s government in 2017 when he passed his own reforms. Macri had also managed to pass a tax bill at the time, as well as a fiscal pact with provinces. But his government ended in shatters, meaning that reforms don’t guarantee success. Of course, this is not a problem for Milei at this moment, as he continues to bask in his victory and dream of hegemony.

Milei and his La Libertad Avanza coalition have been given a second chance – one that Macri dreamt about. In one way, this is arguably the “second half” of Macri’s time in office, given that Milei has absorbed several of his former key players into his governing structure: ‘Toto’ Caputo in charge of the economy; Patricia Bullrich at the Security Ministry securing the streets and now in charge of leading the libertarian caucus in the Senate; Diego Santilli, the freshly appointed Interior Minister; and Federico Sturzenegger, at the Deregulation & State Transformation Ministry. All of them had been working on political projects that were previously part of the Juntos por el Cambio coalition, the one that imploded after Macri failed to generate conditions for unity between Bullrich and former Buenos Aires City mayor Horacio Rodríguez Larreta. Now, Macri sits on the sidelines while his cousin Jorge defends the libertarian siege in Buenos Aires City, while several of his most trusted lieutenants have deserted and sworn allegiance to the purple banner.

To a certain extent, the surprise September regional electoral defeat in Buenos Aires Province, at the hands of Governor Axel Kicillof and local mayors, begat the current situation of libertarian bliss. Milei and Caputo had burnt through all the dollars they could get their hands on and their economic model was melting down. Losing “the mother of all battles” in province sparked a series of mini-crises that exposed the cracks of the system and ultimately led to an emergency bailout from the United States. Trump also tried to save Argentina during the Macri administration, but the International Monetary Fund rescue came too late and in the context of a global repositioning of portfolios that particularly hit emerging markets more broadly and Argentina specifically. This time around, Caputo (having learnt his lesson) refuses to lift currency controls, which he considers fundamental in the context of Argentina’s wild swings of the political pendulum. He also counts on the explicit support of US Treasury Secretary Scott Bessent, who intervened directly in Argentina’s currency markets and has announced potential bond purchases. This is an unprecedented level of support, coming as Caputo looks to “shield” debt payments from the vicissitudes of the market. Bessent will be there holding his hand, all the time pushing him to test voluntary debt markets. Argentina’s economy minister also needs the Central Bank to accumulate foreign exchange reserves.

The US backstop has generated a sensation of hope and optimism that the Milei administration is looking to capitalise on. Markets are surging and the country risk premium has shrunk aggressively. Local businessmen are beginning to make investments while international investors have their eyes on the country. In order to demonstrate that the country is trustworthy, Milei needs to secure political support for his reform agenda. He was successful in his first year in office by acting pragmatically, contrary to expectations. The electoral campaign saw the Casa Rosada radicalise its positions and its attacks on the whole of the political class, including circumstantial allies. This, in part, fed the expectation that they would suffer a defeat in national midterms that could position the opposition, particularly Peronism under Kicillof – locked in a constant power struggle with Cristina to draw in those circumstantial allies, if proper bait is put on the table. Demonstrating they are capable of securing governability via political agreements is probably more important than the actual substance of the reforms. It is one of the main requirements from the White House and the IMF in order for emergency financing to keep flowing.

Looking back at the Macri experience, there are multiple risks that could derail Milei’s ambitions of reelection in 2027. From a macroeconomic standpoint, Milei and Caputo depend on the backstop from the United States, the IMF’s support and other temporary financing that has allowed the government to get this far, not without staring into the abyss. The risks of maintaining an overvalued peso, together with negative reserves at the Central Bank’s coffers, have been made explicit by the market. At the same time, the level of recession and rising indebtedness is particularly stringent, having a strong impact on firms and individuals, a necessary component in any economic recovery. Failing to lift the economy out of the negative trend it is currently stuck in will erode Milei’s popularity and could harm governability, as happened with Macri and his pension reform. And there’s always a black swan risk, particularly on the external front, for which the Argentine economy is nowhere near to being able to absorb. Known unknowns and unknown unknowns, to cite former US defense secretary Donald Rumsfeld.

On the political front, unforced errors and self-inflicted wounds have been the name of the game during the Milei years. Macri felt invincible in the aftermath of the 2017 midterm victory, as does the President today. But hubris is a dangerous ailment for victorious politicians. A civil war is waging within the Casa Rosada between controversial political strategist Santiago Caputo and Sister Karina. It’s dragged on since before the campaign, as ‘Caputito’ (as the spin doctor is called) amassed power from behind the scenes and sought to impose a strategic path. Karina, who has a symbiotic relationship with her brother, has delegated power to the Lower House Speaker Martín Menem, his cousin Eduardo ‘Lule’ Menem and LLA Buenos Aires Province organiser Sebastián Pareja. Now they’ve added Adorni, Santilli and Bullrich to the close-knit group that sets the political orientation of the Milei administration. Caputo isn’t too happy about it, even if he still retains substantial power. The confrontation generates unnecessary noise and increases the possibility of making mistakes. Dirty laundry is constantly being aired by the antagonists themselves. To a certain extent it almost feels acted out, but that would be giving them too much credit.

Milei and his top-line officials must look in the mirror and try to see where Macri failed. And Fernádez de Kirchner before him, and Alberto Fernández afterwards. The opportunity is there for the taking, Macri’s famous “second half” – the liability, as is generally the case, sits at the seat of power. All the way to the top.