Argentina: Election Setback Highlights Elevated Political Risk

Loss undermines reform momentum, bonds sell off as investors reprice sovereign and corporate risk ahead of October midterms

On September 7, 2025, President Javier Milei’s Libertad Avanza party suffered a heavy defeat in Buenos Aires provincial elections, losing to the Peronist opposition by nearly 14 points. The setback, coming a month ahead of congressional midterms, raised doubts about Milei’s political capacity to advance structural reforms. Axel Kicillof’s potential return to national politics also revives memories of his 2012 YPF expropriation, sovereign default, and currency controls. The loss underscores Milei’s weakened political capital heading into October’s midterms, where his ability to secure congressional support for fiscal and labor reforms will be tested. Investors are recalibrating expectations, with many viewing Kicillof’s rise as a signal that heightened political risk premia could persist.

Morgan Stanley reversed its recent Overweight recommendation, moving to Neutral and citing elevated political risk following the defeat and a corruption scandal involving Milei’s sister. JPMorgan and Bank of America, however, reiterated their Overweight stance, arguing that Milei could recalibrate his political strategy and preserve reform momentum. Goldman Sachs noted that Argentina remains an institutional overweight among hedge funds, despite some trimming of exposure.

As a result, markets reacted sharply on Monday. Argentina’s hard-currency bonds dropped up to 7 cents to around 55 cents on the dollar, pushing yields near 12.7% in the steepest decline in two years. The peso weakened to a new all-time low, sliding as much as 7% past ARS1,400 per USD, while the Merval equity index fell 13% in its worst single-day performance since 2020.