Peso plunges further, bonds down again on fears Argentina could return to populism

By Cassandra Garrison and Jorge Otaola

BUENOS AIRES (Reuters) - Argentina's peso and dollar-denominated bonds dropped again on Tuesday as market turmoil spilled into a second day following opposition candidate Alberto Fernandez's landslide victory in a primary election that dealt a severe blow to President Mauricio Macri's re-election chances.

The peso lost 9.32% of its value to reach 59 per U.S. dollar. The currency had hit an all-time low on Monday of 65 to the dollar, a drop of 30%, on fears that a Fernandez government could take Argentina back to interventionist economic policies.

“The market thinks Fernandez will likely default and impose capital controls and renegotiate with the IMF. In a nutshell, the market thinks Fernandez is the return of populism,” said Claudio Irigoyen of Bank of America Merrill Lynch (BAML).

Fernandez, who has former President Cristina Fernandez as his running mate, pulled off a stunning upset in the primary with a wider-than-expected 15-point lead over Macri, a free market proponent.

Monday's crash in the peso unnerved global equities investors, with markets already jittery over the Sino-US trade war and protests in Hong Kong.

“Yes, Argentina is a small economy. However, the last thing global markets want to see is another market-friendly government fall to populism and/or geopolitics,” said Rabobank strategist Michael Every.

In an interview Monday, Fernandez said he was willing to collaborate with the current government after his primary triumph on Sunday sent the peso, stocks and bonds reeling.

Argentine assets had not recorded the kind of simultaneous fall seen on Monday since the South American country's 2001 economic crisis and debt default, Refinitiv data showed.

After an initial tentative move high on Tuesday morning, traders said the market turned and left dollar-denominated bonds down roughly 10 points down across the board, though volume was low.

The primary results showed Fernandez, a former cabinet chief, was well placed to win October's general election in the first round. He blamed Macri for the market turmoil.

“The dialogue is open, but I don't want to lie to Argentines. What can I do？ I'm just a candidate, my pen doesn't sign decrees,” Fernandez said in an interview with Argentine TV channel Net TV broadcast on Monday.

Fernandez, regarded as a moderate within the Peronist movement, has said he would seek to “rework” Argentina's $57-billion standby agreement with the International Monetary Fund if he won the general election. He has proposed an economic and social pact to combat inflation, which is running at 55%.

Macri, a scion of one of Argentina's wealthiest families, came to power in 2015 on promises to kick-start Latin America's third-largest economy via a liberalization wave.

But the promised recovery has not materialized and Argentina is in recession.

Investors were still assessing the damage caused by Monday's crash. Argentina's country risk rose 164 basis points to 1,631, the highest since 2009.

The cost of insuring against an Argentine sovereign default jumped again on Tuesday, according to data from IHS Markit. Markit's calculations price the probability of a sovereign default within the next five years at more than 72%.

Analysts also predicted the peso's fall would continue. BAML said it expects the exchange rate at 70.5 by end-2019 and 106.6 by end 2020.