More than Pope Leo, it is the economy that worries Milei: the spread and doubts over his re-election

Buenos Aires. Pope Leo XIV’s visit to Buenos Aires comes at a difficult time for the Argentine economy. The conflict between the United States and Iran has driven up the price of oil, putting pressure on US inflation and interest rates. Added to this are the fluctuations in the Brazilian market following the elections, which have also had repercussions for Argentina. And finally, Donald Trump, the American ally who had backed President Javier Milei, suffered a heavy defeat in the mid-term elections.

However, as early as mid-July, Argentine bonds began to diverge from those of economies with similar risks, such as Angola and Ecuador. Bond prices fell in several countries, but the decline in Argentina was much more pronounced. A domestic factor explains the sharp rise in ‘country risk’ (the spread): the unexpected slowdown in economic activity. In July, the economy contracted by 2.9 per cent compared with June, and in August it remained stagnant. Growth forecasts for this year compiled by the Central Bank have plummeted in just a few months: from +3 per cent in June to the current +0.7 per cent. Behind this decline lie the loss of purchasing power of wages and the slowdown in private credit: two drivers which, together with exports, had been decisive for the previous recovery. The labour market has also deteriorated, more due to increasing job insecurity than to a surge in unemployment: since the start of the year, over 275,000 permanent jobs have been lost in the private sector, more than offset by informal jobs that are lower-paid and of inferior quality.

The economy is not the only factor determining the vote, but this deterioration is eroding confidence in the government. In September, the University of Tella’s Government Confidence Index stood at 39 per cent, close to the lows of Milei’s presidency. This highlights the link with country risk. As the market favours Milei’s policies and fears those of Peronism, reduced chances of re-election increase the likelihood of an opposition victory and cause share prices to plummet. This is what was seen in 2025: the spread rose in September following the victory of Peronist Alex Kicillof in the province of Buenos Aires and plummeted in October following Milei’s success in the parliamentary elections.

The rise in the spread over recent months has made borrowing more expensive and forced the government to suspend dollar-denominated debt placements on the domestic market. These were intended to cover payments until the end of the year and to create a buffer for 2027, when Milei will be seeking re-election. The government’s financial plan estimates a net funding requirement of 17.1 billion dollars for 2027. The credit expected from these institutions has already been deducted from the payments to the IMF and other bodies. To cover this, the plan envisages $3.5 billion from the government’s account with the Central Bank by the end of 2026, $5 billion from domestic foreign-currency issues, purchases totalling $4.9 billion on the foreign exchange market, $1.5 billion from privatisations and $2.2 billion from other sources.

The point is that a large proportion of these resources is uncertain. The government has around $800 million in its account, against a similar payment due to the IMF, which could wipe it out. To reach the projected balance, 3.5 billion is needed by the end of the year, but the instrument used was precisely the debt issues that have now been suspended. If the spread does not fall, the 5 billion in placements planned for 2027 are also at risk. In total, 8.5 billion depend on financial conditions that are currently uncertain. It is a vicious circle: the rise in the spread reduces funding, fuels doubts about the ability to service the debt and causes the spread to rise even further.

The government’s economic team claims to have alternatives, such as activating part of the swap agreement with China or seeking US support (already used in 2025). But it seems difficult to combine the backing of two rival powers. Furthermore, Trump’s defeat in the mid-term elections, with the loss of both houses, could limit his scope for intervention in Argentina if the Democrats were to introduce a bill requiring congressional approval.

But there is a second vicious circle: the price of the dollar. A rise in the exchange rate would push up prices, reducing purchasing power and economic activity, leading to an even more restrictive monetary policy. This would weaken Milei’s electoral prospects, further widen the spread and complicate financing, with the risk of triggering a run on the dollar that would fuel the process. It is important to note that this remains a future risk: at present, the dollar is stable and there are no signs of an imminent surge, but the supply of foreign currency must be monitored.

In October, private debt placements were at their lowest level of the year. In August and September, they had helped to stabilise the dollar, alongside record crop yields and energy exports. The slowdown has no immediate impact because companies convert dollars into pesos as and when required. However, if issuance does not pick up again, that supply will shrink. The high spread is also hampering private placements.

The trend could reverse if inflation were to fall and purchasing power and economic activity were to improve. In August, real wages rose again and wage negotiations leave open the possibility of a further improvement in September. If this trend continues, the spread could narrow, lending could pick up again and the vicious circle could turn into a virtuous one. This is the government’s gamble, although it seems unlikely that the uncertainty will dissipate as the elections draw nearer.

Milei is counting on a fall in inflation to improve voters’ economic circumstances and win back their support. But deadlines will not wait for the recovery. If funding remains frozen and doubts begin to affect the dollar, reducing inflation could become more costly for the economy and for Milei. The challenge would be how to reach 2027 without these difficulties reinforcing one another.