The coalition government led by President Cristina Fernández de Kirchner’s FPV faction of the Justicialist (Perónist) Party is suffering a steady erosion of its support among a constituency disillusioned by worsening economic trends, corruption scandals, and an overbearing style of governance. The FPV’s diminishing popularity has negative implications for rumored plans to amend the constitution so as to permit Fernández to seek a third term in 2015.

With economic growth having slowed markedly and capital flight a major concern, the government faces pressure to take corrective action. However, the administration shows little inclination to embrace the liberal policies that might improve Argentina’s attractiveness to investors. Instead, the government has resorted to yet more controls.

A tightening of restrictions on access to foreign currency has been accompanied by a characteristic populist sop in the form of an edict freezing retail prices at supermarkets and for electrical services. Similarly, the government has approved an expansionary pre-election budget that the country cannot really afford.

The rapid drawdown of foreign-currency reserves will continue to make Argentine debt a risky bet.

An ongoing legal case involving nearly $1.33 billion worth of Argentine bonds held by investors who rejected the terms of the government’s 2005 and 2010 restructuring deals is nearing its end. A final ruling by the US Court of Appeals expected by June. 

A decision against Argentina would confront the government with the choice: paying the holdouts in full or defaulting on payments on the restructured debt that fall due in June.

After soaring in February, debt insurance costs have fallen amid signals from government officials that they will find some means of continuing to make payments on the restructured debt, regardless of how the court rules. The yield spread for Argentine bonds against U.S. Treasuries has also narrowed, as political tumult in Venezuela has directed some investors toward Argentina.

Nevertheless, at more than 11 percent, the spread remains one of the highest among emerging markets. And the rapid drawdown of foreign-currency reserves — the government’s main source of funds to service the debt — will continue to make Argentine debt a risky bet.

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