After 15 years of struggling with outstanding debt payments resulting from the mega default in 2001, the Argentine government finally reached a payment agreement with holdout creditors. The deal marks a major milestone for the fate of Argentina and its President Mauricio Macri as it will allow the country to regain access to international capital markets to obtain much-needed resources to finance local initiatives.

However, for the deal to go through, two laws passed by former President Cristina Fernandez – the “Lock Law” and the “Sovereign Payment Law” – must be repealed by Congress or be annulled by executive decree. These laws effectively prevent Argentina from paying amounts larger than the ones agreed to in the debt restructuring agreement of 2005. Securing congressional support for repealing these laws is far from a done deal.

To this point, Macri has intelligently taken advantage of Congress’ summer recess to exercise “Emergency Supreme Decrees” to pass key corrective policies. One such measure was the elimination of electricity subsidies, which were costing almost 4% of the GDP, a number very close to Argentina’s current fiscal deficit. However, using such decrees to repeal the “Lock Law” and “Sovereign Payment Law” could undermine Macri’s popular and political support, as followers and potential political allies could see his government as a type of “democratic dictatorship.”

Political alliances in Congress are complicated but improving

Prospects to approve Macri’s proposal to repeal the “Lock Law” and “Sovereign Payment Law” are fairly high in the lower house of Congress. Sergio Massa, once one of the most prominent leaders opposed to Macri’s ideas, has declared his party is willing to support Macri in the search for a final solution to the holdout creditors conflict. Masa’s support in Congress is critical for Macri to counter the efforts by some swing Peronist congressmen to block Macri’s bill.

Another point that could end up playing in Macri’s favor is the Peronist block in Congress appears to be more divided than ever. There is considerable tension in the coalition with the Partido Justicialista (PJ) suffering from an identity crisis as it prepares to choose a new leader this coming May. And Kirchnerist Frente para la Victoria (FPV) is dealing with party defections over disagreements on the lack of pragmatism about development priorities. As a result of those differences, 12 legislators from the FPV decided to abandon the party in February, leaving the FPV with only 81 seats. These same lawmakers have now openly announced their willingness to cooperate with Macri on certain issues.

In light of these recent developments, there is a growing and elevated chance that Macri can leverage his coalition’s 92 seats in Congress and support from other parties to attain the 129 votes necessary. This will allow the lower house to eventually ratify his agreement with the group of holdout creditors.

The job in the Senate will be tougher

Assuming President Macri has the ability to persuade opposition members of Congress, his coalition’s small number of seats in the upper house will represent a real limitation. Of the 72 senators, just 15 are part of Macri’s political alliance Cambiemos, while the FPV holds a strong bloc of 43 seats. Of the remaining 14 seats, 11 are Peronists from regional provinces, who are strongly not aligned with the Kirchnerism. But even if those votes support Macri’s proposals, Macri will need the support of an important number of FPV’s Senate members.

As in Congress, it is highly likely that power struggles erupt among Peronist groups, something that President Macri could try to exploit to his advantage.

And President Macri would still have a bullet in his chamber, the aforementioned President’s Executive Power. However, this is the last option the new president would like to use in this specific legislation, as it would put his political power and credibility at high risk and endanger the implementation of other key austerity initiatives on his critical fiscal stabilization agenda.

Although Macri’s first few months in office have proved less problematic than most analysts expected – partially because of low political and social activity during Argentina’s summer’s recess – Macri’s moment of truth has finally come.

Multinationals should continue to engage in scenario and contingency planning in Argentina until there is more clarity around the real effects of Macri’s corrective policies on the country’s macroeconomic stability and business environment.

For our latest updates and insights, FSG clients can visit the client portal. Not a client? Contact us to learn more.