The weakness of the invisible institution

Julio María Sanguinetti often observes that in public life there is an intangible factor, but one so decisive that he calls it "the invisible institution." It is trust . It is the credit enjoyed by leaders who inspire positive expectations. Javier Milei 's relationship with a segment of society has begun to send signals of a deficit in this dimension.

This was anticipated by opinion polls such as the Government Confidence Index and the Consumer Confidence Index compiled by Torcuato Di Tella University: both recorded a 14-point drop between July and August. This was before the audio recordings of Diego Spagnuolo detailing an alleged bribery scheme organized by Karina Milei in the purchase of medicines for people with disabilities.

Citizens' belief that an administration can produce progress is extremely important for any political group. For La Libertad Avanza (LLA), it's vital. Lacking institutional capital, with few representatives and senators, without its own governors or mayors, and disconnected from the union world, this force depends much more than others on favorable public expectations. That's the lever it can use to leverage the political apparatus to help it achieve its goals. That's the lever that's cracking .

Yesterday, the stars aligned to exacerbate this perception of weakness. While the official dollar exchange rate hit the floating band ceiling set by economic authorities for the first time, at 1,474 pesos, the Chamber of Deputies overwhelmingly rejected Milei's vetoes of funding for the Garraham Hospital and universities . These adversities were anticipated for October, should the ruling party lose the parliamentary renewal elections. But they came early in the middle of the election campaign. The exchange rate and the legislative branch are two vectors that reinforce each other.

History loves ironies. The dollar reached its peak on the same day the Buenos Aires Legislature awarded recognition to the Center for the Study of State and Society (CEDES), led by Roberto Frenkel , for its 50th anniversary. According to official nomenclature, CEDES is a kind of monstrous cage of thuggery. Things happen.

The increase in the currency's exchange rate is driven by the belief that the government will be unable to maintain the exchange rate band regime after the October 26 elections. By that date, it is presumed, the state will no longer have sufficient reserves to maintain a fixed exchange rate. This will happen because dollars are scarce. If net liquid reserves are calculated, they amount to no more than 6 billion . Furthermore, it is suspected that this amount is not freely available. When granting its loans, the International Monetary Fund usually establishes guidelines for government intervention in foreign exchange markets. A specific increase in the exchange rate must have occurred over a predetermined period.

These are classic restrictions, which will become more severe due to a new development: Nigel Chalk has been appointed to head the Fund's Western Hemisphere Department , previously headed by Chilean Rodrigo Valdés. He is an economist with a long career at the organization, who worked for years in the shadow of David Lipton , the deputy director who harassed Luis "Toto" Caputo , president of the Central Bank during Mauricio Macri's administration, by preventing him from using reserves to curb the dollar's rise. With Chalk, Caputo may face the same nightmare.

This means that Caputo and Santiago Bausili have their hands tied in containing a dollar surge. It's impossible to imagine them continuing to encourage an interest rate hike. That very recessionary strategy didn't work. Even worse, there are financiers who assume that, by raising the cost of credit to exorbitant levels, the government achieved the opposite effect it intended : alarmed investors rushing to buy more dollars. If you look at the exchange rate curves, it seems they listened to the minister who ordered them, at the end of June, to "buy champion."

Contrary to the recommendations of some officials on the economic team aligned with the Fund, Milei resisted the government's prioritization of reserve purchases. He feared that this policy would put pressure on the dollar and, in doing so, stimulate inflation. The President set out to defend the peso, and in doing so, ended up jeopardizing credit. "Peso or credit? What does the government prioritize? That's the dilemma," maintains Ricardo López Murphy , in a Hamle-like manner.

Since the markets know that Milei has sanctified the goal of containing inflation and, therefore, fixing the price of the dollar by compromising the Central Bank 's reserves, bondholders are dumping their bonds, speculating that they might face difficulties in paying them off. Consequently, the country risk index has reached high levels: yesterday it reached 1,260 points.

The behavior of these variables suggests that the economy could take on a different shape during the second half of Milei's term. With a credit cost like that indicated by yesterday's risk index, it is unthinkable that Argentina could finance itself in the voluntary debt market. In a recalibrated vision of the future, with an electoral victory in October, the index would return to something like 800 points . Therefore, we would have to "live with what we have." This means that the Central Bank would have to work hard to increase its reserves, which would imply a more expensive dollar. That is, a dollar more favorable to exports, through which the trade surplus that the Central Bank would retain would be generated. Imports would not, for a time, be as abundant as they are today. A scenario that promises less consumption and less activity. In other words, the accumulation of reserves would offer a more adverse context for accumulating political power.

Could it be argued that there was very poor management of time, that strategic resource of politics? Milei resisted buying reserves when it was easier to do so. And she resisted seducing allies when it induced a clearer fantasy of power. In her speech Monday night, she promised to "work side by side with governors, representatives, and senators" to face the new era. Yesterday, Congress demonstrated to her that the availability she once had for such a meeting no longer exists. Many legislators went from voting in favor to abstaining, or from abstaining to being in opposition . If you look closely at the vote, representative by representative, one clear example becomes clear: the government slammed all its allies. She did, indeed, get representatives from the Pro and Radical Party (Radical Party) to abandon the chamber for more aggressive initiatives, so that the session would end without a quorum .

To respond to the defeat in Buenos Aires, the government publicized the creation of several "tables." That is, groups of leaders to coordinate initiatives. Marketing to get through the tough times. The most important change was another: Milei ordered three top-level officials to begin negotiations with the governors to align the legislative branch. These three collaborators are Chief of Staff Guillermo Francos; Interior Minister Lisandro Catalán ; and Economy Minister Caputo. The most significant change is Caputo's presence. Until now, the stoic Francos had been negotiating with the Interior leadership, ad hoc, despite the often frustrating decisions of the Treasury Department. Now the head of that ministry will be at the table to ensure that what was promised is fulfilled.

The topic of discussion is also unprecedented. Individual concessions for each province will no longer be discussed. Instead, the national budget, which sets guidelines for federal fiscal relations, will be discussed. This is good news. But it also presents a drawback. The law that the Casa Rosada is proposing to the governors, as a preliminary step to discussion in parliament, is already old. It assumes that next year's inflation will be 10%, a fanciful target for the dollar exchange rate that will result from a policy of acquiring reserves . This variable is also not incorporated, which is why the text assumes that the dollar will remain at current levels. Is it possible to believe that, under the new framework, Argentina will grow by 5% in 2026? There is a right to doubt.

In any case, the transaction with the provincial leaders will not be uniform. There are allies who are more or less convinced, such as Rogelio Frigerio or the Radical Alfredo Cornejo . They cooperate with the government, despite the mistreatment. In another bloc are the governors of the United Provinces party, who compete with La Libertad Avanza in their districts: Martín Llaryora (Córdoba), Maximiliano Pullaro (Santa Fe), Carlos Sadir (Jujuy), Claudio Vidal (Santa Cruz), Ignacio Torres (Chubut), and Gustavo Valdés (Corrientes).

Torres's case is peculiar because he maintains a relatively friendly relationship with Santiago Caputo thanks to their shared friendship with the restless Neuss brothers . A third alignment is more slippery: they call it the "Move Group," which is the name of Caputo's own consulting firm, which would be hired by those provinces. It includes Rolando Figueroa (Neuquén), Alberto Weretilneck (Río Negro), Raúl Jalil (Catamarca), and, it is claimed, Sergio Ziliotto (La Pampa). The list is hypothetical, given the nature of the grouping. As always, politics is tainted by paranoia: is it true that there are governors who were threatened with receiving fewer contributions from the national government because they refused to hire the "Kremlin Wizard" company? Rumor.

The questions surrounding the economic indicators raise a troubling question: will Congress address the law sent by the Executive Branch or request the drafting of another one with new guidelines? The question is pertinent because, as noted yesterday, the representatives and senators Milei will have to deal with are much less accommodating. Dissidents are emerging in allied parties, such as Pro. The most dramatic was yesterday's by Silvia Lospennato . This wasn't because her position against vetoes was too corrosive. The signal that the ruling party is going through a dramatic moment in parliament was provided by Cristian "Pucho" Ritondo with his violent reaction to Lospennato. It's natural for Ritondo to be more excited than usual: he is one of the marshals of the Buenos Aires defeat, especially because the mayors he counts as allies lost in their municipalities. Of course, the conflict runs deeper. The leader of the Pro bloc led his party into an alliance that, in light of the new situation, seems catastrophic. At a time when a significant segment of the anti-Kirchnerist electorate other than LLA was in power, Pro closed its doors and merged with the ruling party.

The Lospennato case, however, is an interesting example of what can happen. Her conduct before the Presidency is not a consequence of the ill-fated strategies of Ritondo and Diego Santilli . Lospennato was mistreated by the authorities, especially by Milei, during the Buenos Aires campaign. Something similar happened to Luis Juez a few days ago. A sign should be posted on the grand staircase of the Casa Rosada with the following message: "Don't step on anyone on the way up. You might find them on the way down."

One of the great enigmas of public life these days concerns the predictive power of the Buenos Aires elections. Were they the first stop in a Calvary of defeats for Milei? It's impossible to know, because these were such atypical elections that there's no way to compare them—neither from the past nor from the future. It's true that, if some reports are to be believed, the Casa Rosada faces bad omens. Is it true that the President's image in Córdoba has collapsed? Given the idiosyncrasies of that electorate, which gave Macri a landslide victory when he lost the presidency, it would be a major change. Tomorrow, Milei will be there.

One might assume that the LLA's defeat in Buenos Aires province was a local event, determined by factors that can be reversed. However, it had such a resounding effect on the general landscape that it deteriorated the public climate, especially the economic climate, to levels that altered the meaning of the October elections. Now, a Milei victory in the general elections would serve not only to launch her administration toward a new frontier of reforms, but to return it to the situation it was in before that defeat.

The message the government issued after the fall matches that gravity. Milei emerged on the scene to offer increased "humanitarian" spending on pensioners, the disabled, and the education system . An uncertain promise, because it's based on a fantasy budget. A curious fact: compared to that speech on Monday, the vetoes that the ruling party deputies defended yesterday seemed anachronistic. Milei also promised to initiate a period of consensus, negotiating with the "caste." And he sent a budget to Congress with a more modest fiscal surplus target than the one agreed upon with the Fund. In other words, since the defeat in Buenos Aires, the President seems to have renounced the essence of his experiment. He seems to have given up on implementing radical reform . Not so much because he lacks vocation. What has been reduced is the room for maneuver. To put it in more conventional terms: Argentina is now facing another Milei. A gradualist Milei. Pardon the word.

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