BUENOS AIRES – Wall Street rallied Thursday as Argentina's President Javier Milei traveled to Italy for the Group of Seven summit, buoyed by his first legislative victory after the Senate passed sweeping proposals to slash state spending and boost his powers.
Having hitched his political fortunes to the goal of cutting down Argentina's bloated state, Milei hailed the vote as a “triumph" and “the first step toward the recovery of our greatness.”
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Even so, opposition senators scrapped an income tax package and watered down other parts of the bill after a daylong debate marred by clashes between police and protesters in the capital of Buenos Aires.
The legislation aimed at overhauling Argentina’s long-troubled economy during its worst financial crisis in 20 years will return to Congress' lower house for final approval, where it's expected to become law.
In a further boost to Milei's agenda Thursday, data released by the government statistics agency showed Argentina's monthly inflation rate halving to 4.2% in May, the lowest rate since January 2022.
The drop continues a trend of declining prices — on a monthly basis — since January, after Milei entered office and devalued the currency. That sent annual inflation soaring toward 300%, among the highest in the world.
The bill's passage cheered markets. Argentine sovereign bond yields jumped 3.5% on the news, and its country-risk index dropped more than 6% when markets opened. Argentina's currency, the peso, dipped to 1,220 for a dollar on the black market, narrowing the gap between the official and informal exchange rates.
In Thursday's early hours, Senate president Victoria Villarruel, Argentina's vice president, broke a 36-36 tie in the upper house to give overall approval to Milei’s plans to trim the fiscal deficit, incentivize foreign investment and privatize some state-owned companies.
Milei delayed his flight to Italy until the Senate approval then jetted off, exultant.
The right-wing economist is the only leader since Argentina’s return to democracy in 1983 not to pass a law within his first six months as president. A defeat would have pitched his government into crisis.
“Milei has avoided falling off the cliff,” said Lucas Romero, director of the consulting firm Synopsis.
A populist outsider who rode to power attacking the establishment, Milei has found it impossible to enact his promised reforms without compromising. His 3-year-old political party, Liberty Advances, holds 15% of seats in the lower house and 10% in the Senate.
What do the new bills include?
Milei's party made some key concessions, agreeing not to auction Argentina’s flagship airline Aerolíneas Argentinas, post office or radio and TV company. That left a handful of state-owned firms, such as an Argentine natural gas provider, on the list for possible privatization, falling short of his ambitions.
The bills are a diverse array of measures:
1. The most divisive article declares a state of emergency in Argentina for one year and grants the president new powers in matters of energy, pensions, security, taxation and other sectors until the end of his term in 2027. Villarruel again broke a 35-35 tie with her vote.
2. The government will privatize several state companies, including Buenos Aires water and waste management company AySA, national road safety agency Corredores Viales, power provider Energía Argentina and airport service provider Intercargo.
3. An incentive scheme, central to Milei’s ambitions to lure foreign capital, would give lucrative tax breaks and other perks to foreign companies investing $200 million or more. They include exemptions from import tariffs and export duties for three years and preferable tax treatment for 30 years. Critics warn the measures will hurt local industry.
4. Changes to the labor market would make it easier for employers to fire workers by extending trial periods that allow dismissals without cause.
5. A tax amnesty would allow Argentines to register their undeclared assets at home and abroad without paying heavy taxes.
The Senate's rejection of a few other measures — including the lowering of an income tax threshold and pension cuts for civil servants with fewer than 30 years on the job — raises the specter of a cash crunch.
Pressures are mounting over Argentina's rapidly depleting foreign exchange reserves as the government struggles to repay its massive foreign debt, including $44 billion owed to the International Monetary Fund and $18 billion in a currency swap line with China.
On Wednesday, the central bank said it had agreed with China to postpone $5 billion in debt repayments, heading off a repayment deadline that had been looming next month.
How are the Argentines responding?
Using executive powers, Milei has slashed subsidies for electricity, fuel and transportation, causing prices to skyrocket and spreading economic misery. More than half of all Argentines now live in poverty.
The fifth straight month of declining monthly inflation means little to ordinary Argentines, who say their low wages remain stagnant as prices in Buenos Aires restaurants and shops skyrocket to levels seen in American and European cities.
“A year ago I had a completely different life, I could travel, I could eat well,” said Vivi Rola, a 69-year-old teacher in downtown Buenos Aires, as street cleaners were still sweeping away broken bottles, rocks and incinerated metal from the previous night’s violence when police fired tear gas and water cannons and angry protesters clashed with the officers.
“Now I just hope to make it to the end of the month,” Rola added.
The left-leaning Peronist movement, aligned with former president Cristina Fernández de Kirchner, decried the bill's passage as the latest political catastrophe for Argentina, which has been shaped by its brutal military dictatorship in the late 1970s.
“We were able to overcome the dictatorship, and surely this is going to be a new, different challenge,” said Agustín Rossi, the former chief of staff.
Analysts say that the passage of Milei's legislation signals a sharp reversal from Peronist administrations that ran vast budget deficits. That has already reassured markets.
“The Milei government showed it’s on a political learning curve, which is positive for investors and markets whose main concern is how much of his reform promises will materialize,” said Marcelo J. García, Americas director at geopolitical risk firm Horizon Engage.
But the razor-thin vote means that Milei's victory comes “at an extremely high cost,” said Mariano Machado, analyst at risk intelligence company Verisk Maplecroft. He said roadblocks cannot be ruled out as the bill heads back to the lower house.
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Associated Press writer Almudena Calatrava in Buenos Aires, Argentina, contributed to this report.