Morgan Stanley sees a 50% odds of bearish outcome after 2027 elections

Although the elections that will determine whether President Javier Milei secures a second term are still a year away, Argentine government bonds are increasingly pricing in the possibility of a change in the political direction in 2027.

According to a report Morgan Stanley sent to its clients — obtained by the Herald — Argentine bonds “now price a 41-52% probability of a bear case outcome after the 2027 elections, up from 11-20% three months ago.”

The bank’s analysts explained that this estimate results is based on the combined probability of the three most likely scenarios — “Policy Continuity,” “Muddle Through” and “Default” — for the first payment due to private bondholders after the 2027 elections.

On January 9, 2028, one month after the new president takes office, US$3.8 billion in government bonds will come due. The previous payment is scheduled for July 9, 2027.

Morgan Stanley assigns two-thirds of its adverse scenario to a “Muddle Through” outcome, meaning severe financial strain while debt payments remain current. The remaining third is allocated to a default that would leave the January maturity unpaid.

The favorable scenario, meanwhile, assumes policy continuity and continued access to financing.

Nevertheless, the report argued that the fact that most bonds are already pricing in a nearly a 50% probability of a bearish outcome less than a year out before the elections “is not warranted and looks like an overshoot driven by positioning unwind, even if data and domestic sentiment have been weaker than anticipated.”

The bond sell-off and the rise in country risk One direct consequence of the massive sell-off in Argentine bonds has been a sharp increase in the country’s risk premium over recent months. The index, compiled by J.P. Morgan, measures the credit risk of sovereign borrowers seeking financing in international private credit markets.

After hitting an eight-year low last July — when it fell to around 400 basis points — Argentina’s country risk has climbed steadily ever since, reaching 900 basis points, its highest level in a year. Milei’s victory in the midterm legislative elections had previously restored market confidence.

As of Wednesday, J.P. Morgan’s index for Argentina stood at 852 basis points. Although that represents an improvement compared with recent days, the index is still up nearly 50% so far this year.

Consulting firm EconSur explained in its latest client report that markets do not need to anticipate a change of government or a default to demand a higher premium on Argentine bonds.

“It is enough for investors to perceive greater uncertainty about the continuity of the policies they consider necessary to sustain the debt,” the firm explained.

It stressed that maintaining credibility over time matters because “sustainability requires fiscal and external results to remain consistent over several years.”

The consulting firm noted that this explains why the rise in country risk has coincided with improvements in Argentina’s credit ratings in recent months.

“Credit rating agencies assessed the fiscal consolidation already achieved, while the market also weighs the ability to refinance debt under adverse conditions and the possibility of future changes in policy direction,” it said.