By Cassandra Garrison and Hugh Bronstein
BUENOS AIRES (Reuters) - Argentina's peso currency collapsed on Monday while stocks and bonds crashed by a degree not seen in 18 years as voters flirted with a return to interventionist economics by snubbing market-friendly President Mauricio Macri for the opposition in Sunday's primary vote.
The peso initially dropped 30.3% to a record low of 65 per U.S. dollar on Monday, but partially recovered later in the day to 55 per U.S. dollar, traders said, after opposition candidate Alberto Fernandez - whose running mate is former president Cristina Fernandez de Kirchner - dominated the primary by a much wider-than-expected 15.5 percentage point margin.
Fernandez has said he would seek to "rework" Argentina's $57-billion standby agreement with the International Monetary Fund if he won October's general election.
Argentine stocks were among the top losers on the Nasdaq and the local Merval stock index was down 31%. Falls of between 18-20 cents in Argentina's benchmark 10-year bonds left them trading at around 60 cents on the dollar or even lower.
Refinitiv data showed that Argentine stocks, bonds and the peso had not recorded this kind of simultaneous fall since the South American country's 2001 economic crisis and debt default.
The comprehensive victory by Peronists Fernandez and Kirchner "paves the way for the return to left-wing populism that many investors fear," consultancy Capital Economics said in a note to clients.
"With a renewed focus on sovereign default risks, bonds, equities and the peso will come under severe pressure in the coming days. That said, falls in the currency might be tempered by intervention in the foreign exchange market," it said.
Argentina's central bank intervened hours after local markets opened, selling $50 million in the foreign exchange market to defend the peso in the face of the massive sell-off. The auction used the bank's own reserves for the first time since September of last year, traders said. The bank later said it would auction another $50 million of reserves.
Dollar auctions by the bank over recent months had been carried out using funds from the treasury.
According to Win Thin, global head of currency strategy at Brown Brothers Harriman in New York, for global trading purposes the peso market does not have a measurable impact. He does not expect an emerging markets-wide contagion from the peso's demise.
"It's a very small market," Thin said. "Ever since Macri reopened the markets, took some market-friendly measures, there’s been a trickle of activity back in the peso and Argentine assets in general. Money has been trickling back in but it is still very minimal."
Thin added that "beyond Brazil and maybe Uruguay, it's going to have a very limited impact from an economic standpoint."
MACRI STRUGGLES
Macri, a scion of one of Argentina's wealthiest families, came to power in 2015 on promises to kick-start Latin America's third-largest economy via a liberalization wave.
But the promised recovery has not materialized and Argentina is in recession with inflation at over 55%.
An acute financial crisis last year hit the peso and forced Macri to take the IMF loan in return for pledging to balance Argentina's deficit.
Despite Macri's struggles, investors see the Fernandez ticket as a riskier prospect due to the opposition's previous interventionist policies.
Sunday's result indicated that Fernandez had enough support to clinch the presidency in October's first round, without having to go to a November run-off election.
A candidate needs at least 45% of the vote, or 40% and a difference of 10 percentage points over the second-place runner, in order to win the presidency outright.
Argentina's main political parties had already chosen their presidential nominees, allowing the primary to serve as a first concrete measure of voter sentiment.
Edward Glossop, Latin America economist for Capital Economics, predicted higher inflation in a country that has fought against chronic rising prices for decades.
"We will probably see inflation rising, assuming the peso doesn't recoup some of those loses," said Edward Glossop, Latin America economist for Capital Economics.
"The key point there is that high inflation means the peso will need to continue to weaken to maintain its competitiveness," Glossop added. He said it was "completely feasible" for the peso to drop to as low as 70 per U.S. dollar.
Fernandez said the market reactions were in response to Macri's failures on the economy.
"Markets react badly when they realize they were scammed. We are living a fictitious economy and the government is not giving answers," Fernandez said in a radio interview Monday morning.
Voters were given a stark choice to stay the course of painful austerity measures under Macri or return to economic policies that are heavy on state involvement.
Kirchner imposed strict currency controls that slammed investment during her 2007-2015 administration. She fought with the farm sector over export taxes and presided over a multi-year standoff with bondholders that kept Argentina locked out of the international capital markets.
"I would say they (bonds) are pricing in a much higher probability of a default," said Aberdeen Standard EM portfolio manager Viktor Szabo.
Szabo did add however that they were still above the 40 cents level that would truly reflect a fully fledged default.
Fernandez prevailed on Sunday in the majority of the country's provinces, but one of the starker differences was seen in the poor suburbs of Buenos Aires.
What particularly dented Macri's support were newly impoverished Argentines who were more energized to vote to punish him at the polls, political analysts said.
(Graphic: Argentina primary election link: https://tmsnrt.rs/2MWp6jj).
Analysts predicted Sunday's results could be the final nail in the coffin for Macri.
"Macri has already implemented a number of short term measures to try and shore up support ahead of the October vote. Additional promises can be made, but the gap he needs to make up is a very wide one," said Ilya Gofshteyn, senior emerging markets strategist at Standard Chartered (LON:STAN) Bank.
Right-wing Brazilian President Jair Bolsonaro warned that his country could see a wave of migrants fleeing Argentina if Fernandez wins the presidential election.
Bologna has cast himself as foe to the left-wing leaders around Latin America and celebrated his friendship with Macri.