Milei team tries to stem bribery scandal as bonds and peso sink

President Javier Milei’s top officials moved to contain fallout from bribery allegations against an ally that are weighing on Argentina’s dollar bonds amid a liquidity crunch that’s sent interest rates soaring.

Eduardo 'Lule' Menem, a close aide to the president’s sister and chief-of-staff Karina, denied any wrongdoing on Monday in a corruption scandal that erupted last week and dominated local media through the weekend.

Economy Minister Luis Caputo, meanwhile, attributed market pricing to high political risk ahead of looming midterm elections. Rates will soon go back to levels where “we all would like to see them,” he said in a post on X.

Sovereign bonds fell across the curve Monday, lagging emerging peers. Notes due in 2035 fell by more than 1.6 cent, trading around the lowest in a month, according to data compiled by Bloomberg. Argentina’s official peso weakened nearly 2.5 percent to 1,354.7 per US dollar as of 12.18pm local time.

“The corruption case looks pretty serious, especially given the electoral backdrop,” Pedro Siaba Serrate, an economist with Portfolio Personal Inversiones in Buenos Aires, said by email. “At the end of the day, whether it actually shifts voter behaviour is up for debate,” he added, but there’s no doubt the blow to the currency and sovereign bonds “reflects a significant dose of added uncertainty.”

Monday’s market move isn’t being driven just by the scandal’s electoral implications, but by “the challenge for the president’s image and credibility,” said Joaquín Bagues, managing director at local brokerage Grit Capital Group. “It will depend a lot on the government team’s resilience and strategy to get through this.”

Last week, the president fired Diego Spagnuolo, director of Argentina’s disability agency, ANDIS, after local media published leaked audio messages allegedly discussing bribery in the organisation, which he linked to Menem and Karina Milei.

Early Monday, Menem issued a statement saying the scandal is the result of a “crude political operation” by former president Cristina Fernández de Kirchner’s left-wing opposition meant to tarnish the government two weeks before elections in Buenos Aires Province. The September 7 vote in Argentina’s largest province will send a key signal to investors ahead of national midterms in October, in which Milei hopes to increase his libertarian party’s standing in Congress.

“No-one has ever mentioned any act of corruption to me, nor have I had any knowledge of anything illegal happening at Andis or any other state agency,” Menem said. He added that couldn’t speak to the authenticity of the audio messages.

In the recordings, first published Wednesday, Spagnuolo allegedly says the bribery scheme brings in between US$500,000 and US$800,000 per month.

Martín Menem, a libertarian lawmaker who is Lule’s cousin and serves as lower house president, also appeared on local television station A24 to deny any corruption in Milei’s government. Describing the audio messages as of “questionable origin,” he said their content is “absolutely false.”

On the economic and financial fronts, opposition lawmakers threatened the primary budget surplus Milei touts as his crowning achievement by passing various spending measures last week. And the government imposed liquidity provisions aimed at propping up the peso, raising concern among commercial banks.

Caputo acknowledged that the resulting spike in borrowing costs risks clouding Argentina’s economic outlook. But “we believe that this rate hike will be temporary, because the elections will be very favorable” for Milei’s libertarians. “There could be some impact on the level of activity in the short term,” he added, “but it should recover quickly after the elections.”