Following a crucial local election defeat, Argentine President Javier Milei has made a rare admission that the country's financial markets have entered a crisis state.

According to latest reports, Milei acknowledged during a Friday evening interview with local journalists that "markets are in a state of panic."

His political setback has already triggered deep concerns about the sustainability of his reform agenda, leading to accelerated capital outflows and financial market turmoil. Milei's latest statement has further intensified market anxiety, with investors fearing he may abandon defending the peso, causing its exchange rate to enter "free fall."

Over the past month, the Argentine peso has depreciated more than 10% against the US dollar, and has plummeted over 34% in the past year.

Argentine bonds and stocks have declined across the board, with capital outflows visibly accelerating.

**Reserves Under Pressure, Defending Peso Proves Costly**

To support the peso exchange rate, the Argentine government is consuming its already limited foreign exchange reserves at a "frantic pace."

Derek Holt, Head of Economics at Scotiabank Capital Markets, wrote in a report that Argentina's central bank deployed $1.1 billion in interventions within three days - a staggering figure for a country that economists estimate has less than $20 billion in liquid foreign reserves.

Milei is "burning through currency reserves at a frantic pace to prop up the free-falling peso." Holt warned that forcibly maintaining the current exchange rate could risk returning the country to hyperinflation, which would jeopardize the core of Milei's reforms.

Despite the high cost, the Argentine government appears determined. Economy Minister Luis Caputo stated during a podcast program Thursday evening: "We will use the last dollar to defend the upper limit (of the exchange rate band)."

**Argentine Financial Markets Decline Across the Board**

Against the backdrop of heightened political uncertainty, Argentine asset prices across all categories have experienced significant declines. Investors are withdrawing from the country at an accelerating pace, with obvious pressure on bond and stock markets.

This presents a stark contrast to the early period of Milei's presidency. After this libertarian economist took office at the end of 2023, his policies of substantial spending cuts and comprehensive reforms were welcomed by global investors, driving the country's financial markets higher across the board. The inflation rate once declined from over 100%, earning Milei brief support.

Christine Reed, Emerging Markets Local Currency Debt Portfolio Manager at Ninety One in New York, stated: "It may be too early to say this story is collapsing, but all the new information we've received in the past week has been negative. The outlook ahead of the midterm elections has deteriorated significantly."

**Political Headwinds Create Obstacles for Reform Agenda**

The erosion of market confidence stems from the strong political headwinds facing Milei's austerity agenda. In recent days, Milei's political opponents in the House of Representatives have intensified their counterattacks, overturning two of his controversial vetoes on education and healthcare spending.

The consensus view is that the Senate holds a more hostile attitude toward Milei's government, meaning higher spending bills are likely to pass. These political setbacks signal that Milei will face more difficulties during his remaining term, directly contributing to further declines in the country's asset prices.

Additionally, the left-wing Peronist opposition's victory in the key province of Buenos Aires has unsettled investors. In the Buenos Aires provincial election, Milei's La Libertad Avanza party received only 34% of votes, trailing the left-wing "Peronist" party by 13 percentage points - far exceeding market expectations of a narrow defeat.

**Dim Prospects as Market Expectations Turn Pessimistic**

As political uncertainty intensifies, market outlook for Argentina is rapidly turning pessimistic.

Gramercy Fund Management predicted in a Friday research report that foreign exchange and asset price volatility is expected to continue before the October 26 national midterm election voting. The report noted: "The challenging political backdrop and its short-term impact on the macroeconomic landscape increases the likelihood of debt management actions in Argentina next year."

Facing these difficulties, Milei indicated his government is developing strategies for next year's debt repayment and hinted at possible negotiations with an overseas institution regarding financial assistance, though he stated he would not announce anything before confirmation.