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Buenos Aires province elections on Sunday ahead of

national

midterms election on October 26

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Votes seen as biggest test yet of radical policies of

President

Javier Milei

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Markets have seen sharp selloff since scandal involving

Milei's

sister in August

By Marc Jones and Rodrigo Campos

LONDON, Sept 5 (Reuters) - Some of the world's top

investment banks are backing Argentina's markets to bounce if

fiery leader Javier Milei comes through key election tests which

begin this weekend without too much damage, but suffer if he

doesn't.

The rally fostered by Milei's chainsaw-style reforms has

taken a significant hit in recent weeks as a mix of political

pressure, scandal and currency worries has put investors on

edge.

The main stock market fell over 14% last month, the

most since February 2024, while international government bonds

have sold off and an accelerating slump in the now-unpegged peso

saw the treasury u-turn this week and start

intervening in the FX market.

The focus for Sunday's Province of Buenos Aires (PBA)

election is on how much of the vote goes to the opposition

Peronists - the big-state movement Milei swept out of power in

2023 on a platform to resuscitate the economy and quash

corruption.

Recent weeks though have been dominated by a scandal

involving Milei's sister and gatekeeper, Karina Milei, after

recordings emerged of what appeared to be a senior government

official suggesting she was getting kickback payments.

The president has dismissed the allegations as lies. But his

popularity ratings have taken a hit and were dealt a further

blow on Thursday as Argentina's Congress struck down his veto of

a bill increasing disability benefit spending.

The peso is down 6% since the scandal broke while bond

yields, which move inversely to prices, have risen to nearly 13%

- well above the sub-10% level the government would

realistically need to regain access to international capital

markets.

Still, it is unclear how much real effect the turmoil will

have on the election. Many of Milei's supporters have shrugged

off the allegations and some of Wall Street's top banks are now

urging clients to buy up beaten-up bonds and stocks.

"Assuming Milei avoids a disastrous outcome that threatens

governability in the remainder of his term, Argentina has

significant value," JPMorgan said in a note on Thursday which

maintained its 'overweight' recommendation on the bonds.

GAME THEORY

Morgan Stanley and Citi have issued similar calls too, with

the former sticking to its view that yields will be under the

crucial 10% threshold by the end of the year.

"We see attractive valuations in both sovereign credit and

equities and recommend investors add into the recent weakness,"

Morgan Stanley analysts said.

The other scenario though is that Milei takes a drubbing.

Morgan Stanley warns the bonds could drop another 10 points

if he does, compared to an 11 point rise by year-end if his

position and radical reforms hold.

Geronimo Mansutti at research firm Tellimer highlights that

PBA, where nearly 40% of Argentines live, is the main Peronist

political stronghold and one of the few parts of the country

Milei didn't win in 2023.

"A slim Peronist victory, by less than 5%, would be a good

outcome for the government given the circumstances," Mansutti

said referring to Sunday's PBA vote, which comes ahead of

national midterm elections on October 26.

"What ultimately matters is whether Javier Milei or another

pro-markets politician gets elected president in 2027," added

Emerging Markets Insights analyst Metodi Tzanov.

"There is a game theory problem here" though, he added.

"Because the market getting scared today about the Peronists

winning in 2027 can create a self-fulfilling prophecy through

negative (market) dynamics."