FACTBOX-Key political risks to watch in Argentina

BUENOS AIRES Tue Feb 1, 2011 7:03am EST

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BUENOS AIRES Feb 1 (Reuters) - Simmering political tensions could worsen over the coming months as Argentine President Cristina Fernandez and her rivals lock horns ahead of the presidential election in October.

As Latin America's No. 3 economy booms, the leftist Fernandez leads polls and is widely expected to seek re-election following the death last year of her powerful husband and predecessor as president, Nestor Kirchner.

He had been expected to run for a new term this year and Fernandez's poll rating shot up after his death, but she lost ground over the government's handling of a violent land seizure by squatters in December. Sporadic power cuts and a shortage of bank notes also weighed on her. [ID:nN07223296]

While Fernandez keeps voters and allies guessing about whether she will run, numerous opposition candidates are jostling for position and trying to stitch up alliances strong enough to chip away at Fernandez's lead.

The squatter unrest unleashed finger-pointing by opposition rivals and government ministers, setting the tone for what looks like being a testy election campaign.

Here are some of the main issues investors are watching:

ELECTION BUILD-UP

Several polls conducted since Kirchner's death on Oct. 27 have suggested Fernandez would win in a first round if the election were held now, especially because no opposition candidate has emerged as a strong challenger.

However, Fernandez's approval rating has dropped from a high of above 50 percent following Kirchner's death to about 40 percent, according to pollsters Management & Fit.

She might be reluctant to announce her candidacy unless she can stabilize that level of support, but grief -- she continues to wear the black of mourning -- or family pressures might see her step aside whatever the polls say.

Under Argentina's electoral system, candidates can win in a first round with 40 percent of the vote as long as the second-placed candidate trails by at least 10 percentage points. Support of 45 percent guarantees a first-round victory.

That level of backing in polls would also make it easier for her to secure the loyalty of notoriously fickle Peronist party bigwigs who control the vote-winning machinery -- especially in the densely-populated outskirts of the capital.

It could also help cement the support of Hugo Moyano, the country's most powerful trade union leader, and deter any potential challengers from within ruling party ranks.

What to watch for:

-- Fernandez's poll ratings and any signs of waning support that could discourage her from standing.

-- Signs of strong opposition challengers emerging and making significant headway in polls.

-- The outcome of an early primary in the centrist Radical party and infighting among a dissident group of right-leaning Peronists, which will help define the opposition line-up.

POST-KIRCHNER POLICY

Kirchner was widely seen as the architect of Fernandez's interventionist economic policies, which included nationalizing private pensions and limiting grains exports, but she is likely to maintain the status quo in the run-up to polling while the economy grows at one of the world's fastest rates.

Fernandez has shown signs of being more pragmatic than her husband by asking his arch-foe, the International Monetary Fund, for help to restore credibility to Argentina's inflation data and calling for a pact between unions and business on wage hikes.

Economy Minister Amado Boudou is heading another drive to mend Argentina's ties with creditors -- overseeing negotiations to repay more than $6 billion in defaulted debt to the Paris Club nations. [ID:nN26132859]

Traders see a deal as crucial for the country to sell global bonds for the first time since the $100 billion default of 2002. Negotiations could be disrupted by Boudou's plans to run for mayor of Buenos Aires. [ID:nN21256961]

Several minor cabinet changes, such as the appointment of Nilda Garre as security minister and Juan Manuel Abal Medina as media secretary, suggest Fernandez wants to promote progressive leftists. Conversely, Cabinet Chief Anibal Fernandez and Interior Minister Florencio Randazzo appear to have lost influence.

What to watch for:

-- More signs of a softening in tone on economic policy, where Kirchner's influence was strong.

-- Fernandez's approach to conflicts or street protests and unrest following her security shake-up.

-- Clearer signs of a more definite shift to the left in terms of social policy, rhetoric or further cabinet changes.

SPENDING AND FINANCES

Social spending is accelerating fast, highlighting Fernandez's decision to prioritize economic growth despite surging annual inflation ARCPI=ECI, estimated by analysts to be running at about 25 percent. [ID:nN12194801]

She has announced increases to pensions and child welfare benefits, measures that could help bolster her support among the poor and assure die-hard Kirchner followers she is respecting her husband's legacy.

By signing a decree to tap another $7.5 billion from central bank reserves to repay private creditors, Fernandez will be able to maintain spending, which has been growing by about 40 percent year-on-year in recent months.

It remains to be seen how the government will finance the Paris Club repayment, but further use of reserves is possible.

Although Fernandez will govern without a budget this year because Congress failed to pass it, she will be able to use decrees to extend the 2010 budget framework and expand spending with little congressional oversight. [ID:nN29275761]

What to watch:

-- A surge in pre-election spending that could erode narrow fiscal surpluses.

-- The Paris Club repayment and its impact on finances.

-- Any loosening of central bank monetary supply growth targets. [ID:nN26213826]

STRIKES, SOCIAL UNREST

Farm leaders have threatened to resume strike protests if the government does not lift export curbs on wheat. Fernandez is unlikely to budge, meaning more protests are likely before the election, but they are likely to be short and symbolic.

Any repeat strike by farm leaders would be aimed mainly at tiring the government and exposing perceived differences within the cabinet over farm policy.

Surging inflation is, however, fanning wage demands across industries, and could aggravate social tensions and strikes. Fernandez could face conflicting demands from her leftist support base, the trade unions and the opposition.

Some trade unions opposed to Fernandez are expected to seek pay rises of up to 35 percent, though pro-government unions are more likely to heed her call for moderation. [ID:nN25191886]

December's squatter violence, partly blamed on soaring rents in the slums, was a reminder of how unrest can escalate.

What to watch:

-- Involvement of pro-government trade unions in strikes or protests, which might strain Fernandez's ties with Moyano.

-- Any perceived upswing in crime, which opposition could use to attack the government. Polls show crime is voters' top concern.

-- A repeat of last month's farm strike. [ID:nN18154389] (Editing by Kieran Murray)

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