Fernandez's government downplays electoral setback in Argentina

BUENOS AIRES Mon Oct 28, 2013 1:27pm EDT

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BUENOS AIRES Oct 28 (Reuters) - President Cristina Fernandez's government sought on Monday to downplay a sobering defeat in Argentina's mid-term elections, asserting that its ability to govern has not been diminished even though voters shrank her majority in Congress and erased her chances of seeking a third term in 2015.

The government's coalition took a beating in Sunday's elections, leaving her with only a slim majority in both legislative chambers.

Some legislators had said they wanted a constitutional amendment to allow Fernandez to run for a third term. But the poor showing by her branch of the Peronist party dashed those hopes once and for all - effectively kicking off the contest to succeed her in 2015.

"Peronism was able to maintain legislative control. ... It can guarantee Argentines democratic continuity," said congressman Carlos Kunkel, who supported allowing Fernandez to run for a third term.

Retaining majorities in Congress "gives us important legislative strength to conclude this four-year term that President Cristina Fernandez de Kirchner has," Defense Minister Agustin Rossi told a local radio program.

Argentina could face some political uncertainty following the poor election showing by her allies and the questions surrounding Fernandez's health since an Oct. 8 operation to remove blood that pooled on her brain.

Voters angry about high inflation in Latin America's No. 3 economy, currency controls and rising crime punished Fernandez's allies in the country's main districts, including the key Buenos Aires province.

Fernandez was unable to campaign for her congressional candidates after the operation. She is expected to continue convalescing for at least another week, according to her doctors.

With half the seats in the lower house of Congress and a third of the Senate up for grabs, the government's coalition garnered around 33 percent of the votes nationwide on Sunday, 20 percentage points lower than what Fernandez got when she was re-elected in 2011.

Analysts say the government could start to lose allies and legislators could defect to opposition parties, as is common in Argentina when the incumbent has no chance of re-election.

"We think (the government's majority) is vulnerable to erosion due to defections as politicians position themselves ahead of the next presidential election in 2015," Credit-Suisse's Casey Reckman said in a research note.

Under Fernandez, who was first elected in 2007, protectionist trade policies, currency controls and heavy regulation of the country's key grains sector have helped put Argentina at odds with international markets.

Her government has nationalized Argentina's private pension fund system, and the country's main oil company YPF erected import barriers and imposed heavy controls meant to stop capital flight and to support the anemic peso.

Markets seemingly breathed a sigh of relief after the election as Argentine dollar-denominated bonds rose an average 1.5 percent in over-the-counter trading on Monday morning and the blue-chip Merval stock index gained 2.11 percent.

The Merval had already surged nearly 50 percent since a mid-term primary vote on Aug. 12.

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