Argentine leader defends policy after vote defeat

BUENOS AIRES (Reuters) - Argentine President Cristina Fernandez ruled out a Cabinet reshuffle and defended her handling of the economy on Monday after losing control of Congress in a mid-term election.

The vote was seen as a rejection of Fernandez's combative style and economic policies and she conceded she would have to seek new alliances in Congress. But she rejected a broad change in direction.

"It's important to understand that negotiation isn't about giving up your principles," Fernandez told a news conference at the presidential palace. "I don't see any reason to make a change to the Cabinet due to the election result."

Sunday's defeat was particularly bitter for Fernandez and her husband, former President Nestor Kirchner, who preceded her in office, because he lost a high-profile congressional race.

He was defeated by a millionaire businessman from a rival faction within the ruling Peronist party. On Monday, Kirchner resigned as the head of the party and was replaced by Buenos Aires Governor Daniel Scioli.

The government's electoral losses may lead to political gridlock and a power struggle in the Peronist party as rivals jostle for positions ahead of a 2011 presidential election.

A government source, who asked not to be named, said earlier Fernandez could replace several ministers in the wake of the humiliating defeat.

The Kirchners have nationalized some companies and defended their use of price controls, energy subsidies, limits on exports, taxes on grain exports and other interventions in the economy as a way to protect consumers and redistribute wealth.

PRAGMATISM?

Argentine stocks, bonds and the peso currency rallied on Monday as investors bet Fernandez could adopt more market-friendly policies, including a new approach to the International Monetary Fund.

In a press conference, she appeared to leave the door open to restarting talks with the Washington-based lender, saying she would first like to see the outcome of a September G20 meeting in Pittsburg.

"We think that this change in political landscape will translate into a much more pragmatic approach for the conduct of economic policy," Bulltick Capital Markets said in a report on Monday.

The election was widely seen as a referendum on the Kirchners, and reflected voters' concerns about high crime and inflation.

In his closely watched congressional race, the former president had hoped to shore up flagging support for his wife, whose popularity rankings have languished at about 30 percent for most of her 18 months in office.

But, his slate of candidates came in 2.5 percentage points behind a slate led by businessman Francisco de Narvaez in Argentina's most populous province, Buenos Aires, which had been seen as Kirchner's stronghold.

Kirchner had been believed to be planning to run again for president in 2011, but now he cannot use a victory in Buenos Aires province as a springboard.

"The presidential race for 2011 will now dominate the local political scene and there is a risk of seeing earlier presidential elections next year," said Alberto Ramos, senior economist at Goldman Sachs, in a report.

Several political leaders, all of them Fernandez critics, were seen as being strengthened by Sunday's vote as either they or congressional candidates allied with them fared well.

They include Vice President Julio Cobos, who has broken ranks with the Kirchners, Buenos Aires Mayor Mauricio Macri and Senator Carlos Reutemann, a Peronist.

LOST MAJORITIES

In the lower house, opposition parties took more than a dozen seats, rolling back Fernandez's previous majority when her allies had more than half of the chamber.

The president also lost her majority in the Senate, although her allies could theoretically retain control by forging alliances.

The new Congress will not be seated until December. That will give Fernandez five months with a majority in both houses, which some economists and political analysts say she could use to increase state control over the economy rather than to move in a pragmatic direction.

(Additional reporting by Fiona Ortiz and Helen Popper)