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Argentines gather in front of the National Congress in Argentina to celebrate that the ruling party could not continue with the debate on the ‘Omnibus Law’ because they were losing the votes on each article of its general content, in Buenos Aires, Argentina on February 06, 2024.

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Argentina’s President Javier Milei accused governors of seeking “to destroy” his sweeping economic reform bill, shortly after his ruling party abruptly withdrew the package from the floor of the country’s lower house.

The so-called “omnibus” bill, which had received support in general terms from opposition lawmakers last week, was rejected on Tuesday during an article-by-article approval process.

The package of measures is a core tenet of Milei’s push to reform Latin America’s third-largest economy. Among other issues, the bill seeks to privatize state entities, increase penalties for social protests and scale back some environmental protections.

Milei’s Libertad Avanza party has pledged to send the bill back to committees to be debated when governors “understand that it is the people who need it, not the government.”

In an official statement on social media platform X, Argentina’s presidential office said the governors “decided to turn their backs on the Argentines to protect their interests and prevent the national government from having the tools to solve Argentina’s structural problems,” according to a Google translation.

The libertarian leader, who won a presidential runoff vote late last year, has said there is no alternative to his proposed “shock therapy” if the government is to get a grip on Argentina’s profound economic crisis.

The purchasing power of Argentinians has been ravaged by an annual inflation rate of more than 211%, its highest level in 32 years, while two in five citizens now live in poverty after decades of financial mismanagement.

“The defeat of Milei’s omnibus bill in the lower house’s plenary debate speaks volumes about the government’s political ‘inexperience’ and is the consequence of trying to push through all reforms in a single mega bill,” Jimena Blanco, head of Americas at risk consultancy Verisk Maplecroft, told CNBC via email.

Javier Milei, Argentina’s president, during a visit to the Yad Vashem holocaust remembrance center in Jerusalem, Israel, on Wednesday, Feb. 7, 2024. 

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Blanco said a key mistake was the government’s assumption that most of the vote it secured in November’s election would be sufficient to force the “caste,” as Milei has referred to the political establishment, to approve the bill or expose itself to being punished in opinion polls.

“The reform bill has now returned to square one, but with the aggravating factor that the initial willingness of certain opposition blocs to negotiate and collaborate with the executive has been eroded, and some are outright annoyed by what they consider as legislative amateurism,” she added.

‘Plan B’

JPMorgan economist Diego Pereira said Tuesday that the lack of Congress support for the bill suggests Milei’s administration should reconsider its political strategy, “opening up a more challenging period which could lead to increased volatility.”

“This is an unprecedented event, and there is no memory of an administration having its first piece of legislation rejected,” Pereira said in a research note. He added that a “plan B” may now be in the offing given Milei has vowed to continue with his reform program.

“Against this backdrop, the possibility of President Milei calling for a non-binding referendum gains probability. Worth noting, during the campaign Milei referred to the possibility of calling for a non-binding referendum in case of facing a logjam in Congress,” Pereira said.

Milei, who is often compared to former U.S. President Donald Trump, is currently in Israel on his first bilateral trip abroad.

— CNBC’s Michael Bloom contributed to this report.