The International Monetary Fund doubled down on Argentina, expanding a record-breaking bailout for a country that has slid into recession as it struggles to stem a currency rout.
Argentina’s credit line will increase to about $57bn from the $50bn announced in June, Economy Minister Nicolas Dujovne said at a press conference with IMF chief Christine Lagarde in New York on Wednesday. The Fund will also deliver more cash up front, disbursing $19bn to the South American nation by the end of 2019. Argentina will let its exchange rate float, only intervening when there’s “extreme overshooting,” and speed up budget cuts.
“I believe this program will be instrumental in restoring market confidence and protecting most vulnerable,” Lagarde said.
The stakes are high for both sides. President Mauricio Macri is up for re-election next year and risks having to campaign amid a shrinking economy. He sought IMF help even though the fund is politically toxic in Argentina, after the collapse of a loan program in 2001 led to default and a deep recession. For the IMF, there’s an opportunity to rebuild its reputation in a country where it’s associated with poverty and unemployment.
The IMF announcement came after currency trading in Buenos Aires had closed. The peso fell 1.1% to 38.51 per dollar. It has lost more than half its value this year.
The fund program will be implemented by a new leadership team at Argentina’s central bank, which has spent months fighting to shore up the peso. Bank chief Luis Caputo resigned, citing family reasons, and was replaced by Guido Sandleris, an academic who’d been serving as deputy economy minister.
Defending the peso
The central bank raised interest rates to 60% in August, the highest in the world. It’s also been spending heavily to defend the peso, running down reserves by about $14bn between April and June. The initial IMF deal that month replenished the bank’s coffers - but it has subsequently spent almost all the extra money.
Caputo rarely spoke in public, and Lagarde called on the central bank last week to provide better communication - an issue which has dogged this year’s loan talks.
In August, Macri said on national television that the IMF had agreed to bring forward the disbursement of loans, though Lagarde only said that she would review his request. The IMF chief also told Dujovne in front of the cameras in May that his all-male negotiating team was “short on women,” sparking a social media firestorm.
The IMF cash will help Argentina meet external financing needs in 2019 that Dujovne recently estimated at $28bn. Before Wednesday’s deal, the government had been budgeting for $11bn from the Fund to help cover that gap.
Macri had already promised budget cuts for next year, when he’ll likely be contesting October’s presidential vote against the left-populists who ran the country for more than a decade after the collapse of 2001. They achieved rapid growth in the early years before the economy fell into recession amid soaring inflation and fiscal deficits.
In a Bloomberg TV interview on Monday, Macri said that during this year’s currency slump his administration “didn’t do any of those stupid things that we had done in the past,” like imposing capital controls, modifying the banking system or pegging the peso to the dollar. And he predicted that the economy, which contracted 4.2% in the second quarter and is forecast to keep shrinking into 2019, can pull out of trouble “without changing the rules” this time.
“There’s zero chance of Argentina defaulting again,” Macri said.
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