Argentina won a promise of extra cash and faster delivery from the International Monetary Fund, which expanded a record bailout to help the country defend its currency and pull the economy out of recession.
Argentina’s credit line will increase to about $57 billion over three years, from the $50 billion announced in June. The Fund will also deliver more of that cash up front. Argentina has already received $15 billion and will have access to another $35 billion by the end of 2019.
In return, President Mauricio Macri and his new central bank chief will have to tighten policy. Argentina pledged to accelerate budget savings and freeze the supply of money to the economy in an effort to stamp out inflation. It will also stop burning through foreign currency reserves to defend the peso.
The stakes are high for both sides. 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.
‘Restoring Confidence’
The deal “should help investors sleep better at night,” said Daphne Wlasek, a macro strategist at XP Investments in New York. The additional money that’s on the way should eliminate Argentina’s “reliance on external financing” for next year, she said.
IMF chief Christine Lagarde and Argentina’s Economy Minister Nicolas Dujovne announced the revised accord in New York on Wednesday.
Trading in the peso had already closed by then, with the currency falling 1.1 percent to 38.51 per dollar. It has lost more than half its value this year, while yields on the country’s dollar bonds have surged above 9 percent.
“I believe this program will be instrumental in restoring market confidence and protecting the most vulnerable,” Lagarde said. Dujovne said in an interview that an overhaul was required because “when the circumstances change, the program has to change."
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 on Tuesday, citing family reasons, and was replaced by Guido Sandleris, an academic who’d been serving as deputy economy minister.
Money Freeze
Sandleris spelled out details of the new IMF-backed monetary policy at a press conference in Buenos Aires later on Wednesday.
He said the central bank will set a “zone of non-intervention” for the peso that will start in a range of 34 to 44 per dollar, and will be adjusted by 3 percent each month. The bank could hold sales of $150 million in “extreme cases” to prop up the currency if it moves outside that zone, he said.
The bank will also stop setting overnight interest rates or a target for inflation. The new policy will be based on freezing the growth of money in the economy.
Read more: How Poor Communication Fed Argentine Peso’s Collapse: QuickTake
Argentina’s money supply has been expanding at about 2 percent a month. Sandleris said the new target is zero, and the central bank will start publishing daily figures next month. The goal is a rapid decline in the inflation rate, which has soared above 30 percent. It make take a few months for the measures to start having an impact on prices, Sandleris said.
The central bank has given up on inflation targeting after raising interest rates to 60 percent in August, the highest in the world. It’s also been spending heavily to defend the peso, running down reserves by about $14 billion 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.
Read more: Argentina’s Macri Sees New IMF Deal Restoring Market Confidence
The IMF cash will help Argentina meet external financing needs that Dujovne recently estimated at $28 billion for 2019. Macri had already promised budget cuts 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 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 shrank 4.2 percent in the second quarter and is forecast to keep doing so into 2019, can pull out of trouble “without changing the rules” this time.
“There’s zero chance of Argentina defaulting again,” Macri said.
--With assistance from Carolina Millan, Pablo Gonzalez, Jorgelina do Rosario and Andres R. Martinez.
To contact the reporters on this story: Patrick Gillespie in Buenos Aires at pgillespie29@bloomberg.net;Ignacio Olivera Doll in Buenos Aires at ioliveradoll@bloomberg.net
To contact the editors responsible for this story: Vivianne Rodrigues at vrodrigues3@bloomberg.net, Ben Holland
©2018 Bloomberg L.P.
