The IMF came to Argentina’s rescue on Thursday with a standby arrangement worth $50bn over three years, far more than envisaged by markets which were expected to welcome the move.
The size of the loan, which was subject to approval from the IMF board, surprised local media which had speculated it would be closer to $30bn.
“I thought it was going to be big but this far exceeds expectations. Great news,” tweeted Miguel Kiguel, an economist, who expected bond prices to rally on Friday. “It is now clear that the country has ample capacity to pay [its debt].”
A month ago Argentine president Mauricio Macri said he would seek help from the IMF after a run on the peso. The currency lost almost a fifth of its value in a fortnight as a rally in the US dollar turned up the heat on emerging markets.
His decision was fiercely criticised by political opponents — and was regarded with suspicion by many Argentines who blamed the IMF for the country’s economic crisis in 2001-02 that saw the biggest default in history at the time.
In addition to the IMF loan, the government said on Thursday that other international financial institutions would lend Argentina almost $6bn over the next year. Analysts speculated that Wall Street banks might also step in.
Christine Lagarde, IMF managing director, said the plan — “owned and designed by the Argentine government” — was aimed at strengthening the economy for the benefit of all Argentines.
“I am pleased that we can contribute to this effort by providing our financial support, which will bolster market confidence, allowing the authorities time to address a range of longstanding vulnerabilities,” she added.
Included in the conditions the IMF has asked for is central bank autonomy. Bank of Argentina governor Federico Sturzenegger welcomed the “historic” decision, which will mean the bank will no longer finance the government by printing money. Doing so has contributed to repeated economic crises in Argentina over the past half century.
Under the deal, the IMF will require no further primary fiscal deficit adjustment this year beyond the 2.7 per cent already announced by the government. But for 2019, the target will be cut to 1.3 per cent, with the aim of reaching equilibrium by 2020 rather than 2021. The primary fiscal deficit does not include interest payments.
With inflation currently running at about 28 per cent, few expect Buenos Aires to reach its target of 15 per cent this year. The new plan is for 17 per cent for 2019, 13 per cent for 2020 and 9 per cent for 2021.
The negotiations took place more quickly than expected — a sign of the political goodwill towards Argentina. Officials had looked to a deal being announced within six weeks after Mr Macri said on May 8 that the country would seek financial backing from the IMF. In the end, the talks lasted a month.
Alberto Bernal, chief emerging markets and global strategist at XP Investments, said it was positive that Argentina was seeking support from the IMF early, because it implied that the hit to economic growth would be lower. “It’s better to go now than after the recession kicks in. If you are going to have a problem, it is better to fix it as soon as possible.”
Private sector analysts recently cut their expectations for growth for 2018 from 2.5 per cent to 1.3 per cent, according to a poll by Argentina’s central bank. They raised their predictions for inflation this year to 27.1 per cent, from 22 per cent a month earlier.