The IMF agrees to beef up Argentina’s bail-out
THE three-year, $50bn credit line agreed on with the IMF on June 7th was intended to halt Argentina’s currency crisis. The peso had lost a quarter of its value against the dollar since the start of the year as investors fled to safe havens. It kept sliding. On August 29th Mauricio Macri, Argentina’s president, asked the IMF to bulk up the package. On September 26th, after three weeks of negotiations, the fund’s managing director, Christine Lagarde, agreed to increase Argentina’s credit line from $50bn to $57.1bn and accelerate its disbursal.
Argentina is on the brink of its second recession since Mr Macri took office in 2015. The peso has now fallen by more than half in 2018, pushing inflation to 34% in August. The central bank has raised interest rates to 60%. Investors worry that a further slide in the peso would leave Argentina unable to service its large pile of foreign-currency debt. Mr Macri’s approval ratings have slumped.
In recent weeks the government has striven to reassure investors. On September 3rd Nicolás Dujovne, the finance minister, promised to eliminate the primary fiscal deficit (ie, before interest payments) in 2019, a year sooner than agreed on with the IMF, by levying a tax on exports and cutting subsidies for public transport and electricity. The next day Mr Dujovne arrived in Washington to begin negotiations with the fund.
Under the new deal the fund has agreed to provide Argentina with $36.2bn by the end of 2019, $18.7bn more than under the June agreement. The extra cash and speedier hand-out should help Argentina to meet its external financing needs next year, which Mr Dujovne puts at $28bn.
In return Argentina has agreed to a new exchange-rate regime. The central bank has burned through $16bn in reserves since the start of the year in a futile attempt to defend the peso. Now it will intervene only if the peso falls outside a band of 34-44 to the dollar. (On September 26th a dollar bought 38.83 pesos.) Intervention is limited to $150m per day and the band will be allowed to depreciate by 3% a month.
In anticipation of the change, the central bank’s president, Luis Caputo, resigned on September 25th. Mr Macri’s aides had touted the former Wall Street trader as a Lionel Messi of the markets. But his frequent attempts to prop up the peso caused conflict with Mr Dujovne and were thought to irritate the fund. The appointment of Guido Sandleris, Mr Dujovne’s deputy, as his successor should repair relations between the finance ministry and central bank.
Mr Macri had hoped for a vigorous economic recovery in 2019 to propel him to a second term in presidential elections next October. That recovery now looks impossible. Mr Macri has no choice but to “stay the course and deliver on the fiscal commitments,” says Alberto Ramos of Goldman Sachs. It is good advice, but hardly the campaign slogan Mr Macri would have wished for.