Argentina says it reached initial agreement for $44.5bn IMF loan and vows to cut deficit

Country pledges to slash the central bank’s financing of the treasury as part of an economic programme discussed with the fund

Downtown Buenos Aires. Argentina is preparing to sign its 22nd loan with the IMF. AP
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Argentina reached an initial agreement with the International Monetary Fund worth $44.5 billion as part of efforts to stabilise its economy and refinance an earlier loan with the Washington-based organisation.

Argentina pledged to slowly reduce its fiscal deficit and cut the central bank’s financing of the treasury as part of an economic programme discussed with the IMF, Economy Minister Martin Guzman said. The deal would give Argentina at least a four-and-a-half year grace period before starting to pay back its debt, he said.

“We reached the best agreement we could achieve,” Mr Guzman said in Buenos Aires.

The deal, which still needs to be approved by the country’s congress and the IMF’s board of directors, would help refinance more than $40bn of outstanding debt Argentina has with the lender from a record bailout in 2018.

It also provides some new financing and sets the first framework of an economic plan under President Alberto Fernandez, who has opted to govern through short-term policies.

The announcement sets the stage for Argentina to sign its 22nd loan with the international lender, after public disagreements among members of the ruling coalition last week raised questions over whether the nation would default on its largest creditor.

A deal will help Argentina avoid an even worse economic crisis as the country battles inflation running at more than 50 per cent.

Bonds due in 2030 climbed by as much as 3 cents – the biggest one-day gain since the notes were issued in September 2020 – before paring to 33 cents on the dollar. Those price levels show how deeply distressed the nation’s debt remains.

The benchmark Merval stock index rose 2.9 per cent, the second-best performer globally on Friday, led by banks and energy firms.

“We suffered a problem and now we have a solution,” Mr Fernandez said in a speech from the Olivos presidential residence on the outskirts of Buenos Aires on Friday.

“We will be able to access new financing precisely because this agreement exists.”

In a separate statement, the IMF said that it reached an understanding “on key policies”, including the country’s fiscal path, monetary policy and the reduction of energy subsidies as a way to closing its budget deficit.

The lender’s staff will continue working with government officials in coming weeks to reach a staff-level agreement, it said.

“The devil is in the details, and there’s still a lot we don’t know,” said Daniel Marx, a former finance secretary and founder of Buenos Aires-based consultancy Quantum Finanzas.

IMF staff also told board members on Friday at an informal briefing that the two parties agreed on a goal of reaching a primary fiscal balance in 2025, according to a source.

In his presentation, Mr Guzman only outlined the spending path until 2024.

He also said the nation would maintain its foreign exchange policy and would not rapidly devalue its currency. Argentina’s peso is worth less than half its official price in the unregulated exchange markets Argentines use to skirt capital controls, a policy the IMF has been critical of.

Quote
It’s clearly a step in the right direction. But as with all IMF deals with Argentina, this one is fraught with implementation risk
Edwin Gutierrez, portfolio manager at Aberdeen Asset Management

Argentina made a $717 million payment due to the IMF on Friday, a source said.

The pledges that sustain the economic agreement will last two-and-a-half years as part of a 10-year financing deal, known as an extended fund facility, Mr Guzman said, without providing details on the schedule to repay the debt.

The agreement does not include a labour reform or the privatisation of public companies, he said.

“The plan assumes that the treasury in the end will finance itself through the local market, which could be achievable,” Mr Marx said.

Approval of the agreement is not guaranteed, especially on the Argentine side.

Mr Fernandez’s 2022 budget proposal was voted down in December by a new congress. His ruling coalition lost its majority in the senate chamber after being defeated in November’s midterm elections.

If the deal wins approval, Argentina must abide by the budget targets in the programme and pass quarterly reviews with IMF staff to keep receiving debt relief.

That is a difficult task with next year’s presidential election, and a ruling coalition divided after its loss in the midterm polls.

“It’s clearly a step in the right direction,” said Edwin Gutierrez, a portfolio manager at Aberdeen Asset Management in London. “But as with all IMF deals with Argentina, this one is fraught with implementation risk.”

Updated: January 29, 2022, 1:58 PM