Argentina reaches last-minute deal with IMF to avoid default

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Argentina and the IMF have agreed a last-minute deal to prevent the troubled South American economy entering into arrears with the fund, offering some stability ahead of October’s crucial presidential elections. 

After three months of intense negotiations, slowed by the Peronist government’s reluctance to implement unpopular policies in the run-up to the polls, the IMF’s technical team on Friday agreed to disburse an additional $7.5bn of its loan programme.

The fund will release $4bn it had withheld at a June programme review and almost $3.5bn that was previously subject to a September assessment.

The IMF decided to combine the two reviews because the first was so delayed that data for the later one is already available.

However, the fund appears to have rejected Argentina’s calls to bring forward all remaining disbursements for this year, which total $10.6bn.

“The fund’s task was to avoid pushing Argentina into the abyss, while also holding firm to stop the government from doing things that will deteriorate the situation further,” said Santiago Manoukian, head of research at Buenos Aires-based consultancy Ecolatina.

“The IMF knows it will be negotiating with a new administration in a few months.”

Argentina needs the money from the IMF to make loan repayments to the fund itself. The country’s current IMF package, agreed in 2022, is a restructuring of a failed 2018 loan that was meant to lift Argentina out of a debt crisis but quickly went off the rails. Roughly $8.7bn of payments are due by the end of the year.

But with the IMF disbursement set to take at least two weeks to arrive, as the fund awaits approval by its board, cash-strapped Argentina is seeking possible bridge loans to make $3.4bn worth of repayments due by August 1. 

Argentina may be forced to use yuan from its swapline with China to make the payment. It has already resorted to the swapline, which gives it free access to about $10bn worth of renminbi, to pay $1.1bn to the IMF in June. The swapline is also regularly being tapped to pay for imports and intervene in currency markets, with Argentina paying China an undisclosed interest rate that economists estimate is about 6 per cent.

Argentina has fallen short of most of the IMF’s targets, including on accumulating foreign exchange reserves and cutting the country’s fiscal deficit.

Economy minister Sergio Massa, who is also presidential candidate for the ruling Peronist coalition, United for the Homeland, has blamed the failure to meet the targets on a severe drought, which wiped out more than $18bn of expected export earnings this year.

In its statement, the IMF recognised that the “larger-than-anticipated impact of the drought” had contributed to Argentina’s failure to meet the targets, but said there had also been “policy slippages and delays”.

The deal should allow the fund to avoid being accused of destabilising Argentina before October’s vote.

The country’s economy is the most fragile it has been in two decades, with net foreign exchange reserves about $8bn in the red, annual inflation running above 115 per cent and the peso plunging by a third against the dollar so far this year.

Remaining at odds with the IMF or entering into arrears could have triggered a market backlash and a disruptive collapse.

But some of the measures Argentina will implement as part of the deal run counter to the IMF’s long-term hope for more orthodox economic policy in the country. 

Massa successfully resisted calls for a sharp devaluation of the peso’s official exchange rate — which prices the currency at almost twice its value on parallel exchange markets — out of fear of turbocharging inflation.

Instead, Argentina has unveiled a set of creative policies designed to weaken the peso for trade purposes, which are controversial among businesses and resemble other multiple-currency policies previously criticised by the IMF.

The IMF also agreed to relax targets for foreign exchange reserve accumulation. Originally, Argentina was expected to increase net reserves — a figure that excludes swaplines, IMF funds and other liabilities — to $8bn by the end of 2023. Now it will only need to reach $1bn.

The country will face tough cuts on the fiscal front, however. The IMF said the target for the fiscal deficit would remain at the original 1.9 per cent.

As Argentina is not on track to meet that goal, it will require cuts faster than originally planned in the second half of the year to social programmes and energy subsidies, as well as deferring inflation-linked increases to public sector wages.

The fund is also expecting a reduction in Argentina’s interventions in parallel currency markets to prop up the peso, which should only be used in exceptional “disorderly market conditions”, sources familiar with the matter said.