WASHINGTON – The International Monetary Fund and Argentina reached an agreement for a $50 billion credit line to stem a drop in the value of the Argentine peso and shore up the government of President Mauricio Macri, as he accelerates plans to reduce fiscal deficits.
Macri sought the IMF’s help four weeks ago, after the peso’s slide threatened Argentina’s ability to pay its debt, much of which was denominated in United States dollars. The peso is down more than 25 percent this year against the dollar.
“We are convinced that we’re on the right path, that we’ve avoided a crisis,” Finance Minister Nicolas Dujovne said at a press conference in Buenos Aires. “This is aimed at building a normal economy.”
The deal represents a forceful response from the IMF. The size of the program is at the upper end of the $30 billion to $50 billion range that analysts had expected, and the deal also came together quickly. Those factors are likely to reassure investors and bolster confidence that Macri’s government will have the resources to make payments in the coming months, even if the peso remains weak.
To take effect, the deal reached between the IMF’s staff and Argentine authorities still requires the approval of the IMF’s executive board.
The IMF’s largest shareholder, the US, said in a statement Thursday from Treasury Secretary Steven Mnuchin that it supported the program.
“The size of the package should provide relief, but implementing the program entails significant challenges and will require skillful political leadership,” said Martin Castellano, the head of Latin America research at the Institute of International Finance.
The IMF will extend credit under a program known as a 36-month standby arrangement, basically a giant credit line.
Dujovne said that about $15 billion from the credit line would be immediately available to Argentina after the package is approved by the IMF’s board, which is expected on June 20.
The rest would be dispersed as needed as Argentina meets its targets, Dujovne said.
As part of the program, Argentina will agree to accelerate the pace at which it reduces the government deficit.
The nation spends more than it collects in revenue and imports more than it exports, creating fiscal and current-account shortfalls that leave Argentina vulnerable to fluctuations in its currency.
The country’s total budget deficit, which includes interest payments on debt, was 6.5 percent of gross domestic product last year, a hefty burden that in part reflects a debt binge of about $100 billion over the last two and a half years. The primary fiscal deficit in 2017 was 3.9 percent.
“At the core of the government’s economic plan is a rebalancing of the fiscal position,” IMF Managing Director Christine Lagarde said Thursday. “We fully support this priority and welcome the authorities’ intention to accelerate the pace at which they reduce the federal government’s deficit, restoring the primary balance by 2020.”
Argentina’s government said it would aim to rapidly reduce its deficits until it has a fiscal surplus by 2021.
“Garnering political backing to implement the program will be a key challenge for the Macri administration,” said Castellano of the IIF. “The fiscal targets are ambitious, particularly for 2019, which is an election year.”
The president of Argentina’s central bank, Federico Sturzenegger, said officials would aim to guide inflation to 9 percent by 2021, from around 25 percent today.
“We are going to try to have inflation as low as possible,” said Sturzenegger.
He also said the government would prepare legislation to provide the central bank with more autonomy, including a prohibition against central-bank financing of the treasury.
Investors questioned the central bank’s independence last year when the government raised the inflation target to 15 percent for 2018 from a range of 8 percent to 12 percent.
Argentina’s government said it also reached a financing agreement with other multilateral organizations that would provide the country with about $5.65 billion over the next 12 months.
The government said the World Bank agreed to provide a $1.75 billion credit line, while the Inter-American Development Bank offered $2.5 billion in loans, and Latin American Development Bank agreed to financing worth $1.4 billion.
The Argentine program has been closely watched because a number of other emerging markets have faced deep strains as their currencies plunged this year.
Currency drops have been especially sharp in Turkey and Indonesia, raising fears among some investors about contagion spreading among emerging markets.
Gerry Rice, an IMF spokesman, speaking Thursday before the details of the bailout were announced, told reporters that the IMF is “not seeing negative spillovers to other countries at this point.”
Opponents of President Macri criticized the deal with the IMF, which has a bad reputation in Argentina as many people blame it for the country’s 2001 financial crisis that resulted in a massive default.
The agreement comes amid growing discontent with the Argentine leader, with unions threatening a national strike and small businesses struggling to pay higher utility bills since the government cut energy subsidies.
“It is a mockery of everyone that suffered the policies of the fund,” said leftist lawmaker Nicolas del Caño.