In what will be the largest-ever IMF loan to any country in the world, the International Monetary Fund (IMF) has granted Argentina a $50-million stand-by arrangement to stop the pain of a massive emerging market sell-off that threatens the country’s economic stability.
The first 30-percent tranche could be issued in a matter of days, Bloomberg reports, and none too soon: Argentina.
In May, the peso lost almost one-fifth of its value against the dollar in just two weeks amid the emerging market sell-off. Since the beginning of this year, it’s lost 20 percent of its value.
Argentina’s current account deficits took a dangerous hit.
Some might say President Mauricio Macri has been a bit too … relaxed about spending since he was elected in 2015, while at the same time embarking a major borrowing spree. Some might also say that he allows cronyism to flourish, and it’s not helping matters at all.
And the government has been fueling inflation by pressuring the central bank to buy more bonds with cash it doesn’t have—so it’s off to the printing press.
As Forbes put it, “Argentina has wrecked its currency time and again and seems on its way to doing so once more.”
In an interview with World Politics Review, Bruno Binetti, fellow at the Inter-American Dialogue, the “run against the peso was triggered by the rise in U.S. interest rates, which led to the devaluation of many emerging economies’ currencies against the dollar. Argentina was particularly vulnerable to this external shock …”
The peso is overvalued, exchange rates aren’t keeping up with inflation, and the country’s trying to cover a fiscal deficit of over 5 percent of GDP, Brunetti said.
But beyond that, he said, “financial markets penalized the peso due to a perceived lack of coordination in Argentine’s economic policy”.
That’s on Macri.
But from Macri’s perspective, the IMF’s biggest-ever backing package is a major vote of confidence in his rule.
"The amount we received is 11 times Argentina’s quota, which reflects the international community´s support of Argentina," Treasury Minister Nicolas Dujovne said in Buenos Aires, as reported by Bloomberg. “It’s very good news that the integration with the world allows us to receive this support." Related: ECB Signals An End To Its Stimulus Program
In the meantime, it isn’t just Argentina feeling the pain. Investors are taking down emerging markets with a vengeance right now.
South Africa’s rand lost 2 percent today, and Brazil’s real nose-dived, while the Turkish lira is fighting a major decline.
The MSCI index of emerging-market stocks today lost more than it has in three weeks.
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But now comes the tit-for-tat, because IMF money comes with plenty of conditions. The IMF is looking to see Argentina rebalance its fiscal position, noting that it welcomes “the authorities’ intention to accelerate the pace at which they reduce the federal government’s deficit, restoring the primary balance by 2020”.
In late May, Dujovne said the country’s 2019 fiscal deficit target of 2.2 percent of GDP would be cut in an effort tighten the belt a bit more. That same month, the government cut Argentina’s 2018 deficit goal to 2.7 percent of GDP from 3.2 percent.
The IMF also noted that it strongly supports “the redoubling of efforts to lower inflation” and “the central bank’s decision to adopt realistic and meaningful inflation targets”.
The international institution also hit out a cronyism, indirectly, saying that “A central plan of the authorities’ plan is to put in pace measures that will offer opportunity and support to those living in poverty and for the less well-off members of Argentine society.”
By Michael Kern for Safehaven.com
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