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The IMF Arrives to Buenos Aires, Looks to Authorize More Foreign Exchange Intervention

Fund officials begin work as a fresh wave of economic tumult hits Argentina.

By | [email protected] | August 13, 2018 12:12pm

2703286w740IMF Director Christine Lagarde with President Mauricio Macri, via Reuters
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In June, the International Monetary Fund agreed to loan Argentina US $50 billion in the face of a sharply declining peso due to a recent exodus of investors from Argentine markets. As part of the agreement, the Argentina’s government agreed to accelerate the already existing plans to reduce the country’s fiscal deficit. It is the hope of the Argentine government that the loan will help the country both avoid a financial crisis similar to those of the past, and strengthen the peso against the dollar.  

However, the deal between the government and the IMF was received with a great deal of contention in Argentina, as many blame the IMF’s austerity measures for the depth and severity of the county’s 2001-2002 devastating economic crisis. Among the country’s unions, the IMF is especially unpopular, and the agreement between the government and the international organization led the CGT, Argentina’s largest umbrella union, to hold a general strike on June 25th.

In the midst of a new economic troubles in the local financial market—which have been largely exacerbated by the tumultuous international economic climate—the IMF team that oversees the Argentine loan has arrived to the country.

Now, they will begin on August 13th to monitor the economy’s progress from Buenos Aires, keeping in mind the terms and goals outlined in the loan agreement.

Starting today and continuing until Friday, August 24th, the IMF team, lead by Italian economist Roberto Cardarelli, will review the progress the Macri administration has made in terms of the goals they committed to last June.

International Monetary Fund (IMF) Managing Director Christine Lagarde welcomes Treasury Minister Nicolás Dujovne ahead of their meeting at the IMF on a new loan request in Washington, U.S., May 10, 2018, Via Reuters/Yuri Gripas

By last month, Argentina’s government seemed to be making good progress in this respect, and was well on its way to meet IMF targets. On July 19th,  the Ministry of Finance reported that the country closed its second fiscal quarter with a deficit of 0.8 percent of the GDP, exceeding the goal set by the IMF of 1.1 percent. Ultimately, the government managed to save AR $25.3 billion, equivalent to 0.2 percent of GDP.

On his first day in Buenos Aires, Cardarelli will meet with Finance Minister Nicolás Dujovne and Central Bank President Luis Caputo at the Finance Ministry. Later in the day, he will also be meeting with Deputy Minister of Finance Guido Sandleris and Secretary of the Treasury Rodrigo Pena.

Today— according to some off-the-record statements made to La Nación—Central Bank officials in Argentina have received the first nods that they can begin to relax their current strict limits on the use of reserves to intervene in the foreign market. Their aim in doing so is to lessen the impact that a sudden flood of market operations, projected to occur upon the expiration of government-issued securities known as the Lebacs, would have on the Argentine market.

Lebac securities, which function as loans to the Central Bank, are often used by the government as an influx of funds to restore momentary calm to tumultuous currency markets. While these are traditionally short-term loans, in May of this year, the government extended the duration of the Lebacs, with the goal of providing the bond market with a much-needed financing improvement during a time of high inflation and uncertainty surrounding the peso. However, while perhaps helpful in the short-term, the rolling-over of the Lebac loans is not necessarily sustainable in the long-run.

Thus, the reduction of the Lebac stock, currently at AR $950 billion, is one of the objectives agreed upon with the IMF under the goal of “strengthening the credibility of the central bank’s inflation targeting framework.” The aim of lowering the Lebac stock is ultimately to reduce the government’s dependency on these types of loans, and, according to the agreement, “diminish the Central Bank’s vulnerability from  a short-term peso denominated debt.”

The objective of the Central Bank is to be able to start interventions in the Argentine market on Tuesday, the latest expiration date for the Lebac loans, before the possibility that those who chose not to renew their loans to the Argentine market turn to other alternatives instead, such as the dollar market. 

The IMF agreement set a limit of US $ 2 billion for the Lebac stock. Since the beginning of the agreement, about two-thirds of that figure have already been met, which will significantly limit the possibilities of the Argentine government using the Lebac loans as financing methods for the foreseeable future.

Minister of Finance Nicolas Dujovne (left) and Christine Lagarde (right), via Getty

The Economic “Storm” Continues

While Argentina has already been facing high inflation and an uncertain peso, a number of factors have also converged in recent weeks to exacerbate the current situation.

On Friday, the sharp devaluation of the Turkish lira caused panicked investors in emerging markets—including Argentina—to flee to more secure places. Thus, Argentine financial markets went through another day of chaos, experiencing a new devaluation that left the exchange rate at AR $29 to the dollar. To make things worse, the price of Argentine bonds collapsed, and the country’s investment risk level rose to 700 points.

The recent “Notebook Scandal,” which many consider is ramping up to be the country’s greatest corruption scandal ever (and which has involved a number of prominent Argentine companies) has also contributed to the economic climate of uncertainty. As a result of the scandal, Argentine shares traded on Wall Street suffered a new blow, adding to last week’s losses.