A fresh test of the IMF’s rescue chops is in the works as the Argentine peso and Argentina stock markets fall.
But a number of big questions are yet to be resolved, and they could rattle financial markets depending on how they’re answered.
How we got to this point: Argentina was on course to run a large fiscal deficit this year, and Argentina owes a large amount of its debt in U.S. dollars, which are becoming very expensive. Negotiations for an Argentine rescue from the International Monetary Fund are picking up, with the IMF’s board expected on Friday to formally deputize the IMF’s staff to negotiate the details of the rescue.
A rescue is looking very likely. The IMF has said it’s discussing a “Stand-By Arrangement” in which Argentina would receive a large infusion of cash to help get through the immediate crisis, and then face a relatively quick timeline to repay it. Many terms of the loan are predetermined by the program: The program would be like a credit line that’s available no more than three years, that Argentina could tap as needed. The interest rate follows a very specific formula, with the rate rising the longer the program is in use to “discourage large and prolonged use of IMF resource.” Once the program is concluded, Argentina must pay the loan back quickly and in full, typically a two-year repayment period.
Investors are watching for these key details.
Perhaps the most important question is how large Argentina’s programs will be. Initial speculation has centered around a $30 billion line of credit. But with the peso continuing to tumble, investment rushing out of Argentina, and the nation’s FX reserves being drained, many in financial markets have begun to question whether $30 billion will be enough.
“If a bunch of economic nerds get together and calculate a number for the size of the bailout that Argentina needs, reasonable estimates are that the number could be as low as $30 billion,” said Robin Brooks, managing director and chief economist of the Institute of International Finance, an association of financial institutions that also serves as a think tank on emerging markets.
“Perhaps the more important question is: What is the size of bailout that you need to stop speculative attacks on the peso?” Mr. Brooks said.
The risk for the IMF is that if the program is too small, investors will continue to sell out of Argentina’s currency, driving it down further and making its economic challenges even deeper. (In addition to making it harder to pay debts, the falling peso also drives up inflation.)
Mr. Brooks said, “When I canvassed my friends in markets and trading desks” the number they were looking for was “much more in the vicinity of $40 to $50 billion.”
The second question is how fast the program can come together. Argentina’s currency is weakening now. The debts are already coming due.
“The reality is this bailout, as things are dragging on, is getting more expensive,” Mr. Brooks said.
A spokesman for Argentina’s finance minister said such a program typically takes about six weeks, but that may be something of an upper bound. It’s a time line that allows Argentina to declare victory if the program in fact comes together in four or five weeks, a range IMF observers believe would be possible. A faster deal is likely to reassure markets, while a deal that takes a full six weeks, or longer, might begin to be interpreted as a sign of deeper problems.
What Fiscal Targets?
Finally, IMF loans are conditional. In exchange for the lending, the expectation is that the country will take meaningful steps to get out of the situation. With so much of Argentina’s challenge driven by large and persistent deficits, a big focus of the negotiations is likely to be a set of targets, agreed upon by the IMF and Argentina’s President Mauricio Macri, to reduce those deficits to specific levels.
The government already has a target of reducing its primary fiscal deficit this year to 2.7% of GDP.
“If the IMF wants to make life easier politically for Macri, the targets should be close to the targets the government has already announced,” said Jorge Mariscal, emerging markets chief investment officer for UBS Global Wealth Management. “That would be a way for the IMF to show some flexibility and support.”
If the IMF agrees to targets that match Mr. Macri’s current targets, it makes everything easier. If it pushes for tighter targets that might make Argentina more fiscally stable, it could create political challenges for Mr. Macri, who has already faced political pushback from attempts to control spending.
“The IMF walks a thin line, because obviously if they’re too lenient with Argentina, they set a precedent for other nations that want to be treated the same way,” Mr. Mariscal said.
A number of other conditions could be attached to a program, and once the bigger questions have been sorted out, these conditions could become very important, too. But the big questions for now: Is the program closer to $30 billion or $50 billion, is the process closer to three weeks or six weeks, and can Argentina hit the IMF’s deficit targets?
IMF spokesman Gerry Rice declined to answer any specifics at a briefing with reporters on Thursday, saying the “shared goal is to reach a rapid conclusion of these discussions” but that “details of what the program might be, the size, the exact type of the program, the exact type of the instrument, all of that is going to be part of the discussions going forward and the details that will be developed in coming days.”
Argentina is likely to get a rescue, but how those debates play out determine the program’s success.