Friday, May 27 2022

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LONDON/NEW YORK — The board of the International Monetary Fund approved on Friday a new program with Argentina for about $44 billion, the IMF said, acknowledging that the plan comes with “exceptionally high” risks.

The agreement, reached by consensus according to two sources, marks the 22nd IMF program for Argentina and comes after more than a year of negotiations. It replaces a failed $57 billion program from 2018, for which Argentina still owes over $40 billion.

About $9.66 billion will be disbursed immediately, the Fund said.

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The approval comes after Argentina’s Congress signed off on March 17 on the financing aspect of a staff-level agreement, but not on the policies expected to keep the economy on track and the debt sustainable.

Risks to the program are exceptionally high and spillovers from the war in Ukraine are already materializing,” Kristalina Georgieva, the IMF’s Managing Director, said in a statement.

“In this context, early program recalibration, including the identification and adoption of appropriate measures, as needed, will be critical to achieve the program’s objectives.”

Russia’s invasion of Ukraine late in February and sanctions that followed have pushed the price of many commodities, including energy and food, sharply higher and is expected to push inflation even higher than has been expected.

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JPMorgan this week revised its primary fiscal deficit forecast for this year in Argentina to 2.8% of GDP, above the program’s target of 2.5%.

NO ‘CONFIDENCE SHOCK’

The deal aims to strengthen public finances, start reducing inflation and build up the local currency debt market, among other goals.

Political cracks inside Argentina’s ruling center-left coalition have widened over the deal and there are fears the economic strings attached will further strain people in the South American country fighting with inflation above 50%.

“It will very unlikely trigger the positive confidence shock, increase in private investment, and access to international capital markets that the country badly needs,” said Alejo Czerwonko, emerging markets Americas CIO for UBS Global Wealth Management ahead of Friday’s meeting.

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Details of the agreement were made public after a staff-level agreement reached earlier this month.

Argentina’s 2018 agreement was the largest in the IMF’s history and the Fund risks reputational damage if the program doesn’t succeed.

Some private holders of Argentina’s debt, restructured in September 2020, criticized early on the negotiations as tainted by politics, allowing the government to carry on “erratic” economic policies.

“There’s been a lot of criticism of this deal, that it’s going to fall apart, that it’s an IMF-light deal, it’s a Band-Aid… But it’s an important Band-Aid,” said Robert Koenigsberger, chief investment officer at Gramercy, in an interview before Friday’s meeting.

“The only thing that would make this stuff worth less than 32 (cents), which is where it trades today, is if the wheels fall off the bus. What this IMF deal does is it tightens the lug nuts on the wheels, so to speak.”

The restructured U.S. dollar bonds have been trading in the low 30-cents on the dollar area for most of last year and ended down on the day, with the 2030 down 2.6 cents to 29.50.

The restructured bonds in euros ended the day flat to slightly higher.

(Reporting by Jorgelina do Rosario and Rodrigo Campos; Editing by Sam Holmes, Leslie Adler, Chizu Nomiyama and Diane Craft)

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