Argentina schedules talks with IMF over credit line

Argentina schedules talks with IMF over credit line

Corporate & Sovereign Strategy Debt Economy & Policy Argentina

Argentina's central government has asked the IMF for a flexible credit line (FCL) said to be worth up to $30bn in order to curb its depreciating peso.

President Mauricio Macri said in a televised address on Tuesday: "This is going to allow us to strengthen our growth and development program."

However, the deal is unlikely to serve as a strong anchor for Argentina's economic requirements, according to Edward Glossop, an economist for Latin America at Capital Economics.

"Financial markets have welcomed the news," he said in a report on Tuesday afternoon. "But we would caution that the deal is unlikely to be a strong anchor."

The peso appreciated 3.5% against the dollar to ARS22.44 on Tuesday after Macri announced intentions for an IMF FCL.

"If nothing else, the government has finally done its job of helping the central bank to support the peso," Glossop said.

The FCL is a precautionary instrument that gives Argentina access to the funds whenever it needs so long as it reassures markets that Argentina is following economic policy approved by the IMF.

Mexico and Colombia are the only nations left with FCLs after Poland exited its own program last November. The North American nation has a two-year $88bn FCL, while oil-exporting Colombia has an $11.3bn two-year line. Neither one of them is yet to draw from their FCLs.

According to IMF criteria, countries seeking an FCL must have a sustainable "external position," sound public finances and low and stable inflation. Glossop, along with Alberto Ramos of Goldman Sachs, doubt whether Argentina meets these requirements.

"It is unclear if Argentina fits this description," Ramos said in a separate report on Tuesday. "While the authorities are orthodox and market friendly, the country's fundamentals are hardly strong."

Glossop added: "The fact the fund appears willing to give Argentina an FCL in its current economic situation suggests its requirements are not that stringent."

The IMF's FCL is considered "near reserve" and these instruments serve as a complement to, rather than as a substitute, for official reserves.

In a bid to shore up the peso, Argentina has hiked its benchmark interest rate three times in roughly one week to 40% from 27.25%. The central bank has also purchased approximately $.4.3bn in foreign exchange.

In the aftermath of a slumping peso, local corporates - PCR and Telecom Argentina - both postponed planned cross-border bond issuances.

The IMF lent to Argentina back in 2001 shortly before it defaulted on its debt.