IMF, Argentina make ‘important progress’ in loan talks, peso inches up

By Hugh Bronstein and Eliana Raszewski

BUENOS AIRES (Reuters) – Argentina’s bloodied peso currency inched higher and the risk of its bonds defaulting improved slightly on Monday after the International Monetary Fund said “important progress” had been made on revamping the country’s standby loan agreement.

The peso rose 0.71 percent to 39.5875 to the greenback early Monday while country risk tightened by three basis points. Market sentiment has improved slightly as the budget bill and a revamped IMF deal get closer to being announced.

The currency has lost more than one-half of its value against the dollar this year as confidence collapsed in Argentina’s ability to make its 2019 debt payments. But market sentiment has improved in recent days.

President Mauricio Macri’s 2019 budget bill to be released later Monday is expected to outline new taxes and spending cuts the government plans to use for restoring fiscal balance.

Many of the details are being negotiated with the IMF, which is revamping its $50 billion standby financing deal by the government strengthening its fiscal targets.

The JPMorgan (NYSE:) Emerging Markets Bond Index Plus (EMBI+), which measures the perceived likelihood of default against safe-haven U.S. Treasury bonds, pegged Argentina at 654 basis points on Monday, 2 points tighter than on Friday and 118 points tighter than 773, where the country’s portion of the index started the month.

A lower spread over Treasuries indicates an increase in market confidence in Argentina’s ability to pay its debt obligations.

Argentines have taken to the streets in recent days to protest proposed budget cuts. But Macri’s plan will also include export tax hikes that the business community is expected to reluctantly accept as the price of keeping Macri, a free-market advocate, in power.

The 2019 budget proposal is expected to erase Argentina’s primary fiscal deficit next year. In June the government signed a $50 billion standby deal that included a fiscal shortfall of 1.3 percent of gross domestic product.

The IMF backing was not enough to halt a run on the peso, which has erased more than one-half of the currency’s value against the U.S. dollar so far this year.

“Important progress is being made toward strengthening Argentina’s economic policy plan, supported by a stand-by arrangement with the IMF. We are working hard to conclude these staff-level talks in short order and present a proposal to the IMF executive board,” the IMF said in a statement.

Fiscal belt-tightening items included in the budget bill, expected to be unveiled later on Monday, will not be easy for Macri to implement ahead of his expected 2019 re-election bid.

Achieving a zero deficit will not come from spending cuts alone. “A big component of the proposal will be tax increases concentrated on the export sector,” economist Gustavo Ber said told Reuters.

“This can be advantageous from the point of view of generating a financial calm that is the tip of generating a greater expectation of economic recovery, which is where social pressures come from,” Ber said.

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