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UPDATE: Argentina, IMF reach 3-year $50B standby arrangement

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UPDATE: Argentina, IMF reach 3-year $50B standby arrangement

The International Monetary Fund has stepped in to rescue Argentina from insolvency with a three-year, $50 billion standby arrangement designed to give President Mauricio Macri time to address a litany of fiscal concerns.

The IMF carries historical baggage in Argentina having previously accepted its part in the country’s 2001 economic meltdown which saw it default on $132 billion of foreign debt.

However, the fund was called upon to enter the fray once more as Macri battles with fiscal and current account deficits and inflation running at over 20%. The Argentine government said it will draw on the first tranche of the facility and subsequently treat the loan as precautionary.

The terms of the IMF’s cash injection include Argentina restoring the primary fiscal balance by 2020 and further tackling inflation. The Banco Central de la República Argentina attempted to address a run on the peso in early May with a sharp increase in interest rates to 40%.

The IMF is also pushing for increased central bank independence in a bid to prevent repeats of past instances where governments leaned on the bank to print money to plug fiscal holes.

IMF Managing Director Christine Lagarde was complimentary of the efforts of the Argentine leadership, highlighting the "commitment to maintain a flexible and market-determined exchange rate." The country's attempt to maintain a peso peg to the dollar was one of the major factors in the 2001 collapse.

The funding will limit Argentina’s exposure to bond markets which have been increasingly turbulent for emerging market economies.

Emerging currencies have been hammered by both the strength of the dollar and the drainage of dollar funding from sovereign debt markets, particularly emerging market bonds and currencies.

The Turkish lira hit 4.9 against the dollar on May 23, up from 4.1 at the start of the month, while the South African rand fell 0.8%.

The concern surrounding emerging markets means even more attention will be paid to the upcoming meeting of the Federal Reserve, with the governor of the Indian central bank, Urjit Patel, warning in the Financial Times last week that dollar funding of EMEs is "in turmoil."

Patel attributed the escalating pressure to a combination of the Fed trimming its balance sheet and the increase in issuance of U.S. Treasurys to cover the cost of President Donald Trump’s tax cuts.

"Given the rapid rise in the size of the U.S. deficit, the Fed must respond by slowing plans to shrink its balance sheet. If it does not, Treasurys will absorb such a large share of dollar liquidity that a crisis in the rest of the dollar bond markets is inevitable," Patel wrote.

The Federal Reserve meets June 12 and is widely expected to increase interest rates.