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Calm returns to Argentina ahead of key IMF loan meeting

Argentina's peso recovered May 16 after the central bank successfully sold about $26 billion in short term debt and economists said the country did not run the risk of defaulting on its debt even as it seeks a $30 billion credit line from the International Monetary Fund.

The IMF's executive board is scheduled to meet May 18 to consider Argentina's request, which was made after 1,275 basis points in central bank interest rate hikes in little over a week took the key rate to 40% but failed to stop a run on the currency as investors bet higher U.S yields and a rising greenback would leave the country struggling to finance large current account and fiscal deficits.

The peso appreciated 0.5% to 23.95 to the dollar by 11:09 a.m., adding to gains the previous day when the Banco Central de la República Argentina sold dollars heavily in the market and said it rolled over 616 billion pesos in short-term Lebac bonds as well as selling another 5 billion pesos in fresh debt. The bonds, with maturities from 36 to 154 days, were placed at 40% to 38%.

Argentina's application for an IMF stand-by funding request comes as questions grow about the ability of those emerging market economies which are dependent on foreign funding to cope with rising U.S. yields. It is also burdened with memories of the austerity imposed by another loan deal from the Fund, which, together with a fixed peso-dollar exchange rate, led to Argentina's disastrous default in 2001, prompting civil unrest and initiating a yearslong depression.

This time around, however, things are different, said Martín Guzmán, economist at Columbia University Business School, in an email.

"This is a large currency crisis, not a sovereign debt crisis," Guzmán said. "The crisis will have a contractionary effect this year, but it will not entail a default of the sovereign debt."

In 2002, Argentina's general government gross debt as a percent of GDP was 152.2%, according to the IMF. In 2017, it was 52.6%, and is projected to rise to 54.1% this year.

A liquidity, not a debt crisis

"It's a crisis of confidence," David Tawil, president and co-founder of Maglan Capital, an event-driven hedge fund said in an interview. "There's an immediate concern about liquidity, but Argentina can pay back its debt."

Tawil's fund invested in defaulted Argentine debt after hedge funds, led by Paul Singers's Elliott Management refused to take pennies on the dollar and held out until current President Mauricio Macri negotiated a $4.65 billion settlement in 2016.

Now, Maglan invests in Argentine equities, primarily in the commodity sector, the hedge fund manager said, in part because Macri has moved quickly on market reforms after years of populist government. But an Argentine central bank interest rate cut at the start of the year may have been too aggressive at a time when the U.S. dollar was strengthening and global interest rates rising, Tawil said.

The central bank's defense of the peso cost it $7 billion in the 30 days to May 11, when its stock of foreign reserves fell to $54.4 billion, official data shows.

Argentina's problem this time round is not debt but its need for a constant supply of dollars, said Martín Castellano, head of Latin American research for the Institute of International Finance.

"Today we have a flexible exchange rate regime. We have a financial system that operates mostly in local currency and also, relatively higher commodity prices," he said.

Any conditions imposed by the IMF are likely to be in line with what the government was planning anyway, said Guzmán, but he added that they could "lead to a loss of autonomy that may prove too costly in the future if the external imbalances are not resolved."

The erosion of foreign reserves could also present difficulties in times to come.

"This is a loss of part of the country's external assets, that could have been used in the future in situations of debt distress," Guzmán said. "This will make the country more vulnerable to future external shocks."

Argentina and the IMF will get down to serious negotiations once the May 18 review with the executive board is concluded, a person familiar with the process said.

There are no specific timelines for a deal, but IMF Managing Director Christine Lagarde, after meeting with Argentina's Treasury Minister Nicolás Dujovne on May 10, said in a statement, "Minister Dujovne and I agreed that our shared goal is to reach a rapid conclusion of these discussions."