Political backlash over Argentina IMF deal contained, for now

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BUENOS AIRES (Reuters) – Opposition politicians and many ordinary Argentines have been quick to criticize President Mauricio Macri’s decision to seek a lifeline from the International Monetary Fund but the gamble could pay off if he is able to avoid onerous terms.

Demonstrators march during a protest against the economic measures taken by Argentine President Mauricio Macri’s government in Buenos Aires’ financial district, Argentina May 9, 2018. REUTERS/Marcos Brindicci

Macri and IMF Managing Director Christine Lagarde announced on Tuesday they were opening talks for a financing deal after Argentina’s peso currency touched a new low of 23.5 to the dollar, despite tighter fiscal measures and a massive interest rate hike in Latin America’s third-largest economy. Negotiations started on Wednesday in Washington.

For many, the announcement brought back memories of a 2001-2002 financial crisis that many blamed on IMF policy prescriptions adopted by the government. The crisis was punctuated by a debt default and currency devaluation that tossed millions of middle-class Argentines into poverty.

Opposition politicians, particularly those allied with leftist former President Cristina Fernandez, were quick to denounce the deal, placing “IMF OUT!” signs on their desks in Congress.

“Every time Argentina turns to the International Monetary Fund it has been followed by very bad news for Argentina,” Agustin Rossi, head of Fernandez’s party in the lower house, said on Wednesday.

Yet, in a sign Macri’s government was pressing ahead with its agenda despite the crisis, the Congress passed a long-awaited capital markets reform law quicker than expected on Wednesday.

Congress was also expected to reject an opposition bid to limit price increases by utilities, following a reduction in government subsidies. The proposal had contributed to market jitters in recent weeks as a reduction in subsidies is seen as crucial to reducing Argentina’s budget deficit.

The local stock market opened higher and added to gains once the capital markets bill passed. After losing 12 percent in the previous five trading sessions, the Merval stock index offered plenty of low prices snapped up by opportunistic investors.

“If, by resorting to the IMF, the government manages to stabilize the situation, then the political cost of having this unexpected guest back again may be short-lived,” said Ignacio Labaqui, who analyses Argentina for risk consultancy Medley Global Advisors.

The peso was stable after weakening on Tuesday following several days of turmoil that prompted the central bank to hike rates to 40 percent on Friday and the government to cut its fiscal deficit target to 2.7 percent of gross domestic product.


A screen displays a chart as traders work on the floor of Buenos Aires Stock Exchange, Argentina May 9, 2018. REUTERS/Marcos Brindicci

If the IMF lifeline continues to calm markets and does not dramatically change his agenda, Macri’s gamble on seeking assistance could bear dividends. He will have re-established ties to the Fund in time for the political fallout to settle before his expected 2019 re-election campaign.

But if it fails to restore confidence or requires draconian austerity measures, Macri’s appeal to the IMF could jeopardize his ability to win a second term.

Much will depend on the conditions attached to IMF funding. It could take the form of a Flexible Credit Line (FCL), like the more stable economies of Mexico and Colombia have, or a more-demanding Precautionary and Liquidity Line (PLL) that could require orthodox policy reforms.

“Presidential leadership is the key factor. Mauricio Macri has to persuade markets, public opinion and opposition leaders. Not one or two of them: all three,” said Julio Burdman, director of Observatorio Electoral consultancy.

Macri was driven back to the IMF by a perfect storm including a free-falling peso and an economy hobbled by one of the world’s highest inflation rates, currently running at around 25 percent.

Market nerves were strained by a new tax the government slapped on foreign investors last month. Investors had already been shying away from emerging markets generally, ahead of expected further tightening by the U.S. Federal Reserve, which hit currencies across Latin America.

On the streets of Buenos Aires, many Argentines were apprehensive the IMF could once again impose a straitjacket on their country, after the spectacular failure of its policies 17 years earlier.

According to a survey taken by polling firm D’Alessio IROL/Berensztein last weekend, 75 percent of respondents said they would not support a government request for assistance from the IMF. That included 58 percent of those who voted for Macri’s ‘Let’s Change’ coalition in the 2015 elections.

Leftist parties were planning a march to Congress Wednesday afternoon in protest of Macri’s business-friendly policy reforms, and the IMF’s re-involvement in Argentina.

“I feel my salary is devalued more and more. On the macro level, these measures seem to me like holding down a person who is already drowning,” said Juan Manuel Gavilan, a state employee.

Reporting by Hugh Bronstein; Additional reporting by Jorge Otaola, Luc Cohen, Juan Bustamante and Christian Plumb; Editing by Caroline Stauffer and Andrea Ricci

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