A 'full-blown bailout' by the IMF could make Argentina's financial crisis worse
- Argentina's currency, the peso, has been spiraling to all-time lows.
- The IMF is starting discussions with Argentine officials Friday on a possible bailout.
- Some experts are worried the IMF could mandate "front-loaded" adjustments and worsen the crisis.
The IMF announced Monday it will begin discussions on aid to Argentina later this week. But with uncertainty about what an IMF-Argentina deal might include, some worry a bailout could actually make things worse.
"The news that Argentina has started talks with the IMF over a full-blown bailout has masked the fact that - deal or no deal - the economy is likely to fall into recession this year," Capital Economics analyst Edward Glossop said.
Argentina has already been pursuing aggressive contractionary policies in efforts to prop up the peso, which has fallen 34.25% versus the US dollar in 2018 and is the worst-performing currency this year. The Central Bank of Argentina raised rates three times earlier this month to 40%. Meanwhile, the government recently announced hefty spending cuts and increases in utility prices.
The IMF said Monday that the deal won't include a target exchange rate for the peso, but few other details have been released ahead of negotiations.
Glossop thinks it's likely the deal will require even higher borrowing rates and a larger reduction in government spending. And that could push the economy into a deeper downturn, he said, through tighter credit conditions and lower domestic demand.
"The IMF does to some degree take these factors into account, but in general, it tends to favor a quick and front-loaded adjustment," he said.
IMF press officer Raphael Anspach declined to comment on whether the agreement might include such stipulations.
On the other hand, some don't see many other options for Argentina. The peso plummeted to an all-time-low versus the dollar Monday, falling more than 8% to nearly 25 per greenback.
Deutsche Bank analyst Cesar Arias said Argentina needs high interest rates, faster fiscal deficit reduction, and an IMF program - while still acknowledging the major risks that would come along with those policies.
"The costs of this adjustment are likely to be slower economic growth and risks of political backlash," Arias said.
Argentina has had a complicated relationship with the IMF, which has been blamed for worsening the country's economic crisis in 2001. After President Macri announced negotiations with the IMF last week, citizens took to the streets of Buenos Aires to protest.
Alberto Fernandez, who served as cabinet chief to President Néstor Kirchner, criticized the decision on Twitter last week.
"The only idea that came to Macri is to resort to the lender of last resort," he wrote. "That is the IMF. What a way to smash an economy."
Capital Economics revised their growth forecast for Argentina this year from 2.5% growth to a 0.5% contraction.