Argentine bailout is short-term fix as investors wait to see results.(Brief Article)(Statistical Data Included)

BUENOS AIRES -- The deal between the IMF and Argentina heads off the danger of an imminent default, but it will make little difference to most Argentineans, who appear to be in for a protracted period of austerity. The deal also represents a significant roll back of what was supposed to be a tough policy regarding emerging market debt by the Bush administration.

The deal to provide up to $8 billion in additional funds will allow the government to service its debts and strengthen the financial system. The additional funds, $5 billion of which will be made available in the near term, will be used largely to support the financial system, which has been hit by shrinking reserves and falling deposits. At the height of the crisis, the banking system was losing $250 million to $500 million per day. The rest will be disbursed after the IMF is satisfied that the government is spending the money responsibly and is expected to be used to repurchase debt. The new loans boost to $22 billion the amount of aid that the IMF has granted Argentina since last December.

After weeks of uncertainty, local markets reacted positively to the deal, despite the fact that it was less than the $9 billion to $12 billion that analysts had hoped to see. The smaller-than-expected package means investors are likely to be very watchful for any signs of future problems and will react quickly if they see trouble.

But as with several previous deals, the new loans are unlikely to have much impact on the Argentine economy in terms of job creation or spurring economic growth. Although Argentine officials say the deal does not impose any new economic requirements, the government is clearly expected to continue its zero-deficit policy. The government has said it will only spend as much money every month as it takes in. However, this does not include debt service payments so the $128 billion in public debt will continue to grow.

In addition, the austerity imposed by the zero-deficit policy means that the government will have trouble injecting funds into the economy via public works projects or other spending.

The deal represents a significant retreat for the Bush administration, which had said that it would not bail out emerging markets unless they got their own affairs in order first. While Argentina has moved to resolve its spending problems, it has done little to resolve its structural problems such as an overvalued currency, excessive labor costs and large pension outflows.

However, Treasury Department officials say that the US government felt it could not afford to let Argentina founder out of fear that investors would exit emerging markets en masse, something that a growing number of analysts say is starting to happen as the global economy slows.

Over the longer term, Argentine officials say they hope the new funds will help ease investor fears about investing in the region, which should help stabilize the situation in Brazil, one of Argentina's main trading partners. In addition, they hope that the most recent crisis will convince the US government to accelerate the process of negotiating trade deals with Mercosur or with Argentina on a bilateral basis.

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