£5.5bn IMF aid package eases Argentina debt fears

Fears of a domino-style financial crisis in Latin America receded yesterday after the International Monetary Fund lined up $8bn (£5.5bn) of new aid for Argentina, aimed at heading off a default by Buenos Aires on its $128bn of outstanding public debt.

The deal, hammed out in tense negotiations in Washington and announced overnight by the IMF's managing director Horst Köhler, provides for an extra and immediately available $5bn credit, on top of Argentina's existing $14bn stand-by facility at the IMF.

On top of that, a further $3bn would be released to underpin a reorganisation of outstanding debt. Domingo Cavallo, the Argentine economy minister said the operation would not be a debt restructuring ­ which the markets might regard as tantamount to default ­ but what he called "a voluntary debt swap". His plan is to secure agreement by creditors to exchange short term for longer-term debt, thus reducing the immediate weight of debt service payments.

Although the new package will only be formally approved by the IMF board early next month, the deal is expected to be a formality.

Paul O'Neill, the US Treasury secretary who has previously criticised bailouts for countries like Argentina, welcomed the agreement. Buenos Aires, he said, had taken "exceptional" steps to tackle its economic difficulties, notably last month's 'zero-deficit' law calling for big cuts in state salaries and pensions to balance the national budget.

News of the fresh IMF aid spurred a 10 per cent rally on the Argentine bond market, and also helped steady a jittery Wall Street, which had been worried that default in Argentina could trigger crises in neighbouring Brazil, Chile and elsewhere.

Argentina has been trapped between a sharply slowing economy, rising debt-service payments and its anti-inflation policy of rigidly pegging the peso to the US dollar. Despite seven stabilisation packages in the past three years, recession has deepened and unemployment has risen to almost 20 per cent, while more than a third of the population lives below the official poverty level.