By Jorge Otaola, Karin Strohecker and Rodrigo Campos
BUENOS AIRES (Reuters) -Argentina's long-suffering markets gave a slightly weary cheer on Monday after the country sealed a $20 billion loan program with the International Monetary Fund and undid large parts of its currency and capital controls late on Friday.
The peso slid around 9% to 1,170 per dollar, but less than expected, while widely-used parallel exchange rates strengthened, almost closing the gap between the official and informal rates that has widened sharply in recent years.
The country's international bonds, meanwhile, rallied with some maturities adding more than 4 cents on the dollar, according to data from MarketAxess. Some local bonds slipped, while the local Merval stock exchange jumped 8.5%.
The currency drop came after the central bank undid its so-called crawling peg and allowed the currency to float freely within a far wider trading band of 1,000-1,400 pesos per dollar, a major policy shift investors and firms had been pushing for.
The moves are a key part of bold and risky reforms under libertarian President Javier Milei that is shaking up the South American country. He has managed to restore some economic stability after years of cyclical debt and currency crises.
The currency had closed at 1,074 per dollar on Friday, though popular parallel rates often used by Argentines and local firms to access greenbacks due to strict capital controls in place since 2019, had been nearer 1,350 per dollar.
The IMF support is seen boosting overall confidence and the removal of controls could help spur investment.
"We have a positive view of the announced macro framework, which should allow for FX reserve accumulation and more sustained growth," said Morgan Stanley economist Fernando Sedano in a note on Monday.
He added that inflation could heat up in the short term, and interest rates may have to rise, while the investment bank was keenly watching a visit to Argentina on Monday by U.S. Treasury Secretary Scott Bessent.
"Will that visit bring tariff relief or some extra FX funding? We view both as likely," Sedano wrote.
The IMF deal will release an initial $12 billion, with $3 billion more coming later in the year. Argentina also announced large loan deals with other multinational lenders and banks that should help bolster its depleted foreign currency reserves.
The South American grains producer is digging itself out of a major economic crisis under Milei, who came to office in late 2023 and has managed to stabilize the economy with austerity and fiscal discipline.
Capital Economics said Buenos Aires had moved "more quickly than we'd anticipated to restore macro orthodoxy," though cautioned that the peso still looked over-valued.
"The country appears closer to a semblance of macroeconomic stability than at any point since the 2000s," it wrote.
The IMF deal came with targets and baseline assumptions that would see the country continue to commit to a "zero deficit" and to build up reserves this year. New investment in areas like energy and grain exports will be important for that.
J.P. Morgan said the fall in the peso could be tempered by demand from grain exporters for pesos as they looked to liquidate their foreign currency income at a more attractive exchange rate.
"In our view, the official FX will likely stabilize below the parallel FX level as of Friday, with agriculture-related FX supply catching up. The FX gap will likely shrink to around 5%," the investment bank said.