Sept. 11 (Bloomberg) -- Argentina's stocks and currency may gain after an International Monetary Fund-led group of lenders pledged $21 billion in new financing, improving the chances the country will renegotiate debts and spur the economy.

The IMF agreed to lend $12.3 billion over three years, Argentine President Nestor Kirchner said late yesterday in Buenos Aires. The World Bank and Inter-American Development Bank will finance the rest. Argentina promised to pay the fund $2.9 billion that came due Tuesday before final approval of the loans Sept. 19.

Argentina's Merval stock index yesterday climbed 4.9 percent, the biggest gain among the world's primary indexes, as investors anticipated an accord with the IMF would allow the country to start talks with holders of $95 billion of defaulted debt and speed an economic recovery. The peso probably will rise against the dollar, said Edwin Gutierrez, who helps manage $1.25 billion of emerging- market debt at Deutsche Asset Management in London.

``This is the first step towards a debt restructuring,'' said Gutierrez, whose assets include Argentina's bonds and currency. ``It's going to be a pretty complicated process but now, with the IMF agreement under their belt, they seem pretty determined to present something to investors.''

Shares of Repsol YPF SA, Spain's top oil company, rose after Argentina announced the accord. Repsol generates nearly half its operating profit in Argentina.

Peso, Bonds

The peso strengthened 0.2 percent to 2.935 per dollar before the accord was announced. Argentina's defaulted dollar bond due 2008 fell 0.15 cent on the dollar to 32.1, after climbing to 32.25 yesterday, according to Deutsche Bank AG prices at 12:10 p.m. in London. The bond was trading at about 28 cents on Aug. 1.

Argentina's government pledged to control spending, establish a new tax-sharing structure with provinces and begin to strengthen the nation's state-run banks as part of the accord. The agreement is needed to begin restoring investors' confidence in Argentina after the nation's debt default in late 2001, said Joydeep Mukherji, associate director at Standard & Poor's in New York.

``For the country to get out of its situation they have to follow certain steps and the first key step is to come to an agreement with the IMF,'' Mukherji said in an interview. ``It is a necessary step but not a sufficient one.''

S&P downgraded Argentina's long-term foreign-currency debt to selective default in November 2001.

IMF Managing Director Horst Koehler said he will recommend the IMF executive board approve the agreement ``once Argentina's arrears to the fund are cleared.'' He said he expects approval next week.

`Pleased'

``I am pleased to welcome President Kirchner's announcement of Argentina's economic program that aims at restoring strong economic growth and reducing poverty,'' Koehler said in a statement from Washington.

Argentina promised to increase the budget surplus excluding debt payments to 3 percent of gross domestic product next year from 2.5 percent this year, Kirchner said at a press conference. The restriction may limit the amount Argentina offers to pay bondholders in debt talks this year, said James Barrineau, senior vice president at Alliance Capital Management Co. in New York, which manages $145 billion in fixed income assets.

``A 3 percent primary surplus does not bode well for defaulted bondholders because it allows no room for fiscal expansion at all,'' Barrineau said. ``It will make it hard to maintain long debt sustainability and to restructure defaulted debt.'' Argentine officials have said they will propose a plan for restructuring the nation's debt during an IMF meeting in Dubai later this month.

Pressure

Argentina, which owes the fund more than $14 billion, had resisted pressure from the IMF to agree to make payments three months before receiving new loan disbursements. Government officials yesterday didn't specify what timetable they agreed to in the accord. Koehler said the IMF would provide financing to the country according to the fund's ``usual procedures.''

The fund traditionally demands payment before it disburses new loans to ensure it gets paid and avoid the appearance that it's only lending to repay itself. The time lag for repayment gives the fund leverage it needs to insist the government meets the targets set in the agreement.

``It's a mechanism which can be used to put pressure on Argentina to meet its commitments,'' said Luis Secco, an economist who runs research organization Secco & Asoc. in Buenos Aires. ``The fund can revise your goals in that period and hold back payment if goals aren't met.''

IMF Role

The government, which has blamed IMF policies for helping trigger the biggest sovereign default in history, refused demands to let utilities raise rates and to boost compensation to banks that became insolvent after the nation's default, Economy Minister Roberto Lavagna said at the press conference.

The fund continued to negotiate with the government even after the country missed the payment due this week. Iraq, Liberia, Somalia and Sudan all lost IMF membership in the months after defaulting to the fund.

``It has been a game of brinkmanship that Argentina has won,'' said Richard Segal, research director at Exotix Ltd., a London- based brokerage for emerging market debt. ``This sets a very awkward precedent for the IMF.''

Segal said that Argentina probably promised the IMF that it would grant utility rate increases after provincial elections are held during the next two months.

Argentina defaulted in late 2001 after borrowing more on international markets than any other developing country in the 1990s to finance increased spending. It also maintained a one-to- one currency link to the U.S. dollar even after neighboring Brazil devalued its currency in 1999, reducing Argentina's competitiveness and sparking a recession.

Bank Losses

International banks operating in Argentina, including Citigroup Inc. and FleetBoston Financial Corp., lost at least $11 billion after the government defaulted and devalued its currency, and most utilities in the country stopped paying their obligations. The economy, which shrank a record 11 percent last year, expanded 5.4 percent in the first three months of this year -- the first growth after 17 quarters of contractions.

France Telecom SA this week decided to sell its stake in Telecom Argentina SA, the nation's second-largest telephone company, and many other utilities and banks have abandoned their investments in the country because of growing losses and a refusal by the government to adjust its policies to enable them to boost revenue.

Argentina will keep up payments to the IMF, World Bank and IDB through 2006, Lavagna said.

Last Updated: September 11, 2003 07:24 EDT