By Jorge Otaola and Scott Squires
BUENOS AIRES (Reuters) - Argentina's peso stopped its slide against the U.S. dollar on Wednesday as markets waited for clarity on whether the International Monetary Fund would back the government's request for early cash disbursements in an emergency financing deal.
The peso had opened 0.89 percent weaker before gaining 0.22 percent in midday trading to about 39 pesos per dollar. Argentina's Merval stock index rose about 2 percent and the country's OTC bonds were up 0.8 percent on average.
The reversal for the peso, whose 16 percent drop last week had fanned fears of contagion, came as other emerging market currencies and stock indexes fell on Wednesday.
Argentine government officials in Washington continued talks with the IMF for a second day in hopes of speeding up a $50 billion standby loan to shore up credibility in Argentina's ability to pay its debt.
Economy Minister Nicolas Dujovne said from Washington late on Tuesday that he hoped to clinch a deal with the IMF this month, while U.S. President Donald Trump backed market-friendly President Mauricio Macri's handling of the crisis.
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"With IMF talks happening in the United States, it is a hopeful climate, at least in this moment," economist Gustavo Ber told Reuters. "Other emerging market currencies are continuing to fall, but the dollar is taking a breather."
On the eve of the talks with the IMF this week, Macri's center-right government announced ambitious new targets to balance next year's fiscal deficit, paid for with new taxes on exporters and steep spending cuts.
But markets remained skeptical, with the peso losing 5.25 percent of its value against the dollar in the first two days of this week, despite the central bank selling $458 million in the local spot market. The bank has sold more than $14 billion of reserves this year.
"The low values (of Argentine assets) reflect Argentine risk ... it could be a turbulent ride," local consulting firm Delphos Investment said.
Some in Argentina believe Macri's government lacks the political will to implement unpopular spending cuts that are expected to be part of a revamped IMF deal.
The austerity measures aim to eliminate the primary fiscal deficit next year, when Macri is expected to seek re-election. Previous targets announced after the country inked the IMF deal in June included a 1.3 percent of GDP primary fiscal deficit in 2019, with no deficit in 2020.
Rolling out the austerity measures will not be politically easy. Buenos Aires streets are regularly blocked by anti-austerity marches. When the government introduced a bill to reduce pension benefits late last year, protesters rushed Congress and were held off with water cannon and teargas.
Economists expect Argentina's economy to shrink 1.9 percent this year compared to a previously estimated 0.3 percent contraction, according to a central bank poll published on Tuesday. Inflation in 2018 is now seen at 40.3 percent, versus 31.8 percent in the previous monthly poll.
Argentina is struggling to break free from the cyclical crises that have hammered the country every decade over the last 60 years. A financial meltdown in 2002 tossed millions of middle class Argentines into poverty, with many blaming IMF's orthodox economic policies for setting the stage for the crisis.
(Reporting by Jorge Otaola and Scott Squires, Writing by Mitra Taj; Editing by Frances Kerry and Tom Brown)