Tuesday’s peso debt auction by Argentina’s Economy Ministry ended with the government refinancing only 76% of its maturities. The administration faced maturing debt for AR$11.8 trillion and awarded AR$9 trillion, paying a monthly rate of 4.28% for a 15-day Lecap — a 65% annual interest rate, three times the inflation figure and one point above what the Finance Ministry approved in a tender two weeks ago.

With the latest bid, it closed its July commitments and now awaits a challenging August, when some AR$30 trillion will come due.

The government has been facing increased exchange rate tensions since it dismantled the Fiscal Liquidity Bills (LEFI, by their Spanish acronym), a bond issued by the Economy Ministry. Two weeks ago, the government held an emergency tender to absorb the “excess” liquidity that resulted from the end of the LEFIs. In order to cap the U.S. dollar exchange rate, which reached AR$1,300, the government had to increase its interest rates to an annual 29%.

After the emergency tender, the Central Bank placed an even higher 36% rate on one-day repo operations, also known as pases pasivos in Spanish. The administration is also intervening in the future market in a bid to contain the U.S. dollar rate.

President Javier Milei accused two banks of “carrying out a currency run against the peso” in an interview with Radio Mitre.

Market sources had diverging opinions about the result of Tuesday’s bid. Financial analyst Gustavo Ber called it “satisfactory.”

“Demand continues to favor shorter-term Lecaps, with no appetite for dollar-linked instruments,” Ber told the Herald. Dollar-linked instruments give the percentage of the devaluation as a rate. “Peso rates would be more competitive with the dollar, already close to $1,300.”

Another market source, an analyst in a brokerage firm, who spoke under the condition of anonymity, told the Herald that after the emergency tender and the pases pasivos comeback “damaged the peso debt market through a disorderly, messy process.”

“The rates they have to validate are getting higher and higher, even with falling inflation,” the source added, “and, on top of that, they could not roll over 100%.” 

The researcher also argued that the government made a “serious mistake” when it dismantled the LEFIs, adding that the administration will have to “increase the fiscal surplus to offset the interest cost.”

“The high interest rates will negatively affect economic activity,” he said.