Argentina’s Central Bank (BCRA) began issuing regulations on Thursday that will govern the operation of its monetary scheme going forward. The government is describing this as the “second stage” of its economic plan.
On Wednesday, the executive issued a decree authorizing the treasury to issue new Fiscal Liquidity Bills (LEFI, by their Spanish acronym). These will be used to conclude the migration of interest-bearing debt from the BCRA to the treasury.
The BCRA published two communications — A8060 and A8061 — regulating aspects of the new scheme. The first establishes the regulatory framework for the operations the monetary authority will use for liquidity management with banks, through a scheme of buying and selling LEFIs. The BCRA has stated that from Monday, July 22, it will stop placing one-day repo operations (pases pasivos) with banks. That same day, it will begin to trade LEFIs.
The other communication exempts LEFIs from the limit on public sector financing that banks are subject to. This will allow them to subscribe to LEFIs (which will be issued by the treasury but managed by the BCRA) without violating credit fractioning regulations. This mirrors the same criteria previously used with LECAPs that financial entities purchase following the dismantling of passive repo operations, though in this case, the previous stock of passive repo operations held by each entity will not be considered.
LEFI: a measure awaited by banks
The measure was announced on Friday, June 28, by Central Bank chief Santiago Bausili and Economy Minister Luis Caputo. Their press conference failed to meet the market’s expectations of changes to the exchange rate regime. Instead, Caputo confirmed the crawling peg of 2% monthly and the blend exchange rate, postponing the lifting of currency controls to a third stage. On Thursday, he told Radio Mitre the controls would be removed gradually. The announcement was followed by several days of strong pressure on parallel exchange rates.
The objective of the new monetary scheme, according to Bausili and Caputo, is to end the issuance of the pesos used to pay for the BCRA’s interest-bearing liabilities. To achieve this, the one-day passive repo operations currently conducted by the Central Bank with banks will be eliminated and replaced by bills issued by the treasury, which will assume the payment of interest through an additional adjustment in other budget items.
Thus, a debt migration process from the Central Bank to the treasury, initiated early in the government’s term, will be completed. President Javier Milei claims this is a key step toward creating conditions to lift currency controls. However, numerous economists and market agents have reservations, since they believe it involves the same stock of pesos that could put pressure on the dollar if controls are eased. They argue the crucial factor to monitor is actually deposits (which ultimately represent the counterpart to both repo operations and treasury bills purchased by banks).
Nevertheless, Milei has once again extended the timeline for lifting controls. On Tuesday, via his X account, he added a new condition to the two requirements already set for dismantling restrictions. In addition to eliminating interest-bearing liabilities of the BCRA and puts (insurance on government securities that the Central Bank has provided to banks, constituting contingent liabilities for the entity), he now requires inflation and monthly devaluation rates to converge around 0%. This is an objective that virtually no economist expects to be achieved by the end of the year.
The executive branch has taken the first step toward formally launching the measure. On Wednesday afternoon, the Government published decree 602/2024, which provides the regulatory framework for the creation of LEFIs.
Article 1 of the decree authorizes the treasury to issue LEFIs, stating they will have a one-year term and a total issuance of AR$20 trillion (US$21.8 billion at the official rate, US$14.1 billion MEP rate). It also specifies that the bills will accrue the monetary policy rate, which will continue to be set by the BCRA. LEFIs will only be transferable and negotiable between the BCRA and financial institutions, serving as the new vehicle through which the Central Bank will manage economic liquidity via daily buying and selling operations.
The decree allows the Executive to exchange LEFIs with the BCRA for Public Debt Instruments held in the Central Bank’s portfolio, including non-transferable bills. Eligible securities for this exchange will be valued at market prices, while LEFIs will be valued at face value.
On July 22, the BCRA will start using LEFIs to manage liquidity. Specifically, they will require banks to replace their one-day repo operations. Subsequently, liquidity will be managed through daily buying and selling operations.
How LEFIs will work
According to the measure, the Treasury Department will be required to cover the financial cost of LEFIs placed with banks by the BCRA. This implies the treasury must cover the daily interest costs at the monetary policy rate, which will be “deposited as collateral in an account established for this purpose” at the Central Bank.
Official sources indicate that the aim of this scheme is to end monetary issuance caused by interest payments on BCRA’s repo operations, which will cease to exist. This cost will now be transferred to the treasury (some economists estimated it to exceed AR$600 billion per month), which will manage it through additional budget cuts or net funding obtained from regular peso-denominated debt auctions by the Finance Ministry. Since interest will accrue over a year, LEFI’s costs will impact the fiscal outcome in 2025, although the daily cost will fall to the Treasury.
According to sources directly involved, the intention is for the broad monetary base not to vary. The exception would be the Central Bank’s intervention in the foreign exchange market through currency acquisition or sale. From a macroeconomic and monetary perspective, they say the operation will be practically equivalent to the repo operations, the difference being that interest payments will not be covered by issuance but by additional adjustments from the treasury beyond the already substantial cuts.
In official circles, they argue that the operation of the new monetary scheme will not entail changes in the management of financial institutions’ liquidity. “The plan is for banks to have no changes in their day-to-day operations,” one source said. They explain that LEFIs will be backed by the pesos each bank invests in purchasing them, plus the deposits the treasury will place in the Central Bank for interest payments. Interest will accrue daily, and when an institution wishes to sell the bill, the BCRA will deliver the pesos the following day.
For this purpose, communication A8060 stipulates that the BCRA will open various windows on business days so banks can sell LEFIs (in whole or in part) if they need liquidity. One option for banks will be to indicate the amount they wish to sell between 6:30 p.m. and 8:30 p.m. with settlement occurring at 9 a.m. the following business day. Additionally, there will be a session from 3-5 p.m. each business day, allowing banks to acquire pesos on the same day (with funds credited after 5 p.m.).
The bills will accrue a floating rate daily, equivalent to the monetary policy rate. BCRA sources have indicated that the institution will soon publish a regulation stating that this reference interest rate will no longer be based on one-day repo rates, which currently stand at 40% nominal annual or 3.33% effective monthly.
Going forward, the monetary policy rate will be defined by the Central Bank’s board of directors and will remain unchanged until a new decision is communicated. Economists on the economic team believe that with the new scheme, the BCRA gains autonomy to manage interest rates. Until now, the strategy has involved negative rates to reduce the money supply and prevent excessive peso issuance for interest payments at a rate higher than inflation. In the future, an increase in yields will not imply increased issuance but will require greater fiscal adjustment (at a time when revenue continues to decline sharply and expenditure reduction is beginning to reach limits).
It remains to be seen whether the board will announce a rate hike before LEFIs’ launch to try to contain exchange rate pressures.