Juan Strasnoy Peyre Argentina’s Central Bank (BCRA) launched its new monetary scheme to stopper what the government calls a “peso emission faucet” on Monday by nixing one-day repo operations with banks and trading with new Fiscal Liquidity Bills (LEFI, by their Spanish acronym) issued by the Economy Ministry instead.
The move was the conclusion of the government’s migration of interest-bearing debt from the BCRA to the treasury. From now on, interest will not be financed by issuing pesos, but by the treasury shouldering the payment through an additional adjustment in other budget items.
Starting Monday, the BCRA will no longer tender for one-day repo operations (pases pasivos), the remunerated debt that it placed on banks whose stock stood at AR$11.5 billion as of July 17. BCRA sources told Ámbito that they expected the bulk of the repos stock to initially be allocated to the new LEFIs issued by the Treasury.
Last Thursday, the Government officially issued AR$20 billion in LEFI through joint resolution 40/2024 of the Secretariats of the Treasury and Finance. It is a one-year bill (maturing on July 17, 2025), whose main repayment will be made in full at the time of maturity and will accrue interest that will be capitalized daily at the monetary policy rate (which will be set by the BCRA) and also be canceled at maturity.
“On each modification of the annual nominal rate of monetary policy, the interest will be capitalized and considered as new capital,” says the rule.
LEFIs may only be negotiated between the monetary authority and the banks. Starting Monday, banks will have two windows on business days to buy or sell LEFIs (in whole or in part) if they need liquidity. One option is between 6:30 p.m. and 8:30 p.m., with settlement occurring at 9 a.m. the following business day. The other is between 3:00 p.m. and 5:00 p.m., which will allow banks to obtain the pesos that same day (with funds credited after 5 p.m.).
Government officials are confident the new monetary scheme will not cause significant changes in the financial entities’ management of liquidity. “The plan is that nothing changes for the banks’ day-to-day basis. The operation will be very similar to that of the repo,” a source in a government office told Ámbito.
Despite being issued by the Treasury, Central Bank regulation indicates that the LEFI will not count towards the entities’ cap on public sector financing.
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LEFI, currency controls and further spending cuts
According to Bausili and Economy Minister Luis Caputo, the goal of the new monetary scheme is to end the emission of pesos to pay interest on liabilities of the BCRA by ceasing to issue them.
The government framed the decision as part of the “second stage” of its economic program. To that end they also announced they turned off other monetary “emission faucets”: last week, the Central Bank began to intervene on financial dollar rates using reserves purchased in the legal market (which means reabsorbing the pesos issued in the first move). The repurchase of AR$13 billion worth of puts (insurance on government securities that the Central Bank has provided to banks, constituting contingent liabilities for the entity), concluded last week. The puts were a latent debt for the BCRA, which could have been forced it to issue if the contracts were executed. All in all, there are still active puts for more than AR$3 billion.
President Javier Milei claims that “zero emission” is a necessary step to create the conditions that would enable him to lift Argentina’s currency restrictions known as the cepo. He specifically mentioned putting an end to BCRA liabilities and puts.
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) and, above all, the bank reserves (the accumulation of which is hindered whenever the government intervenes in the blue chip swap rate, or CCL).
A few days ago the president added yet another condition to lift the cepo: inflation and monthly devaluation rates should converge around 0% — a value that virtually no economists have forecast for the end of the year. Milei further upheld the government claim that shuttering peso emissions will be important to continue the slowdown of price increases.
In any case, the other side of eliminating emission as a result of paying interest on the Central’s passive repos is a greater burden on the Treasury, which will be responsible for paying the interest accrued daily by the LEFI. This will imply an additional cut to other items, on top of the harsh cuts that have already been made, and whose magnitude will depend on the monetary policy rate defined by the BCRA.
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Interest rates and uncertainty
On Monday afternoon, the BCRA opted to maintain the benchmark interest rate at a 40% nominal annual rate or a 49% effective annual interest rate. From now on, the benchmark will also be used to remunerate the LEFI bills, although the Treasury will shoulder the cost..
For now, the debt transfer with the Treasury alone will cause an implicit rise in yields. The repos were covered by the Gross Income tax in different districts (including the Buenos Aires City, where 80% of the banks’ headquarters are located), and that will not happen with the new bills.
“It will have all the tax exemptions provided for in the laws and regulations in force on the matter,” read the joint resolution of the Treasury and Finance. In itself, this will imply a slight increase of 3.2 percentage points in the annual nominal rate (TNA) or almost 0.3 points in the monthly effective rate (TEM).
What will the BCRA decide beyond that? “It is not clear to us what the BCRA will do because there are convincing arguments in favor of both raising and maintaining the monetary policy rate,” said the latest report from the consulting firm 1816.
Asked before the BCRA announced that the interest rate would remain the same, the firm said that “maintaining the monetary policy rate at 40% would be a new example of the economic team’s conviction in maintaining the downward trajectory of all nominal variables (inflation and nominal rates) with the idea that they converge to a monthly 2% crawling peg.
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