Government lets MEP dollar surge to dismantle financial loophole

“If people use loopholes, they have to know that there is a risk and that it can go wrong”

The Central Bank, in a move that was coordinated with the Economy Minister, did not intervene yesterday in the financial currency exchange markets, making the MEP dollar jump by almost 7% in just one day.

The decision, according to sources in the Central Bank, was made to dismantle a financial loophole that allowed brokers to earn up to 9% “with just two clicks.”

“Brokers were calling their clients to tell them to use the LEDE loophole,” a source in the Central Bank told the Herald. “It started at the beginning of the week.”

Market participants could take advantage of the loophole in at least two ways. One involved buying a bond, such as the AL30, for AR$10,400. The next day, the bond was sold for dollars (as AL30D) for US$23.25. The MEP exchange rate, at that point, was AR$447.31.

The MEP dollar is the exchange rate implicit when investors buy shares or bonds in pesos and sell them in dollars in the local market. 

The government had been intervening in the AL30 market, which reduced the MEP dollar rate.

Then, with those dollars, investors bought a LEDE bond with US dollars for US$0.209 and sold it for AR$96.03. At that moment, the exchange rate was AR$459 – meaning a potential 2.7% daily earning, not counting commissions.

Another way was using the dollars obtained for AR$447 in the first transaction in the “blue” (informal) market for AR$488 each – a simple way of making a 9% margin.

Both operations could be repeated indefinitely.

Yesterday, the Central Bank, which since April 25 has been actively intervening in the bond market with international reserves to stop the surge of the MEP dollar, decided not to intervene to avoid fuelling financial speculation – that day, the MEP dollar went from AR$444 to AR$473 in just one day.

“It’s impossible to determine how much they lost,” a source in the Central Bank told the Herald. “The risk was that, if [the MEP dollar] increases that much in a single day, it can all go to the blue [dollar informal market].” The source added that “yesterday was a good day” to implement the decision since the city center was virtually inaccessible due to massive protests, making access to informal dollar vendors harder.

“We never reveal our strategy,” another source in the Central Bank said. “It’s a highly volatile market and, if some people use loopholes, they have to know that there is a risk and that it can go wrong.”

Market reactions

Not everyone in the market saw it that way. An important broker who operates in Buenos Aires, who asked to remain anonymous, told the Herald that the move was not done to “dismantle any loopholes,” but because the MEP dollar at that value was “indefensible.”

“They let [the MEP dollar] run because they could not keep intervening with a US dollar value that low, and they were losing international reserves left, right, and center.”

The government is currently facing an international reserve scarcity crisis which was aggravated by a historic drought, which slashed some US$20 billion of export income this year.

The broker forecasted that the Central Bank will intervene again, “and in a few days, we will have another loophole, this time with a higher value.”

“[The government] does such a poor job taking care of the bond market that, when they intervene, they break everything and they affect investors,” they said.

However, they begrudgingly admitted that investors who were speculating lost money due to the government’s decision. “Anyone who bought AL30 must have suffered.”

Federico Furiase, director of the Anker Latinomérica financial consulting firm, told the Herald that the “ammunition for intervention in the financial dollar market is limited because there are not enough net reserves in the Central Bank.”

“They need to rebuild their ammunition and, for that, they have to negotiate advanced disbursements with the IMF, and that a part of that can be used to intervene in the financial dollar market,” Furiase said. “But that won’t be easy to achieve in an election year”.

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