Economy Minister Sergio Massa’s team is planning to switch public sector dollar bonds into peso bonds and eliminate restrictions on Argentine brokers holding some Argentine bonds in a bid to control the blue-chip swap rate after it hit record values over the past week.
The blue-chip swap rate, also known as contado con liqui or CCL, is used in the financial world as a way to get dollars. It is obtained by investors buying shares and financial instruments in pesos and selling them in dollars on the international market. The “CCL dollar” is the implicit exchange rate in that operation. Investors use this type of transaction because there are multiple restrictions on accessing foreign currency in Argentina.
The changes to be implemented by the government comprise two main measures.
First, the Government will exchange sovereign dollar bonds currently held by the public sector for new debt instruments in pesos. The objective is to withdraw from the market all dollar debt under NY law currently held by public agencies. Official sources told the Buenos Aires Herald that they expect to withdraw US$4 billion of hard dollar bonds and that they anticipate the prices will improve.
Secondly, the government will eliminate the limits that Argentine brokers and dealers have on holding some Argentine bonds in their portfolios (the “bonares” bonds, such as AL30, AL35, AL38 and AL41) and will also force public agencies to sell this type of bond to the market, in order to increase supply and lower prices.
The combination of these two measures seeks to impact the value of the bonds in both pesos and dollars, and thus control the value of the blue-chip swap rate.
According to official sources, this decision offers the market avenues for dollarization without compromising international reserves. Argentina has numerous capital controls that prohibit economic agents from accessing international currencies freely, which generates the proliferation of multiple exchange rates.
The government believes these measures will allow the withdrawal of peso liquidity from the market and will have a positive impact on the central bank’s balance sheet by reducing its liabilities. They also believe it will help to contain the pass-through in the inflation because of the stabilization of the official exchange rate.
One report by a respected consultancy firm, viewed by the Herald, said the blue-chip swap exchange rate’s erstwhile relative calm “stood out” given the current historical drought, which its analysts expect to slash agricultural production by US$20.3 billion this year and deepen international reserve scarcity. But this week this relative calm came to end, because the blue-chip swap rate has peaked at record values.