Guido Zack is Economy Director at Fundar Foundation
This year, Argentina’s economy has been characterized not only by its volatility, but also by the uncertainty of the long electoral period. Once the run-off was over, that uncertainty was replaced by a different uncertainty, no less significant, over the absolute lack of hints about the necessary stabilization plan.
President-elect Milei announced a public spending cut of 15% of the GDP. Of that, 10 percentage points would correspond to recovering Central Bank interest-bearing liabilities (LELIQ and repo operations). That would be a clear conceptual mistake: these are not a primary expenditure, nor do they represent an effective outlay.
On the contrary, the Central Bank uses these interest-bearing liabilities to regulate the monetary volume and short-term reference rates. They were created in 2002 when the Central Bank was unable to carry out monetary policies with Treasury securities because of the default. After the renegotiation of the debt, they never replaced them, and they became the Argentine economy’s risk-free asset.
This has hindered the Treasury’s financing, but hasn’t eliminated the currency exchange risk because of its very short duration: 28 days for the LELIQs, one day in the case of repo operations. Today, they represent around 10% of GDP and three times the monetary base.
Since the day after the runoff, Milei has been making comments about solving the problem of the central bank’s interest-bearing liabilities as soon as possible to enable the elimination of currency controls. He went so far as to mention that he had secured a loan of at least US$30 billion to recover them. However, of all the Argentine economy’s problems, interest-bearing liabilities are by no means the most important. Here’s why.
First of all, these liabilities are public sector debt consolidated in local currency, with a negative interest rate in real terms. Renewing them is part of the Central Bank’s strategy to regulate the monetary volume and set short-term interest rates. Until now, refinancing them has not been a problem, although this week financial institutions have been moving from LELIQ to repo operations in order to reduce the duration of the title and avoid expiry dates that would come after the next government takes office on December 10.
The next government will have to implement a stabilization plan that will have to include, among other things, fiscal balance consolidation, in order to eliminate the monetary funding of the Treasury. This way, you interrupt the main engine of monetary expansion.
A shock plan doesn’t necessarily mean abrupt measures in every variable of the economy. In the case of interest-bearing liabilities, that is neither necessary nor desirable. What is important is macro-economic consistency. This could mean going faster in fiscal and monetary matters (achieving fiscal balance in 2024 and eliminating monetary financing of the deficit) than in currency exchange ones (a more gradual dismantling of the controls as the stock of liabilities decreases).
Not all shocks are created equal
Indeed, the rush to solve the interest-bearing liabilities problem can be explained by the intention to eliminate currency controls as soon as possible. The main point here is to draw a distinction between shocks. They’re not all the same: they can be organized or disorganized. A premature opening of currency controls could result in a disorganized shock — that is, a larger devaluation than necessary, which would impact inflation and risk hyperinflation.
To release currency controls quickly and minimize this risk, you need dollars, which are glaringly absent at the moment. In contrast to Milei’s claims, these dollars would not be used to recover interest-bearing liabilities, but as backing in case savers wish to withdraw their deposits — these are the last link in the chain, as they are backed by the liabilities — to purchase dollars. As long as currency controls are in place, banks have no incentives to liquidate their positions in local currency because they are not allowed to purchase foreign currency.
For the consolidated public sector, recovering interest-bearing liabilities through a foreign loan, as Milei has suggested, would mean exchanging a debt in local currency (and legislation), with a negative real interest rate that it has so far been perfectly possible to refinance, for another in foreign currency (and legislation) with a positive real interest rate, which would be harder to refinance.
Fiscal balance is necessary for the Central Bank to stop financing the Treasury. If progress is made in that direction, the stock of interest-bearing liabilities will be reduced, thus making exchange rate unification possible. Prioritizing the liquidation of this stock without a comprehensive and consistent stabilization plan to accompany it would be putting the cart before the horse.