The reasons for the pause in the debt “handrail plan”
The decision to put the debt “handrail plan” on standby comes after the financial shock that was experienced last week, which included volatility in parallel dollars and sharp falls in Argentine assets, of which sovereign securities in pesos were no exception. A shock that was triggered by the BCRA’s latest rate cut, the Government’s political difficulties in imposing its plans and also growing market uncertainty about the limits to the accumulation of reserves and the monetary-financial strategy itself.
“The pause is a prudent decision. Because many of us have already been observing that This massive migration swelled the Treasury’s shorter profile and at some point that begins to take its toll.the market is starting to get a little more volatile,” he said. Salvador Vitellihead off research at Romano Group, in dialogue with Ámbito.
The truth is that the handrail strategy was part of the Government’s objective of rapidly reducing the stock of remunerated liabilities of the BCRA, which Javier Milei considers as a necessary preliminary step for the lifting of the exchange rate.
It is so Last month the stock of BCRA repos was reduced by $14.2 billion going from $32.7 billion on the last day of April to $18.5 billion at the end of May. But most of those pesos went to the new Treasury debtwhich in net terms increased by $11.9 billion during the same period (a record placement equivalent to 3.4% of GDP, according to Facimex), with increasingly shorter issuance terms.
As this media reported, this had begun to ignite some alerts regarding the weakening of the Treasury’s financial position, which could in the future begin to face greater difficulties in renewing its growing short-term maturities. In addition, Ramiro Tosidirector of the consulting firm Suramericana Visión and former Undersecretary of Financing, stated that, if a large stock of repos is transferred to Treasury bills, “the cost goes from being quasi-fiscal to fiscalTherefore, the story of the double surplus (primary and financial) begins to complicate.”
“There are several factors. Nor do I think the banks are willing to do all the migration and put all that Treasury risk within the balance sheet, especially the foreign ones, in an instrument that when there is some volatility (like this last week) implies an impact on the sheet. of balance (unlike the pass, which is a rate accrual without any volatility),” added Tosi in dialogue with Ámbito regarding the decision to pause the handrail.
“There are still passes from private banks but It seems that the market is stuck LECAP. They only aim to do rollover,” he said, for his part, Nicolas Rivasfrom BAVSA.
Debt and stocks
Some City operators read the decision to only go out to renew this week’s maturities as a ratification by the economic team that the exit from exchange control is not around the corner.
Along these lines, Vitelli agreed that the pause in the debt migration process “also marks that the lifting of the stocks is not so close as one would have thought in the previous days.” “Although there was no date to get out of the trap, the haste with which the rate was lowered gave food for thought… Now it seems that they are trying to privilege prudence, pragmatism,” added the economist.
As mentioned, Milei reiterated on several occasions that the dismantling of the stock of BCRA repos is a requirement for him to then be able to open the stocks. Although he did not specify a date for such an opening, the President claimed to be very close. It is something that the Minister of Economy himself tried to clarify in his last public appearances, in which he pointed out that they are still far from having sufficient reserves to do so. The BCRA’s increasing difficulties in purchasing foreign currency only contribute to this idea.
This Tuesday, in fact, Caputo once again deposited his expectations to add foreign currency and open the stocks in the International Monetary Fund (IMF). The organization’s Board of Directors will meet this Thursday and will discuss the review of the current program, on which the sending of some US$800 million depends. The minister said that from that moment he will begin the negotiation of a new program: “It will take some time but it must be agreed with the Fund and eventually with this new program new money will arrive,” he said, at an event at the Cato Institute.
With everything, There are a series of objections that the strategy of encouraging banks to migrate from BCRA debt to Treasury debt would generate better conditions to remove exchange controls.. “It does not imply that there is a lower potential demand for dollars. They are the same pesos that now, instead of being in the Central account, are in the Treasury account. The key is through deposits, which are the other side of both the repos and the LECAP and which are the ones that could go to the dollar,” said an economist from the banking sector in dialogue with this medium.
The Economist Damian Pierri considered that, just as the improvement in the demand for money registered in May is a point in favor of opening the stocks, the aforementioned situation operates in the opposite direction. “The disarmament of passes and the impossibility of issuing puts are ‘incubating’ a refinancing crisis”, he stated.
Because? Pierri maintained that contrary to the increase in credit to the private sector (both in amount and duration) there was a drastic reduction in the weighted average placement term of the Treasury since the Central Bank decided to promote migration from repos without granting banks insurance of liquidity (known as puts), precisely because they constitute a source of latent issuance for the BCRA, which Milei described as the other obstacle to overcome before opening the stocks. Thus, the average length of Treasury issues went from 15 months in April to just 3 months in May (and 1.3 months if only the last tender is considered). More debt in the treasury account that matures in closer installments.
Furthermore, within this framework, Economía stopped using the net financing of its tenders to repurchase public securities that are held by the BCRA and began to leave the pesos without application in a Treasury account at the Central Bank at a zero rate. For the economist and researcher, by not offering puts, these pesos function as a “guarantee” to eventually allow banks to exit Treasury debt.
“By dismantling the repos, the consolidated BCRA-Treasury changes liquidity risk (the endogenous issuance associated with remunerated liabilities) for refinancing risk (by shortening the ‘duration’ of the issues and leaving pesos alive to guarantee the exit of the entities ),” said Pierri. That is, in a scenario of lifting exchange control, the risk would involve the renewals of each maturity of the short LECAP, which will appear on a biweekly basis and could threaten to put pressure on the dollar. “It doesn’t seem like the best way to get out of the trap,” he concluded.
It remains to be seen how the strategy continues after the break. For now, debt maturities in Treasury pesos for the next 10 months total $45 billion. An account that will grow (especially in the nearest months) as Economy reactivates the migration of passes to short LECAP.
Debt tender details
All in all, the Ministry of Finance will try to place $5.4 billion through three LECAP. It will reopen bills maturing on July 12 and August 16. In both cases, they will leave without a minimum rate. The performance will be defined in the auction itself based on a price comparison.
Additionally, it will offer a new LECAP that will expire on September 13. In this case you will have a Minimum monthly effective rate (TEM) of 4.25%. This is a change in the strategy since in the last placement it had been the shortest letter that had a predetermined minimum yield. The intention is to stimulate the market to extend the term a little compared to the previous auction and prevent the refinancing from concentrating on the shortest instrument and increasing the pile of maturities. Already in July $10.5 billion expires (if TDJ24 is included, which expires on June 30 but is paid the next day because it falls on a Sunday).
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“We are going to see how they cut those that do not have a minimum rate that before last week were already equal to or somewhat below the monetary policy rate. It seems to me that they are going to have to raise the minimum rate of 4.25% (TNA of 53.16%) if they want the market to go a little ‘longer’. The new LECAP (S13S4) would be just 1 percentage point above the one that expires on October 14, little premium compared to what the last tenders were,” Tosi analyzed in dialogue with Ámbito.
For his part, Vitelli said: “The minimum rate put in the letter as of September catches my attention. This could lead to more weakness on the short curve. And the curve in general could tend to become flat in the next few wheels.”
