What are Central Bank puts and why do they obsess Milei?

At the heart of recent economic discussions in Argentina, the “puts” emerged as a significant obstacle that the government of Javier Milei seeks to overcome eliminate the exchange rate.

There is no agreement among specialists that they are such a determining factor for the success of the economic plan of the minister of economy, Luis Caputobut the president’s tendency to delve into technical issues makes these financial options placed by the Central Bank (BCRA) to the banks ring in all economic forums.

But, What exactly are puts and why are they so relevant to Milei’s vision?

A put is a put option that gives its owner the right, but not the obligation, to sell an underlying asset at a predetermined price within a specified period. In the context of Argentine banks, these puts are linked to sovereign debt securities issued in pesos. Banks have the option to sell these bonds to the Central Bank if their value falls below a certain level. This acts as a kind of insurance, guaranteeing that banks will not suffer significant losses if the bonds lose value.

The main problem with these puts is that, if the banks decide to exercise their right to sell the bonds to the Central Bank, the latter would be forced to print more money to buy them. Everything that the BCRA buys – dollars, bills, bonds – implies an issuance of pesos to pay with it. And this clashes with Milei’s goal of eliminating all sources of money creation.

This additional monetary issue could increase the inflation, which is already a persistent problem in Argentina. In short, puts can trigger higher inflation by forcing the Central Bank to increase the supply of pesos in the market.

President Milei has pointed out that puts are a key impediment to eliminating the exchange rate. His argument is that As long as these instruments exist, the pressure on the Central Bank to issue money will continue to be high, which makes it difficult to stabilize the peso and eliminate exchange controls. Milei believes that solving the put problem is an essential step to move towards a freer and more stable economy, where exchange restrictions are no longer necessary.

Currently, the Central Bank, headed by Santiago Bausili, is in talks with commercial bank executives to find a solution to this problem. Proposed solutions being analyzed include:

• Change the legal format of puts: One option is to modify the legal conditions of puts, allowing banks to only exercise them in situations of extreme need for liquidity. This would limit the frequency with which banks could force the Central Bank to buy the bonds.
  
• Buyback of puts: Another proposal is that the Government buy the puts from the banks, thus eliminating the risk of their being exercised en masse. This could involve exchanging long bonds with puts for shorter bonds without puts, such as Lecap, which have greater liquidity in the market.

These alternatives seek to reduce the banks’ dependence on these instruments and, at the same time, reduce the pressure on the Central Bank to issue more pesos. The conversations continue, and it is expected that in the coming weeks an agreement will be reached that will allow progress in the elimination of the exchange rate.

According to the consulting firm 1816, the value of the puts linked to sovereign debts in pesos held by banks amounts to 20 billion pesos, which is equivalent to approximately 16 billion dollars at the parallel exchange rate. These puts are distributed as follows:

• Half of all current puts expire in 2026 and 2027, mainly related to the TZX26 and TZX27 bonds, which were issued during Milei’s management.
• The total stock of puts, including the American ones (which can be exercised at any time) and the European ones, is around 19 trillion pesos.
• Till the date, Banks have exercised puts for a total of around 5.5 trillion pesos so far this yeara figure that rises to 8.8 billion pesos if adjusted to constant June pesos.