Wednesday , September 28 2022

Did we lower the rates or did we buy dollars?


Because this cost of financing falls more than it allows for the increase in domestic credit, the BCRA should cancel this debt by issuing pesos; which would imply the risk of breaking the prefixed ceiling of currency quantity. This would break the promise that credible the current monetary strategy and It would generate a new capital flight, subtracting credit and greatly increasing the rates; so the shot would come out through the butt.

On the contrary, the low cost of placing the Leliq since the launch of this program demonstrates that it is the monetary tranquility and the credibility of the BCRA strategy that allows local credit to increase. Therefore and at the most, Upon cancellation of the exchange rate, it would be advisable for the BCRA to use as much as possible the issuance capacity that allows the fixed ceiling, canceling paid debt. Incidentally, not only would it bring a little more credit to the market, but it would accumulate a little less interest capitalization.

It is true that it would be good if rates go down faster; For this reason, it is necessary to solve the other problems that make the cost of financing high. The reduction of the total deficit of the national, provincial and municipal public sector that absorbs much of the available credit; but, above all, the uncertainty about whether the excess state will ever be resolved, a real problem that gives rise to red in the accounts.

This would make it possible to discard a default in the medium term which is what makes it unattractive to save in Argentina and, therefore, to increase local financing. Unfortunately, Our irresponsible political leadership has not given clear signals in this regard And, in that case, you will have to get used to the credit being expensive and scarce for the private sector.

Therefore, what the BCRA should do whenever the exchange rate perishes the floor of the lower band is buy currencies, How has been doing it It is this capital inflow that brings the dollar to the floor which generates an increase in internal financing and low its cost.

In addition, it seems a good strategy that the BCRA did not use the full currency purchasing potential it had, up to $ 50 million per day; since this would leave more weights in the market than in the future could add to a potential run and, unfortunately, given the committed monetary policy could only be withdrawn when they touched the roof, which is almost 30% above the floor.

For this reason, it is important to analyze some of the media outlets indicating that it would be trying to renegotiate with the IMF the possibility of buying larger sums of dollars to support the exchange rate floor.

If it were true, it is important that you also negotiate the possibility of using all the purchased for this reason to defend the band's ceiling, offering everything, plus the $ 150 million of that day, in the At which time the dollar reaches this limit. This will allow you to have a greater firepower to take over the excess pesos, taking advantage of that it will be more than 29% of what it was necessary to issue to buy them. In this sum, they should include the $ 1,100 million that "exceptionally" bought from the Treasury at the end of 2018.

It should be noted that, If the chances of the current government being re-elected are unreliable, it is possible that we are beginning to see a growing capital flight.

In this case it is the demand for pesos will be falling, Which is Argentina's most risky asset. Therefore, the exchange rate will tend to rise and in a few weeks it will have reached the ceiling, with an increase percentage that could exceed 25%.

Obviously, at this time there will be great fear and the commitment of the BCRA is to remove pesos for up to $ 150 million per day; which clearly looks insufficient to get everything that people will not want at this moment.

Therefore, its value will again fall, to increase the exchange rate, further reducing the preference to have local currency and depreciating it and, again, boosting the local value of the dollar. This is clearly a vicious circle that has historically led to currency crises.

The big mistake is to think that, with the commented currency sales, monetary policy is contractive; which is true when the problem is excess weight and not disaster demand. For that, It is important to have a more powerful tool to curb the run on the ceiling; That could be the possibility of Sell ​​with great profits all the dollars purchased to defend the floor and those acquired "exceptionally" in the Treasury, which we discussed earlier.

On the other hand, a currency broker can encourage the departure of bank deposits and, at this time, the unpaid tips must be high to facilitate their safe withdrawal from a systemic crisis. For this reason, in a context of high economic instability as the current one, it would be irresponsible to lower the percentage of fixed assets so that the portion of the deposits that banks can lend and, thus, decrease its cost It is true that, in addition, this would lower the demand for weight and, therefore, its value; which would help to press the exchange rate rise.

However, it must be taken into account that the requirements are a prudential instrument whose objective is to guarantee the liquidity of the financial system against a tax exit. In the face of a potential run, it will be difficult to rest these minimum cash points that were reduced before; since banks will be very complicated trying to keep deposits and financing in the middle of a capital flight and, hopefully not, a bank savings out.

To close and give the uncertain of the electoral scene, it would be good if the BCRA give signs that it will be more forceful when it comes to stopping the bullfight when it reaches the band's roof.

It would also be prudent for the government to continue with the current policy of maintaining a stock of foreign exchange savings, and also to try to reach the second half with the largest possible sum saved. Changes in short-term domestic debt are very likely to be very complicated insofar as we enter the election period.

For this, it will be better as: a) Minors are the maturities that accumulate in this period; b) the higher the percentage of these payments that are in pesos; and c) the more it is now that expires in 2020, leaving the possibility of using these resources to pay maturities in local currency this year.

In this way, the government could be selling dollars when its demand is increasing; which make the BCRA alleviate the exchange rate pressure. It is very important that no one underestimates the degree of electoral uncertainty.

It was an unmanageable government optimism that projected an eternally liquid world, a scenario that almost nobody anticipated, which led to the 2018 exchange rate crisis. If we repeat the same error, it is likely that we will end up in a new economic downturn .

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