BCRA Launches New Monetary Scheme Aiming to Eliminate Endogenous Issuance
The central bank (BCRA) began issuing rules on Thursday that will govern the operation of the future monetary scheme.which the government dubbed the “second stage” of the economic plan after the Board of Directors meeting was announced. VolumeOn Wednesday, the executive branch issued a decree allowing Treasure release a new one Liquidity Income Tax (LEFI) Letterswhich will be used for the conclusion Migration of paid debt from BCRA to Treasury.
As the media expected, the Central published more than one message to regulate various aspects. These are communications A8060 and A8061. The first of them establishes the regulatory framework for the activities that the structure it heads will use. Santiago Bausili for him liquidity management with banksthrough the LEFI purchase and sale scheme.
Other communication exempts the tax bill from the public sector funding limit that banks have. That is, it will be allowed you can subscribe to LEFI (which will be issued by the Treasury but administered by the BCRA) without violating the credit splitting rules. This is about the same criterion that was already used with LECAP which financial entities acquire through the disarmament of passive repo, although in this case the previous stock of passive repo that each entity had will not be taken into account.
LEFI: A measure expected by banks
The measure was announced on Friday, June 28, by Bausili and the Minister of Economy. Louis Caputo, in a press conference that failed to meet market expectations, which had been expecting a change in the exchange rate scheme. On the other hand, Caputo endorsed a crawling peg of 2% per month and a blended dollar, and postponed the abolition of exchange rate (which today, in a statement to Radio Mitre, he said, will be removed layer by layer.) This statement was followed by several days of strong pressure on parallel dollars.
He target the new monetary scheme, Bausili and Caputo said, will be cease issuing pesos to pay interest on BCRA remunerated obligations. To this end, the one-day passive REPOs that the Central Bank currently places with banks will be liquidated and replaced by a bill of exchange issued treasureWhat will be responsible for paying interest on the additional adjustment of other items.
Thus it will be completed the process of debt migration from the central government to the treasurywhich the government has been promoting almost from the very beginning of its rule. Javier Miley He argues that this is a key step to create conditions for the exchange rate to rise. Many economists and market agents object to this idea, arguing that it is the same peso stock that could put pressure on the dollar if controls are opened, and that the real variable to watch is deposits (which are ultimately the other side of the exchange rate, both repos and treasury bills that banks buy).
Anyway, Miley once again beats the timing of exiting shares. On Tuesday, thanks to its placement in banks and representing a conditional debt for the enterprise), it is now added that inflation and the monthly devaluation rate converge around 0%. A goal that virtually no economist expects to be achieved by the end of the year.
Decree on the creation of LEFI and debt barriers
The first step towards the official launch of this measure was taken by the executive branch. This Wednesday afternoon, The Government published Regulation 602/2024, which provided the regulatory framework for the creation of the Liquidity Fiscal Letter (LEFI).
Section 1 of the Decree authorizes the Treasury to issue LEFI and provides that It will be valid for one year and a total of US$20 billion will be issued.. It also stated that the letter would capitalize the monetary policy rate, which would continue to be determined by the body chaired by Bausili. The LEFI would be transmitted and exchanged only between the BCRA and financial institutions and would become the new instrument through which the Central Bank would manage the liquidity of the economy through daily purchase and sale operations.
How will the new scheme be implemented? The order allows the executive branch to exchange LEFI for BCRA for government debt instruments. which are part of the Central Bank’s portfolio, including non-transferable notes. Securities eligible for this exchange will be recorded at their market price, and LEFI at their technical value.
On July 22, BCRA will begin using fiscal letters for liquidity management.. In particular, with them, banks will have to replace their night passes. Then you will manage liquidity through daily buy and sell operations.
This is how LEFIs work
The measure establishes that The Treasury Department must cover the financial costs of the LEFI that BCRA places on banks.which would mean that The Treasury shall place an amount equivalent to the interest accruing daily at the monetary policy rate, which “shall be placed as collateral in an account established for this purpose” at the Central Bank.
Official sources indicate that The aim of this scheme is to end the money problem. which results in interest being paid BCRA passes that will no longer exist. Now This value will be transferred to the treasury (some economists estimate it at more than $600 billion per month), which will occur due to a larger adjustment in other items or due to net financing obtained through the Treasury’s regular peso debt tenders. The possibility of capitalization within one yearLEFI’s interests will not affect this year’s tax accounting result, but rather the 2025 result, besides the fact that the cost of this measure will fall on the treasury every day.
The new scheme was told Volume sources directly responsible for the subject matter, The goal is to keep the broad monetary base unchanged.. An exception would be the intervention of the Central Bank in the foreign exchange market by buying or selling the currency. From a macroeconomic/monetary point of view, they argue that the operation would be practically equivalent to a repo operation, with the difference that interest would not be paid on issuance, but with an additional adjustment to the Treasury in addition to the strong cuts already made.
Official agencies assure that the new monetary scheme will not entail changes in the management of liquidity of financial institutions. “The plan is for nothing to change in the banks from day to day,” they say.. And they explain that the LEFI will be backed by the pesos that each bank put up when it was purchased, plus deposits that the Treasury will place with the Central Bank corresponding to the interest; the interest will be capitalized daily, and when the institution wants to sell the bill, BCRA will deliver the pesos the next day.
To do this, message A8060 states that Each business day, BCRA will open different windows for banks to sell LEFI. (in whole or in part) in case they need liquidity. Organizations will have the opportunity to indicate the amount they want to sell from 18:30 to 20:30. In this case, the settlement will be made at 9:00 the following business day. In addition, from 15:00 to 17:00 of each business day, a wheel will be opened that banks can use when they need to receive pesos on the same day (the money will be credited after 17:00).
The bills will accrue a floating rate daily, which will be the monetary policy rate. To make that clear, BCRA sources said the organization will issue a rule in the coming days that will establish that this benchmark interest rate will no longer be the passive repo rate, which is currently at 40% of the nominal annual rate or 3.33% of the monthly cash rate.
From now on, the monetary policy rate will be set by the board of directors of the institution and will remain unchanged until a new change is announced. The economic group believes that with the new scheme, the BCRA gains autonomy in managing the interest rate: until now, it has resorted to a strategy of negative rates to dilute the peso in the economy and avoid issuing pesos to pay repo interest at a rate higher than the rate of inflation. In the future, increasing yields will not mean an increase in the volume of issuance, but will require more serious budgetary adjustments. (at a time when incomes are still in free fall and spending cuts are starting to show their limits). It remains to be seen whether the board will consider raising rates ahead of the LEFI launch to try to contain currency pressures.