How the market reacted to Louis Caputo’s new move

As part of the government’s announced “second stage” of the economic stabilization plan, the Board of Directors Central Bank (BCRA) This Thursday he ordered suspension of passive repo operations starting Monday, July 22nd, and continuing through Communication “A” 8060The technical and operational aspects of the Liquidity Fiscal Letter (LEFI) were defined, which, it was announced, “will serve as the main instrument for managing the liquidity of the banking system from this date”.

The transfer of the remunerated obligations will be effected through the LEFI issued by the National Treasury and this note will be capitalized at the monetary policy rate communicated by the BCRA.

• As announced, financial institutions will be able to purchase them and sell all or part of their assets to the monetary regulator.
• The new letter will be valid for a maximum of 1 year and can only be agreed upon between financial institutions and BCRA.
• LEFI will be operated at its technical cost and will not be taken into account in calculating the funding limit for the non-financial public sector (as provided for in Communication “A” 8061 and as is the case with LECAP).
• With the transition to the passive BCRA REPO, the financial costs of this peso surplus will begin to be borne by the National Treasury, and for this purpose the Ministry of Economy will make a deposit in the BCRA to cover the financial costs that arise in managing liquidity through the letter.

This Thursday, the statement and the rule were finally published. The communication that regulates them stipulates that The base amount will be retained for the following days, in case of failure to notify of a new one or intention not to participate in new purchases of “Liquidity Tax Bills”. and that the operation will come into effect after the closure of the MOOS.

Entities may sell all or part of their BCRA Liquidity Notes through the ECO – Operations Management system as specified below, between 18:30 and 20:30, with settlement at 9:00 a.m. on the following business day. And on any business day between 15:00 and 17:00 under the specified system, with settlement commencing at 17:00.

“ Transactions on the purchase and/or sale of bills of exchange under the liquidity tax will be settled at their technical value.“The Central Registry and Settlement Centre for Government Debt Instruments, Monetary Authorities and Financial Trusts will be the registration, settlement and sole depositary agent for the notes and may only be affected by the purchase or sale transactions described above,” the BCRA said.

Market View on LEFI

And the market is beginning to digest this measure. As explained Volume economist Lorenzo Sigaut Gravina, “The government said the second channel of emission would be cut off and it was a matter of remunerated obligations.” He points out that he had already started migrating the “puts” from the BCRA and everything else to the Treasury and is now going to finish doing that with this instrument.

Economist Jorge Neuro agrees that “the advantage is that BCRA will stop paying interest on the debt and will not allow this to affect the interest account.” Thus, the quasi-fiscal deficit virtually disappears and monetary policy becomes more effective.

According to Sigaut Gravin, with this step, “the BCRA balance sheet is completed.” But he warns that, on the other hand, the Treasury’s backpack is becoming heavier. “The creditor is changing in favor of the banks, and this is not the same as the BCRA instead of the Treasury having more risk, especially in terms of repayment of the peso debt,” he notes.

For his part, the economist Fabian Medina In a dialogue with this medium, he emphasizes that one of the advantages of treasury bills is that from January to June they pay a higher interest rate than the Central Bank, only the new ones have the same interest rate.

However, he also believes that “the main risk that banks face is that they don’t collect them because, being dependent on the Treasury, they need to be able to pay them to increase collections,” and he believes that in the current recessionary context, this is worrying. On the other hand, he points out that in the case of BCRA bonds, if they are to be collected, the monetary authority will eventually issue and pay.

LEFUI risk, Treasury solvency

Therefore, for Economist Fabian Medinaforward, “The main risk that banks face is that they don’t collect them. because, depending on the Treasury, there is a requirement that they only collect if the fees go up,” and in the context of the current recession, that is worrisome. On the other hand, he points out that with BCRA bonds, if they have to collect and there is no rollover, the monetary authority ultimately issues and pays.

Thus, Sigaut Gravina warns that: At the same time, the national debt becomes heavier, and its ratio to GDP increases.. In this sense, he expects that achieving a zero fiscal deficit will become more difficult in the short term. “We must ensure that the primary surplus is sufficient to pay off the interest. More revenue is now needed to achieve a surplus and pay higher interest on the public debt,” he explains. And while it acknowledges that some taxes are improving as a result of the budget package, things are becoming more demanding on the fiscal front.

For Economist Juan Granja says this government move “begins more than the second stage of the economic program, a deepening of the first stage.”And while he thinks it makes perfect sense for BCRA to work with Treasuries rather than its own, “putting that much debt in the highest-risk Treasury at a time when country risk is very high” is “unreasonable,” and warns that things will look very challenging in terms of maturities by 2025.

However, Granja suggests that, in addition to what has already been said, “the most disturbing thing is that There are no details about the share issue yet.none of Fixes for creeping snapping or the real exchange rate, which are the most important elements in the short term.” And he emphasizes that this must be determined in the future.