Saturday , June 12 2021

Do we lower fees or buy dollars?

For this financing cost to fall more than the increase in domestic credit allows, the BCRA should cancel this debt by issuing pesos; which would imply risk of breaking the fixed ceiling of the amount of money. This would break the promise that made the current monetary strategy credible and would generate a new capital flight, subtracting credit and raising rates strongly; then the shot will backfire.

On the contrary, the low cost of placing Leliq since the launch of the program shows that it is the monetary tranquility and credibility of the BCRA's strategy to increase local credit. Therefore, and at most, If the exchange rate falls, it would be convenient for the BCRA to use, as much as possible, the emission capacity allowed by the fixed ceiling, canceling the remunerated debt. In addition, this would not only bring more credit to the market, but also accumulate less interest capitalization.

True, it would be good if rates fell faster; That is why the other problems that make the cost of financing high are to be solved. The reduction of the total deficit of the national, provincial and municipal public sector that absorbs much of the available credit; but, above all, uncertainty about whether the excess of state will ever be solved, the real problem that gives rise to the said red in the accounts.

This would exclude default in the medium term, which is what makes savings in Argentina unattractive and thus increases local financing. Unfortunately, our irresponsible political leadership gave no clear signals in this regard and although this is the case, it will be necessary to get accustomed to the fact that credit is expensive and scarce for the private sector.

Therefore, what the BCRA has to do every time the exchange rate pierces the floor of the lower band is buy foreign currencyas he has done. It is this income of capital that drives the dollar on the floor, which leads to an increase in domestic financing and a decrease in cost.

In addition, it seems a good strategy that the BCRA did not use all the foreign currency buying potential it possessed, up to $ 50 million per day; as this would leave more pesos in the market than in the future could add to a potential rush and that unfortunately given the compromised monetary policy could only be removed when they hit the ceiling, which is almost 30% above the floor.

In light of the above, it is important to look at some transcendent media reports that are trying to renegotiate with the IMF the possibility of buying larger amounts of dollars to support the floor of the exchange rate.

If it were true, it is important that the possibility of using everything you bought for that reason is also negotiated to defend the band's ceiling, offering everything, plus the $ 150 million that day, by the time the dollar arrives. for this limit. This will allow you to have a greater firepower to remove the excess weights, taking advantage of that will be more than 29% of what you needed to issue to buy them. That sum should include the $ 1.1 billion that "exceptionally" bought from the Treasury in late 2018.

It should be borne in mind that, If by mid-year the current government's chances of re-election are unreliable, we may begin to see an increasing capital flight.

This means that the demand for pesos will be falling, which is the Argentinean asset with the highest risk. Therefore, the exchange rate will tend to rise and in a few weeks will have reached the ceiling, with a percentage of increase that can exceed 25%.

Obviously, at that moment, there will be great fear and the BCRA's commitment is to take pesos for up to $ 150 million a day; which seems clearly insufficient to remove everything that, at that moment, people do not want to have.

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

The big mistake is to think that with the commented sales of currencies, the monetary policy is contractive; which is true when the problem is of excess supply of weights and not of debacle of its demand. Therefore, It is important to have a more powerful tool to stop the run on the roof; what could be the possibility of to sell with great profits all the dollars acquired to defend the word and those acquired "exceptionally" from the Treasury, which we have already mentioned above.

On the other hand, a currency exchange may encourage the withdrawal of deposits from banks, and at the moment, unpaid reserves should be high to facilitate their withdrawal without the risk of a systemic crisis. Therefore, in a context of economic instability still high as the current one, it would be irresponsible to decrease the percentage of fixed assets to increase the portion of the deposits that the banks can lend and, therefore, to reduce its cost. It is true that, in addition, this would reduce the demand for the peso and, therefore, its value; which would help increase the exchange rate.

However, it should be borne in mind that the requirements are a prudential instrument that aims to ensure the liquidity of the financial system in the face of a withdrawal of deposits. In the face of a potential rush, it will be difficult to replenish the previously reduced minimum cash points; as banks will be very tricky trying to keep deposits and financing in the midst of a capital flight and hopefully not a bank savings outflow.

To close and given the uncertainty of the electoral scenario, it would be good if the BCRA signaled that it would be stronger when it comes to stopping the race when it reaches the top of the band.

It would also be prudent for the government to continue with the current policy of maintaining a foreign currency savings stock and, furthermore, to try to reach the second half with as much savings as possible. It is very likely that the renewal of short-term domestic debt will be very complicated as we enter the electoral period.

Therefore, it is best when: a) the accumulated maturities in this period are lower; b) the higher the percentage of such payments that are in pesos; and c) more is placed now that it expires in 2020, leaving the possibility of using these resources to pay the local currency maturities this year.

In this way, the government could be selling dollars when its demand is increasing; which will help the Central Bank to ease exchange pressure. It is very important that no one underestimates the degree that electoral uncertainty can have.

It was an overpowering government that projected an eternally liquid world, a scenario that almost no one expected, which led to the currency crisis of 2018. If we repeat the same mistake, we will probably end up in a new economic disaster.

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