Argentina signs ephemeral rate deal with banks

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Argentine Central Bank (BCRA, in its Spanish acronym) will launch today a set of measures to pump liquidity into market and to lower the cost of money. This is the prelude to the announcement Argentine government is preparing, whereby banks will trim rates.

Bank associations will hold meetings on Monday morning to determine the implications of credit cost reduction, which has increased strongly during the last months. The goal of Argentine Internal Trade Secretary, Guillermo Moreno, is to cause rates of consumer lines to lower to 12 per cent and of those allocated to production to 9 per cent.

However, Argentine administration's intention is to see rates falling in the most widespread manner. And this includes mortgage credits, one of the segments in which rate rise stood out, since they are long-term lines.

The main obstacle to carry out these measures is that funding has become more expensive for banks. BADLAR (wholesale time deposit rate) jumped from 8 per cent at midyear to 12.5 per cent, now climbing. Entities have opted for transferring such adjustment to the public.


Government decisions are intended to decompress rates, particularly for short terms, and to offer greater liquidity to entities. Measures Argentine administration will announce today are provided below (some of them will only come into force tomorrow):

BCRA will raise daily credit amount from ARG$2 billions to ARG$3 billions through actives repos. This measure looks bland and it only tries to shock with the announcement, since peso demand by banks is substantially lower. In fact, total stock of repos taken by banks settles quite below ARG$1.5 billions.

Moreover, active repo terms will be extended. This measure will have a strong impact. Up to now, BCRA has lent at 30 days maximum. However, such term will be raised to 60 days. Therefore, entities will be able to get funds at longer terms, without depending on funding.

Simultaneous rate cut: apart from granting more time to repos, yields are reduced. In the case of 7-day terms, it moves to 9.75 per cent annual from 10.25 per cent annual. For 30 days, the rate falls to 10.25 per cent from 10.75 per cent. Sixty-day rate was set at 10.75 per cent. We are talking about yields considerably lowering funding costs banks had to pay in market.

Strong liquidity pumping through BCRA's Bills of Exchange (LEBAC, in its Spanish acronym): BCRA will only renew less than 50 per cent of maturities in today's auction: out of ARG$1.3 billions, it will just take ARG$600 millions. The remaining ARG$700 millions will be injected in market. Most of LEBACs falling due are in the hands of public banks. Therefore, this liquidity increase will benefit them significantly.

Of course, this mode of proceeding leaves BCRA with less leeway to carry out its peso sterilization policy (absorption), crucial to contain inflation.

The same can be said about boost of active repos to lower rates. If banks replace their private deposits with BCRA funds (cheaper), the amount of circulating pesos will increase considerably, which may have an impact on an already-overheated inflation.

The other effect of these measures is seen on dollar. This peso issue will surely be allocated to dollar purchase, instead of granting more cheap credit. In fact, BCRA had already trimmed repo terms to prevent banks from moving with those funds to dollar. The monetary authority has already given signs that it's ready to keep dollar ceiling at ARG$3.20 till October 28 presidential elections. Will government continue with that attitude after elections? Reserve sale has been strengthened during the last weeks with that aim and government will surely admit a somewhat lower quote with two goals: losing less reserves and, at the same time, improving competitiveness through exchange rate.

Election closeness explains government's decision to take these risks. This measure with electoral overtones joins the already-announced cut in prices of supermarket items.

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