Disturbing BCRA measures

During the last days, as a consequence of foreign turmoil, Argentine Central Bank (BCRA, in its Spanish acronym) was forced to put itself to the test. Things have not turned out as expected: first, because it bought dollars on Wednesday, keeping it at ARG$3.20. BCRA could have lowered the American currency to ARG$3.15 perfectly well. This looks like an attempt to punish those selling peso-denominated bonds so as to take foreign currencies out of the country. If dollar is kept at that level, prices will be unavoidably hit. It seems that current administration has not noticed that LEBACs (BCRA's Bills of Exchange) are yielding 17 per cent annual in pesos. For how long will 12-per cent mortgages or credits to small and medium-sized enterprises continue? Not much, and, for that reason, this situation, if not corrected, will end up affecting real economy. As opposed to what happens across the world, Nation Bank stopped pumping pesos into market. As a result, lack of liquidity strengthened and entities got rid of LEBACs, reason why their yield climbs. Repo mechanism was put into action ten days ago so as to give liquidity to banks. Daily auctions were also going to be carried out. However, such measure was not applied in the end. According to reports, BCRA head, Martín Redrado, will make a turn: he will allow banks, under certain conditions, to journalise instruments at technical value, which may at least curb those sales.

BCRA head Martín Redrado

BCRA Board of Directors has decided to help financial entities, favouring report of public bond holdings under "investment account" valuation. Therefore, they are not exposed to ups and downs of market prices.

In the following hours, the new rules already agreed with banks will be revealed, which, according to BCRA sources, are in keeping with the ones in force in US.

Banks will be able to allocate part of their public bond portfolio to investment account, but they will have to promise to keep them till maturity. BCRA Board of Directors will have to endorse such commitment on the minutes.

In this way, BCRA is trying to discourage banks from selling public bonds, particularly, debt issues of the monetary authority itself. Thus, BCRA guarantees itself some support in bond value, instruments severely lashed by global market crisis.

Then, banks will have a portion of bonds allocated to trading (purchase and sale) and another under investment account (a bond valuation at maturity which pays yield on a monthly basis).

During the last days, market has witnessed a significant overoffer of LEBAC and NOBAC (BCRA's Bills of Exchange and Securities), which, in several cases, has not found bid. Banks, somewhat upset because BCRA did not help them at the worst moment of crisis through repo mechanism, would have decided to sell LEBAC and NOBAC.

After several meetings, an agreement must have been reached, triggering approval of these new rules.

It's worth mentioning that, probably, BCRA did not open active repo window so as to avoid eventual manoeuvres from some entities seeing how call money was climbing above 20 per cent annual, against 9.75-per cent annual repo rates.