LEBAC and NOBAC drop hits banks

Drop in LEBAC and NOBAC (Argentine Central Bank's Bills of Exchange and Securities) had a negative impact on banks' balance sheet. According to estimates by Argentine Central Bank (BCRA, in its Spanish acronym), book losses reach to ARG$170 millions. Now, the monetary authority is analysing the possibility of allowing entities not to show such negative result, though the matter still stirs up discussion in the board of directors.

Banks are the main buyers of BCRA bonds (ARG$65 billions or u$s20 billions in stock). Rise of country-risk and subsequent reduction in government bonds' price ended up infecting LEBAC and NOBAC. As we are talking about peso-denominated bonds, in some cases at fixed rate and in some others adjustable according to interest rate development, they could not manage to escape from strong wave of sales during the last two weeks.

"Only ARG$170 millions have been lost, a minimum figure taking into account accumulated profits," a BCRA official explained. This is equivalent to only 3.5 per cent of the ARG$4.8 billions of profitability banks have shown during the last twelve months.

Mechanism to prevent LEBAC fall from showing on banks' balance sheets is to allow them to move to investment account. In this way, bonds would be valued according to their technical price and not in relation to market fluctuations. In order to avoid losses, bonds should be kept till maturity. If they are sold before that, such transaction would be included at market prices. Government bonds have been treated in that way since the 90's.

Aggressive

For their part, banks state that they did not jump into market to sell BCRA bonds. They point at foreign institutions, mainly mutual funds. The most aggressive one in LEBAC and NOBAC sale is Schroders. "They left their positions at any price, hitting the rest of the system," BCRA members expressed.

Nation Bank and Buenos Aires Province Bank have been severely lashed by BCRA bond drop.

BCRA will have to pass a difficult test next Tuesday, when it will have to face ARG$1.43-billion maturities. It's estimated that the monetary authority will only refinance a portion and it will be carried out in the short tranche of yield curve. This is because drop was more significant in NOBAC, bearing terms ranging between two and four years. Of course it won't be easy for BCRA to place new bonds not exceeding 10 per cent annual in less than one year. This level was paid before dollar and country-risk hike. Market liquidity has been falling sharply since then, being BCRA forced to repurchase LEBAC to inject more pesos and thus prevent interest rate from rising any further.