Why the Massa plan to increase reserves scares the market

Economy Minister Sergio Massa is running out of options to prevent a run on the financial dollar against Central Bank reserves from being triggered again. The last thing he announced was a bond repurchase loan (REPO) from foreign banks, but the market believes it will be expensive and have no practical benefit.

Y Central Bank official said off the record that the last hope seen in the Government of getting a significant mass of dollars to enter the entity’s balance sheet for reserves will be the REPO loan that the Massa team negotiates.

This is so because the gap did not react with the force that was expected, and as it happened in October 2020, the effective rate rose sharply to 96% per year, since, for BCRA officials, it is unlikely to get a large liquidation of dollars from agriculture.

A REPO (according to its acronym in English is a loan where an asset is sold, usually fixed income (bonds, obligations or letters) in the short term, in exchange for a sum of money, with the agreement to repurchase it at a later stipulated date by contract.

Does the REPO that Massa negotiates secure reserves?

Massa revealed in the Council of America that they are negotiating three ways of financing with a REPO loan with an Asian, a European and an American bank.

All three made offers. We are proposing that they unify the offers for the repurchase of debt and strengthening of reserves,” announced the minister.

The dollars of a REPRO in the short term would only increase gross reserves

In this regard, the BCRA official consulted recalled that those dollars that would enter the Central Bank through the REPO would increase the gross reserves of the entity, but not the net reserves.

Economist Miguel Kiguel, from the consulting firm Econviews, said in this regard that “an issue to take into account is that if the REPO is for less than one year (which is surely the case) it is not computed in the net reserves. So it is important to know the conditions of it.”

In the market they wonder, before this panorama even officially recognized, So what are the REPO dollars for?

The operators who look closely at Massa’s next steps also point out that the REPO “is going to be expensive and will not give the market peace of mind”.

Even the BCRA official consulted emphatically denied that the swap with China was activated at any timeprecisely for that reason of high cost.

“Only a very small test was done with the yuan, but the swap was not activated because it is very expensive“, he acknowledged.

The swap with China was no longer activated because it was too expensive

The swap with China was no longer activated because it was too expensive, which is repeated with the REPO

What is known about the characteristics of the REPO

In the banks, very little is known about the REPO that Massa negotiates with foreign banks, but some limitations that would be inevitable are discussedamong others, the following:

  1. It would be short-term it would not be possible to include it in the net reservesthose that could be used in the event of a currency run to avoid devaluation.
  2. With the current price of the bonds, Argentina might have to leave collateral outside and except for the embassies, it has nothing abroad that can be used for these purposes, emphasized Mariano Sardáns, from the FDI Asset Manager.
  3. that collateral could be gold reserves of the Central Bank
  4. In case there is no agreement on a collateral, Another possibility is that the bonds have a capacity of 50% of market value, for example.
  5. By For each bond with a market value of $22, the banks would be lending $11.
To get just $1 billion, a huge amount of bonds would have to be raised

To get just $1 billion, a huge amount of bonds would have to be raised

In this way, Massa would need to raise almost US$10 billion of bonds at face value to get only US$1 billion for reserves, which in turn would be unavailable.

“At this price of the bonds, the operation would be suicidal for any creditor,” Sardans said, adding “that the country already has a lender of last resort, which is the IMF.”

For Sardáns, for now it cannot be assumed that there is something serious and firm regarding the REPO. “You can’t assume that it’s really going to happen until something is signed,” he remarked.

What is the BCRA’s parallel strategy for reserves

Due to the characteristics of the REPO, it is Crucial to reduce the exchange rate gap through the drop in the spot price with liquidationthe increase in agricultural exports and continue to contain imports, said the official consulted.

When asked about the possibility of releasing some of the imports whose closure is paralyzing the industry, he stated that the The Government will be able to comply with the commitments made with various sectors to speed up the procedures for importing supplies to the extent that reserves are replenished.

Massa commented in the Council of Americas that Economy studies a mechanism to change non-automatic import permissions called SIMI.

The Government sees it as crucial to reduce the exchange rate gap

The Government sees it as crucial to reduce the exchange rate gap to increase reserves

This change being analyzed by the Secretary of Commerce, Matías Tombolini, together with the heads of other areas of government, would consist of the fact that once SIMI approved, dollars are automatically released at the official exchange rateand that they cannot be delayed, explained the minister.

Meanwhile, the consulted official acknowledged, regarding the fact that liquid reserves are still negative despite the fact that the Central Bank is able to buy some dollars every day, that optimism that these purchases of dollars by the BCRA will be sustained over time is premature.

However, he denied that bank reserves had been used to buy dollars in the last days of fury, before Massa took office, given that there are “state deposits and other mechanisms that can be used very transitory”.

Why financial dollars win the race

Martín Kalos, from EPyCA Consultora, said that “the exchange gap is generating a perspective that there is no other way out in the short term for the Government than a devaluation of the exchange rate in the short term“.

“And if the positive real rate is 96% buta devaluation is expected that exceeds the benefits of that rate, there are no incentives to leave the financial dollar to place the money in pesos at that rate,” he considered.

Claudio Caprarulo, from the Analytica consulting firm, stated that ” to lower the financial dollars they have to accumulate reserves and eliminate the possibility of a devaluation shock in the short term.”

So that there is no run on the financial dollar, the expectation of devaluation must disappear

So that there is no run on the financial dollar, the expectation of devaluation must be lowered

With the rise in interest rates, they lowered the gap from 150% to 100%, but to break that threshold they have to show results in the foreign exchange market and then release imports,” he explained.

Santiago Manoukian, from the consulting firm Ecolatina, explained that “the sharp rise in rates implemented by the BCRA last week, higher than expected by the market, but still negative in the short term, is a necessary condition, not sufficient, to calm the dynamics of the exchange rate gap and prop up the demand for pesos”.

“In order for the calm to extend in time, rapid progress should be made with concrete measures in terms of correcting the main imbalances: the monetary fiscal front and the accumulation of reserves, this being the most pressing in the short term,” he said.

“Tener “wallet” (getting to swell the stock of reserves) is key to defuse expectations of devaluation and avoid a disorderly correction of the exchange rate in the short term“, he warned.

Gabriel Camaño, from Consulting Ledesma, indicated that “the rise in rates is having an effect since, before Massa took office, it helped to push back the parallel dollars somewhat and now it is helping in the official market with private supply and demand.”

“But the magic rate alone is not going to do magic, it comes to correct one of the inconsistencies in the economic policy that they had, at the margin, because therate is still not positive and in itself will not correct everything, a stabilization plan is necessary“, he concluded

Leave a Comment