Argentina Nudges Banks Into Treasury Bonds by Changing Rates

Argentinas central bank is taking steps to tighten its monetary policy and encourage banks to buy local peso assets.

To do so, it raised a repo rate used by banks by 3 percentage points to 27%, and lowered its benchmark Leliq rate by 1 percentage point to 37%, according to a statement late Thursday. The rates had diverged at the start of the coronavirus pandemic as the government sought to mitigate the economic effects of the virus, the central bank said in its statement.

Unwinding

Central Bank pushes banks to reduce their position in its Leliq notes

Source: Argentine central bank

The move seeks to encourage banks to help finance the government deficit by buying local Treasury bonds, rather than by having the Central Bank print more money. With sky-high foreign borrowing costs and muted demand for local peso instruments, the country has been printing money to finance its virus stimulus plans.

“The idea behind this is to create incentives for banks to unwind their holdings in Leliq and instead, invest in Treasury bonds,” said Federico Furiase, director at consulting firm Eco Go. That will allow the government to access pesos locally rather than to have to resort to monetary issuance to finance its deficit in the very short term, he added.

Incentives to Change

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The central bank has taken several measures over the course of the past few weeks to encourage banks to buy Treasury bonds. It reduced the amount of Leliq notes theyre allowed to hold while boosting the percentage of Treasury bonds they can have in their portfolios. Over the past week, banks reduced their Leliq holdings by 7%.

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The move also marks the second increase for the repo rate in one week. On Oct. 1, the central bank announced that it was raising repo rates to 24% up from 19% and creating savings instruments with rates that exceed inflation, in an effort to encourage Argentines to save and invest in pesos.

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The central bank added that it would be more flexible with companies looking to restructure their foreign debt. On Sept. 15, it said that it required companies with debt maturities larger than $1 million per month until March 31 to present a restructuring plan.

Read More: Pesce Says Argentine Firms See Restructuring as ‘Reasonable’

(Adds chart and detail on banks Leliq holdings in 5th paragraph.)