BCRA Financing Cannot Be Eternal

Economic Analyst in Libertad y Progreso.

EL CRONISTA- The pandemic caused public accounts to deteriorate enormously. In May, public spending rose 96% over the same month last year, while revenue rose just 2.4% in the same period, all in nominal terms.

This fiscal hole that is being generated has to be financed in some way to meet the budget constraint that any economic agent has. We Argentines have to understand that each peso the State spends requires that we Argentines adjust somewhere. Until May, the national State accumulated a financial deficit (primary deficit added interest) for $ 898,969 million, which represents 4% of GDP.

Looking at the different sources of financing available, the government only has the assistance of the BCRA available to supply the stratospheric increase in spending to face the pandemic. The other tools are blocked for our country. Raising taxes is no longer an option given the suffocation that the private sector is already suffering with the current level of tax burden, added to the economic situation that we live in. We cannot take on debt in the international market, given our history of governments that persevere in spending much more than what can be paid and our record of serial defaults that led us to a new debt restructuring.

Factors that explain the variation of the monetary base in 2020

(Data as of June 30 in millions of $)

Source: Libertad y Progreso based on BCRA

In this way, the only way out is the mentioned assistance from the BCRA. So far this year we see that the transitory advances totaled $ 312,000 million, thus reaching the limit imposed by article 20 of the Organic Charter of the monetary authority. With financing made impossible through this instrument, the BCRA made an accounting move that allowed it to transfer more profits. The Non-transferable Bills that the Treasury gives to the BCRA, which was previously valued at market value (they had a very low value because they are non-transferable), now began to be valued at technical value, that is, on the BCRA’s balance sheet they are accounted for by what they say they are worth and not by what they really are worth. It should be noted that if any Argentine bank or company or a serious country did the same to generate fictitious profits, that action would be considered fraud. However, here this move generated “profits” that can be transferred to the Treasury. In this way, Profit Transfers totaled $ 940,000 million. Adding the Transitory Advances and the Transfers of Profits we find that the BCRA financed the Treasury for a total of $ 1,170,872 million.

Initially, the BCRA’s assistance to the Treasury was mainly through monetary issuance. Seeing that the depreciation of the peso that was generated brought the exchange gap to 80% levels, the BCRA decided to continue financing the government via LELIQs and Passive Passes that yield interest of 38%. Although it seems like a similar form of financing, it is not the same. The first has immediate effects on the parallel exchange rate and on inflation. On the other hand, the second brings as an immediate consequence the worsening of the solvency of the BCRA and, like any obligation, at some point it has to be paid, probably in the future it must issue generating inflation. Accumulating paid debt without any kind of fiscal and monetary plan leads to the “snowball” becoming bigger and more difficult to stop it. Sturzenegger exploded in 2018 the bomb of the remembered LEBACs generating more inflation and more poverty. Currently there is a stock of $ 1.6 trillion LELIQs and $ 737,391 million of passive Passes.

It is important that both the government and the BCRA show which are the paths that they will follow in fiscal and monetary matters. In the first area they have to demonstrate that the increase in public spending caused by the quarantine is transitory and that in the coming years a fiscal balance will be sought. On the monetary side, it has to be shown what monetary policy is going to be like to deal with the excess of pesos that are on the street and, if they solve it by increasing the remunerated liabilities, how are they going to do to deactivate the LELIQs ”. Otherwise, those who will suffer the consequences of poor fiscal and monetary management will be Argentines through higher inflation and poverty.