A ridiculous defence of an unplayable debt

Roberto H. Cachanosky

Member of the Academic Council of Libertad y Progreso. Degree in Economics from Universidad Católica Argentina. He is an economic consultant and author of the books "Economía para todos" (Themes, 2002) and "El SindromeArgentino" (Ediciones B, 2006). He serves as a columnist in the newspaper La Nación. Previously, he worked the same task for the newspapers La Prensa (1985-1992), El Cronista Comercial (1992-2001) and La Nueva Provincia de Bahía Blanca (1992-1998). He's the host of the cable TV show "The Economic Report." Lecturer in Applied Economics of the Master of Economics and Administration of ESEADE, senior lecturer in Macroeconomic Theory of the Master of Economics and Administration of CEYCE. President of the Center for Economic and Institutional Studies. He was Economic Adviser to the Argentine Chamber of Commerce (1983-2002) and to the Argentine Chamber of Importers (1992-1993).

Miguel Pesce defined the regulatory instruments as “guarantee of the deposits of Argentine companies and families

INFOBAE: In an article published recently, Miguel Pesce, president of the BCRA, states that the Leliq support the savings of Argentine companies and families. The title caught my attention because, in my opinion, exactly the opposite occurs with the BCRA’s indebtedness in these instruments. Moreover, within the article there are other arguments that caught my attention because they do not correctly explain the Argentine economic problem.

Miguel Pesce maintains that the interest rate does not fall because the BCRA places net Repos and Leliq and thus they don’t fall below the inflation rate that liquefies the savings of families and companies. In other words, the indebtedness of the monetary entity allows the central bank to raise the interest rate and thus saving people’s savings.

Pesce maintains that: “If the Central Bank did not intervene in the money market, the excess of deposits over the demand for credit would bring down the interest rate, placing it markedly below inflation, liquefying Argentine savings and exacerbating mistrust in the national currency as a way to store value.” However, that is not what is happening.

In fact, in July the annual effective rate in private banks taking Badlar was 64.8% with an annual inflation rate of 70.8%. A lower rate was offered for deposits of less than $10 million.

Another point to consider is that both in 2000, as in 2001 and in June of this year, monetary issue was the main income of the Treasury. Monetary issue in concept of Temporary Advances and Transfer of Profits made by the BCRA to the Central Administration totals $4.3 billion, money that was largely withdrawn from the market with the placement of Leliq and Net Passes and the rest remained circulating generating the growing inflationary pressures.

In this graphs we can see how the remunerated liabilities ratio (Leliq and Net Repos) is taken in relation to the monetary base, it reaches record levels, perhaps surpassed by the unavailable deposits/monetary base of the Plan Primavera that led to the hyperinflation of 1989. In other words, the remunerated liability of the BCRA grows faster than the unremunerated one, which is the monetary base or the currency.

The remunerated liabilities/monetary base ratio is currently double the level it had in April 2018, when a financial run took place during Macri’s administration.

Clearly the lack of experience with several of these monetary strategies and the lack of training in basic currency and finance issues lead to these gross diagnostic errors. Interestingly, those who say they want to close the BCRA, saw this as a way to converge to equilibrium by ensuring inflation liquefy the debt of the monetary entity with other entities.

Going back to Miguel Pesce’s arguments, he has trouble solving the following problem: by definition, no central bank should issue its own debt to regulate the market interest rate. In any case, his operation, contrary to my economic ideas, has to be done via the management of bank reserves or using treasury bonds. Sell ​​treasury bonds and absorb pesos. By selling bonds, their price drops, the final yield of the bond rises and thus they “achieve” the objective they say they seek.

Why shouldn’t the BCRA issue its own debt? Because unlike commercial banks that earn income from commissions, credit card sales, personal loans, etc., the governing body of monetary policy has no income except what little it can obtain from the placement of foreign exchange reserves. But its own liquid foreign assets are minimal, not even in this way can it add any income to pay off that debt.

I should clarify that neither the Non-Transferable Treasury Bills that the BCRA has on its balance sheet nor the Temporary Advances can be considered assets because they are indebted to the National Treasury, which is also insolvent. Therefore, their market value is minimal and enough to cancel the remunerated liabilities that at the time of writing this note reached the equivalent of USD 24,000 million at the blue exchange rate and about USD 43,000 million at the official exchange rate.

The options that the BCRA has to resolve this debt are the following:

2) Issue pesos and generate a hyperinflation scenario;

3) Liquidate that liability with an effective interest rate offered by the Leliq lower than the inflation rate. Under current conditions, which stands at 96.82% per year, the price variation rate should rise to three-digit annual percentage rates, with the consequent negative impact on average real wages.

4) Apply a Bonex Plan, this is compulsively exchanging a liability with an average term of just over 30 days in a 10-year bond, with a 4-year grace period.

In short, the Central Bank is facing a quasi-fiscal problem of the same dimensions as the fiscal one because there is no easy solution to face the monumental remunerated liabilities that it has created in the last two and a half years, speeding the process by multiplying by 7 the debt received and threw ever-increasing interest rates.

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