Increasing debt: lengthening the fuse

LA NACIÓN: In economics, “time” is called “credit.” Not only because taking a loan allows an expense or investment to be brought forward to the present, but also because the resolution of problems can be postponed. This is precisely what the current government has been doing when it gets into debt in the local market or with international organizations.

In March of last year, the signing of the agreement with the IMF resulted in financing for almost 4.5 billion dollars. They “evaporated” in a few months, being used to cover the loss of foreign currency generated by the exchange rate delay due to the stocks. In September, Minister Sergio Massa traveled to meet with the directors of the IMF. To strengthen the stock of foreign currency of the Central Bank (BCRA), he also obtained loans from other international organizations for some 2.1 billion dollars. As they where still insufficient to sustain the reserves, he opted to advance with “soybean dollars” and thus advanced export settlements for some 10,800 million dollars. Part of this anticipated income corresponds to shipments that will be made this year and that, therefore, are not accompanied by an income of foreign currency. Once again, this measure fulfills the function of a credit insofar as it makes it possible to “plug holes” today at the expense of the future.

One of the latest news was the activation of about 5.2 billion dollars of the swap, a form of loan, from the Central Bank of China that the BCRA will be able to use to pay for Chinese imports. This will allow it to reduce the fall in its own currencies, at least for the next few months. Of course, borrowing to finance the loss of reserves makes the BCRA increasingly insolvent and, therefore, makes a currency and exchange rate crisis more and more likely. However, there are still other ways to keep putting off solving problems, at the cost of being more and more broke. One of them is the sale of future dollars by the BCRA. This instrument was used “generously” at the end of the administration of then-president Cristina Kirchner and made it much more difficult and costly for Argentines to get out of the trap left behind by her administration.

“The Government lives not only on dollars, but also on pesos”. To finance the elephantine and expensive State, the BCRA has been issuing at an average cruising speed of between 40% and 50%; with daily peaks above and below. In addition to sending funds directly to the state, it has been buying Treasury bonds in the market. Thus, there is more demand when the national management needs to make new placements.

The serious problem is that the Treasury’s needs to cover excess spending were actually much higher, which would have forced an even larger increase in issuing, generating even more inflation. To avoid the latter, and in order to provide more financing, the BCRA has taken credit in the local market. Today its remunerated debt – so called because it pays interest – is more than double the amount of existing national currency, this is the monetary base. This measure is taken as a reference because the only way the BCRA can pay these liabilities is by issuing pesos. One can imagine what would happen to the value of the national currency if it were not possible to refinance that debt and it had to be paid in whole or in part by printing.

The situation worsened when, to stop a currency run last July, the BCRA sharply raised the interest rate to more than 100% (annual effective). It is true that he achieved his goal; but this implied enormously increasing the costs of its liabilities. It is estimated that, just to maintain the current percentage of remunerated debt with respect to the monetary base, the increase in issuance will have to be brought to more than 50% in the second quarter and to a range of 60%-70% in the second part of the year. So the printing machine is going to be working faster and faster, accelerating the loss of value of the peso and, therefore, boosting inflation.

Finally, the Treasury is also paying high interest rates, and its debt debt in pesos is growing rapidly. So far, it has managed to refinance interest and principal, as well as get some extra resources to cover excess government spending. In addition, it has offered securities in exchange that allowed it to reduce the maturities of the first quarter; but very few are encouraged to lend for a period that exceeds the elections and only 2% of the liabilities mature in the last quarter.

Between April and September of this year, more than $11,000,000 million pesos will be concentrated, which is equivalent to 86% of the total debt maturities in pesos for the year. They coincide with the period prior to the presidential election, which always generates greater uncertainty and makes it difficult to place titles. Let’s take, for example, what happened in 2019 and the jump in risk perception in Argentina that followed the STEP. It became clear that it was highly probable that the current government would win and no one else wanted to lend to the State. The result was the decision to “re-profile”, postponing the payment of the debt that was due in the following months.

A scenario that assumes the administration will be in the hands of the opposition could make the situation not so complicated, since there will be some hopeful bet on a change of direction. However, it will surely imply refinancing those payments at very high rates and with the exchange guarantee that they are giving to the current “dual” bonds. The latter will increase the cost of indebtedness that the new government will inevitably face, as well as the cost of getting out of a trap that is clearly unsustainable.

Taking credit to buy time and solve the country’s serious problems is not necessarily a bad strategy. However, it is very worrying when this decision is in the hands of a management that considers that there is no need to advance in the fundamental solutions that cannot be postponed. This means that the future government will inherit a more indebted country and with a BCRA on the verge of bankruptcy, all of this added to the current fatally aggravated ills. When a short-sighted government avoids substantive decisions, it is forced to lengthen the fuse, making it difficult to disarm the bomb or delaying its inevitable explosion.