The government has launched a new financial and monetary strategy to bolster international reserves. The announcement comes within a context in which country risk is still above 650 basis points. 

The plan does not foresee direct currency purchases in the official market, but it does include taking debt in U.S. dollars through Central Bank (BCRA, by its Spanish acronym) and Treasury repo deals, as well as tighter control of the monetary base through the emission of a new BOPREAL bond.

On Monday, the BCRA announced a new tender in the context of its repo deals program with international banks. It will be the second round of the year following a US$1 billion placement in early 2025. The new operation, scheduled for this Wednesday, is expected to raise up to US$2 billion, although there are still no details regarding rates or participants.  

Meanwhile, the BRCA is already repurchasing put contracts on bank-owned Treasury bonds with the goal of reducing money in circulation and offering signs of stability in the battle to tame inflation. It is a similar operation to the one done last June in which the government organism repurchased 80% of these instruments.

The fourth BOPREAL tender has also been confirmed. This a bond for companies whose profits or commercial debts were withheld prior to December 12, 2023. It’s estimated that US$7-10 billion have yet to be transferred abroad as a result of currency controls in previous years. These changes would involve mopping up the pesos in the market, contributing to falling inflation.

Changes in monetary policy

From July 10, Fiscal Liquidity Letters (LEFIs) will no longer be issued. These had replaced LELIQs. With them, the reference interest rate — typical of inflation goal schemes — will also be eliminated. Instead, a regime will be implemented based on the control of monetary aggregates, where rates will be determined by the market.

The Central Bank will also move forward with changes to the bank reserve requirement regime, with a gradual increase in requirements on items that generate more volatility. In addition, it will evaluate unifying the reserve treatment for interest-bearing accounts, regardless of who the depositor is.

This refers to the Central Bank (BCRA) planning to apply the same bank reserve rules (that is, the portion of money banks must immobilize and cannot lend) to all interest-bearing accounts, without distinguishing whether the account holder is a bank, a company, a person, or a mutual fund (FCI).

If a portion of the money must be reserved (i.e., remains immobilized and does not generate returns), mutual funds (FCIs) would earn less from deposited balances, which could be reflected in a drop in the daily rate they offer.

In this way, institutional or corporate investors might seek other investment alternatives if FCIs become less attractive, especially in the case of short-term money.

The Treasury’s new strategy

Faced with the maturity of the LEFIs, the Economy Ministry and the BCRA will replace these instruments held by the Central Bank with a portfolio of short-term bills (LECAPs) with quotations on the secondary market.

The Treasury will maintain biweekly auctions, including fixed-rate LECAPs with maturities of one, two, and three months. The issuance of securities with maturities longer than one year is also planned — in pesos, adjusted by CER (inflation index), tied to the monetary policy rate (TAMAR), dollar-linked, or directly in dollars (known as “hard dollar”) — which will allow diversification of the maturity profile.

One of the novelties is that dollar-denominated bonds with maturities greater than one year may be subscribed for up to US$1 billion per month. These will be available to both local and foreign investors.

Lastly, all new securities will have a minimum issuance amount to ensure liquidity in the secondary market, and the BCRA may intervene if it deems necessary to ensure the proper functioning of the capital market.

A controversial point

Within the regulations, one controversial point was the announcement of the elimination of minimum holding periods for non-residents who invest in the Foreign Exchange Market or in primary offerings from the Economy Ministry with maturities longer than six months. 

This reminded many investors of 2018, during the Macri government, when the so-called “electoral trade” was allowed and large volumes of “hot money” dollars (known locally as golondrina or “swallow” capital) entered Argentina, only to exit shortly after the then-President lost the election.

It is worth recalling that “hot money” refers to short-term investments that enter a country seeking high interest rates or quick financial returns, but which can leave suddenly at any sign of economic or political instability, or changing expectations.

These investments often come in the form of bond purchases, stocks, or bank deposits, without any intention of staying long-term or generating real productive investment. The name golondrina is used because, like the bird, they “come and go” quickly.

In 2018, Argentina experienced a massive outflow of hot money, which triggered a currency and financial crisis. The inflow of capital was encouraged with high peso interest rates while maintaining a relatively stable exchange rate. Many foreign investors brought in dollars, converted them to pesos, invested in LEBACs (BCRA bills with very high peso returns), and later switched those pesos into dollars to exit, making significant profits.

“It’s inexplicable to eliminate the 6-month minimum holding period for foreign financial capital. We’ve learned nothing,” economist Juan Manuel Telechea commented on X.

Originally published in Ámbito