The suspicious operation that Central investigates and allows banks to earn 59% in dollars

Banks in Argentina use a profitable business that makes almost guaranteed profit and at the same time, allowing companies local sale dollar bonds that pay zero rate.

Take advantage of financial institutions a “gray area” of complex regulations Argentine currencies reserved for prevent dollars from leaving the country.

They bought local dollar -denominated bonds and then sold them in pesos andn ang unofficial marketwhere is he the higher the dollar price. later, they exchanged those pesos for dollars at the official exchange rate and they turned out favored by the exchange rate gap.

Some banks have recently cashed in on the opportunity and became the largest buyer of these bonds in recent weeks, according to people familiar with the matter, who have asked not to be identified because the information is confidential.

The Central Bank says that such an operation is not allowed and begin an investigation if it determines that banks buy and sell bonds making this type of transaction, said a spokesman. The country’s two private banking associations did not respond to a request for comment.

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The operation has become very popular boosted demand for corporate bond sales and make companies like hipotecary Banc debt issue to 0% coupons (that is, that they lend you dollars without paying any fees).

Relatively risky companies can sell securities that yield less than 3%, a ridiculously low rate for issuers from a country considered a defaulter serial, especially at a time when junk bonds sold in the US were yielding 7.5%.

Sent by the Central Bank last week an informal warning to banking associations so that they do not participate in that exchange arbitrage, according to someone else.

“There is no regulation condemning these operations, and everything not prohibited is allowed”, Said Carlos de Nevares, senior analyst at Moody’s in Argentina. “The financial sector believes it can do it, but the Central Bank says it can’t ”.

It’s all part of the wild world of investing in Argentina, a country whose bonds are rated “junk”, with high levels of public spending, annual inflation of over 50% and a history of three defaults since the turn of the century. In an effort to stabilize its economy, Argentina relied increasingly stringent exchange controls.

Banco Hipotecario is selling nearly US $ 16 million in bonds a 0% coupon May 2.

How is the operation

In the midst of strict control, banks belong to some players with some access to the official foreign exchange market, because they can buy dollars for their own wallet.

The transaction would work like this: A bank buys $ 1 million in dollar -denominated bonds issued by a local company. then sell them to a small discount, usually at 10%, in the secondary market, where the dollar is worth 206 pesos, receives 186 million pesos.

The bank can then convert 186 million pesos back into dollars at a cost of 117 pesos per dollar, leaving him $ 1.59 millionmeaning, a quick 59% profit with minimal effort.

The biggest loser in these transactions was the Central Bank because it involves surgery drainage reserves, which decreases at a time when the government is struggling to strengthen them to meet goals established in its recent agreement with the International Monetary Fund.

Anyway, the the amounts involved are relatively small in relation to nearly US $ 42,000 million of the country’s total reserves.

For Paula La Greca, a corporate fixed income analyst at TPCG Valores in Buenos Aires, the ability of Argentine companies to sell dollar bonds at low yields is a sign that the exchange rate gap is distorting the market.

“The release of Banco Hipotecario dollars in the local market shows how turbulent Argentina’s parallel exchange rate regime is“, he said.

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