A lack of coordination that caused the reversal

The Pesos financing gap projected at the start of the year suggested that as we approach next year’s presidential election, the market it would test the government’s ability to cover them. However, it was difficult to predict that it would happen so soon, and that the “test” was self-inflicted.

La lack of coordination caused the capsizing in the debt market by weight, they generate uncertainty as to whether this is an isolated event or whether its consequences will be permanent. This market, and especially through inflation-adjusted debt issuance, is practically the only source of funding that the government has access to. Not being able to use this market would cause serious damage to the funding program.

Given the sharp decline in the price of bonds in pesos the monetary issue was challenged to intervene on the bond market, tried to restore the price of these bonds and to boost their demand. While this issue was successful in partially reversing the decline in bond prices, it has effects on other markets.

What happens in the foreign exchange market is the counterpart to what happens in the peso market. The increase in the money supply that has allowed intervention in the debt market, at a time when uncertainty affects the demand for assets denominated in pesos, caused an excess of weight in the economy.

Whenever the economy has excess pesos, the BCRA’s demand for foreign currency increases through increased demand for foreign currency to pay for imports of goods and / or services, while the monetary authority accelerates the rate. depreciation and rising interest rates trying to restore demand for domestic currency assets. If not, the the residual surplus of pesos puts pressure on the exchange rate gap. As a result of all of the above, the inflation rate accelerates.

The next few months it will be crucial when it comes to financing. It is likely that the government will have to cover its needs with short-term debt placements and, if this proves insufficient, resort to issuing money and subsequent sterilization through debt placement by the monetary authority. However, until this liquidity reaches financial entities in the form of deposits, which would allow them to be withdrawn from the market in the face of the placement of BCRA liabilities, it circulates in the economy causing pressure on various currency markets.

In the years of the elections, and in particular the presidential years, the Argentines they tend to deepen the dollarization of portfolios, by minimizing holdings in pesos. To avoid imbalances in the weight market, it is crucial reduce the fiscal imbalance while rebuilding credibility to support the demand for debt in pesos. Otherwise, the result will be the loss of BCRA reserves, more constraints trying to “defend” them, which will deepen economic stagnation, more depreciation, more gaps, more inflation and, consequently, a greater deterioration of the social situation. If this is the scenario, social unrest will be the dominant feature in choosing the next president of the nation.