Pesce came out to justify the high rates: “The Leliq now support household savings”

The president of the Central Bank, Miguel Angel Pesce, has issued a document to defend the rate hike recently applied by the institution. This is the text:

The BCRA basically has four monetary liabilities: currency, deposits of financial institutions with the central bank, repurchase agreements on government bonds and liquidity bills (Leliq). If the Central Bank did not exercise its obligation as a monetary regulator, it would be reduced to the first two.

In countries where there are local developed capital markets and public sector credit is normalized, the Central Bank, in order to regulate the interest rate and the quantity of money, carries out open market operations (essentially buying and selling public securities).

The BCRA’s goal is to progressively implement its monetary order by these means. It is currently used, carrying out its regulatory role, with the aim of avoid interest rate volatility and the impairment of Treasury pesos debt securities, this also affects the monetary regulation instruments, which serve to manage the liquidity levels of the economy.

savings capacity

Contrary to what one might intuitively assume, The Argentine economy has a great capacity to generate surplus or economic savings. However, this has been oriented in the past to the formation of foreign assets, paradoxical in a country that needs to grow and create jobs, impracticable in a context of strong imports and closed foreign credit.

The logical thing would be that these savings were channeled into productive investments, given that, due to external and energy constraints, the possibility of growth has been limited by factors unrelated to financing. This motivates that currently the economic surplus that is generated each year is accumulated monetarily in bank deposits.

If the Central Bank did not intervene in the money market, the excess of deposits over the demand for credit would cause the interest rate to fall. placing it well below inflation, liquefying Argentine savings and exacerbating distrust of the national currency as a store of value.

Excess liquidity

Therefore, the BCRA absorbs this excess liquidity and sets the interest rate to preserve the value of Argentine savings.. This basically happens with two of the aforementioned monetary instruments: pass and Leliq. The remuneration paid for these instruments essentially tends to compensate for the deterioration suffered by money in the inflationary process while waiting for these resources to be converted into financing through the demand for credit.

Over the past three years, the stock of money management instruments has been significantly below the previous highs reached in March 2018, both in the inflation-adjusted calculation and in the GDP measurement.

The stock of these tools is on average $ 6.89 billion in July 2022, a record 23% lower than the maximum reached in March 2018, when the stock of liabilities BCRA (later LEBAC) expressed at current prices (Jul-22) was equivalent to $ 8.95 billion.

The measurement in terms of GDP confirms the results: they were on average 8.3% of GDP, while the maximum record in March 2018 was 10.5% of GDP, or 2.2 percentage points more than in today.

No external credit

The second quarter 2020 growth expresses only the monetary management efforts required by the issue that requested assistance due to the pandemic in an economy without access to external credit and with low financial depth.

More recently, in the months of June and July, there was an increase in the remunerated liabilities of the BCRA, following the intervention of the monetary authority on the Treasury debt market. As highlighted, the month’s records remain significantly below previous highs.

Unlike what happened with the release of aid during the pandemicthe circumstantial increase in interest-bearing liabilities caused by open market operations on Treasury securities implies for the BCRA’s balance sheet the incorporation into its own assets of instruments acquired at more favorable price and performance conditions than those of remunerated liabilities issued to manage the sum of money.

Paid liabilities

The BCRA’s holding of interest-bearing liabilities is currently limited to financial entities only. Therefore, the monetary policy instruments of the Central Bank are entirely in the hands of institutions regulated by the same monetary authority, which exclusively fulfill its liquidity management role.

Like this, These instruments act as a substantial counterpart to the savings of Argentine households and businesses. The Central Bank promotes the development of the capital market to channel that savings, but as it progresses along this path, returns on liabilities are what allow financial entities to remunerate savers while relatively preserving their savings.

In order to ensure adequate income transmission, the BCRA has established a reference minimum interest rate scheme required for deposits.

The goal of these tools has not always been the declaration. In particular, the current situation contrasts significantly with that prevailing between 2016 and 2018, not only in relation to the levels reached. At the time, as part of foreign exchange liberalization and financial deregulation policies, resident and non-resident investors were allowed to purchase BCRA debt securities.

bring trading strategies

This decision entailed a distortion of the monetary regulation role assumed by the Central Bank’s debt instruments, which at that moment began to be used to channel bring commercial strategies of unregulated investors.

Between the end of 2017 and the beginning of 2018, LEBAC placements not held by entities regulated by the BCRA reached two-thirds of the total, with holdings of $ 42.5 billion. BCRA estimates show this more than a quarter, about $ 11 billion, was in the hands of outside investors. In this context, the role of monetary policy instruments has been distorted.

Towards the end of March 2018, the decision by this group of outside investors to end their “carry trade” strategies on BCRA debt instruments drew local investors behind it who also joined in asking for dollars as they sold their debt. their holdings LEBAC. The accelerated disarmament of unregulated investors triggered the onset of the currency and debt crisis in late April 2018.

Currency risk limit

In this sense, foreign exchange regulation is also a factor to consider in measuring the risk implicit in the stock of monetary policy instruments. Currently, the validity of exchange controls, established towards the end of 2019 in the context of the balance of payments and debt crisis, establish a specific limit on the foreign exchange risks of the BCRA’s stock of interest-bearing liabilities.

Three factors can therefore be identified that clearly mark the decrease in systemic risk compared to the situation in 2018.

• Current levels are lower than they were then.

• Holding restricted to BCRA regulated entities significantly reduces risk.

• The existence of exchange controls limits the risk of potential decommissioning decisions.

As noted, unlike what happened in the 2016-2018 three-year period, these tools currently meet an exclusive role of monetary regulation, trying to preserve the value of savers’ deposits in an inflationary context.

The virtuous reduction of the BCRA’s stock of interest-bearing liabilities will not be achieved through liquidation or flight abroad, but through the development of the financial system and the capital market, which ensures that increasing shares of national savings are channeled towards development investments. and job creation.