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ECONOMY | 22-03-2023 17:00

Analysts react as government obliges state bodies to convert dollar bonds into pesos

State entities are to sell their dollar bonds on the market in return for peso debt bonds issued by the Treasury with the aim of taming surges in the CCL and MEP parallel but legal exchange rates.

Markets and analysts reacted swiftly on Wednesday after Economy Minister Sergio Massa announced that Argentina’s government would oblige state bodies to “pesofy” the debts of state entities.

According to the plan, government bodies will sell their dollar bonds on the market, turning the pesos thus acquired into Treasury bond debt. The manoeuvre is aimed at permitting more dollar liquidity to calm such financial instruments as the CCL (contado con liquidación) and MEP (or ‘dólar bolsa’) parallel but legal exchange rates.

The Economy Ministry’s overall objective is to meet payment deadlines without printing more money to heat up inflation with various instruments on offer to draw attention. Some US$4 billion is in play with this manoeuvre, according to officials.

“The Economy Ministry is adding instruments for market stability. Today there are state organisms with bonds denominated in dollars, both under local (AL) and foreign (GD) legislation. The former (AL) are not used for MEP/CCL,” off-the-record ministry sources told the Perfil newspaper.

The initiative, they added, aims at “placing on the market some of the AL bonds to create depth so that the Economy Ministry, in coordination with the Central Bank, can concentrate the rest while withdrawing GD bonds from the market. In this way the Economy Ministry will have the capacity to operate on dollar money markets without affecting reserves.” 

It also aims at “lifting some exchange rate restrictions as the first step towards normalising currency markets while reducing the volatility of dollar money markets in particular and capital markets in general, thus avoiding an inflationary impact, as well as placing the AL bonds under local legislation on a par as a benchmark with dollar money markets, also consolidating the financial programme of the Treasury and continuing the path of stabilisation to overcome the crisis of June, 2022.”

The decree for the sale of the bonds of state entities was scheduled for publication in the Official Gazette on Thursday.

 

Explanation time

On Wednesday morning Massa met up in the Economy Ministry with bankers, financial consultants and Argentine investment fund managers to give them the details of his decision. 

The meeting took place amid rumours of a split exchange rate which the ministerial entourage ruled out to Perfil. Most of the participants expressed a positive opinion, at least in public, but private analysts were sceptical about the wisdom of the decision.

Argentina’s poor fiscal performance, with a primary deficit of 228.134 billion pesos and a  financial deficit of 485.591 billion, has triggered doubts as to whether the targets agreed with the International Monetary Fund can be met, including pulling the brakes on printing money in order to cover the red ink. That bad equation was mainly driven by the fall in the export of agricultural commodities.

There is not much optimism for this month in fiscal terms, not only because of the adverse momentum from the first two months but because the third month of the year is usually deficient in the historical comparison from 2015 until now. In the view of many analysts, the government will again violate the agreement with the IMF in order to have the conditions but also to renegotiate the fiscal target, the only one to remain unvaried until now with the most flexibility shown to the accumulation of international reserves. 

Following the meeting with bankers, financial consultants and Argentine investment fund managers, Economic Policy Secretary Gabriel Rubinstein tweeted more details of the decision.

"Today we are beginning to give more depth to the dollar bond market under local law, starting with the purchase of the global bonds of public entities, which will permit the public debt under foreign law to be lowered to the tune of some US$4 billion initially," Rubinstein published..

He further maintained that the state was reducing foreign debt without using Central Bank reserves. The official also underlined that the restrictions on investor purchases of AL bonds were being relaxed while pointing out that the new demand would be supplied by the Economy Ministry and the Central Bank, in coordination with market players.

In conclusion, Rubinstein explained the objective of this measure by arguing that "the state will gain in its capacity to act in dollar money markets, thus avoiding disruptive rises in the CCL and MEP (exchange rates), a key factor for deploying measures to strengthen the macroeconomic scenario."

 

Reaction

The immediate reaction last Wednesday was for Argentine sovereign bonds to plunge after the government affirmed that it was seeking to withdraw dollar bonds from public entities in order to reduce exchange rate volatility.

In principle, the analysts consulted agreed that the measure would meet its objective in putting brakes on exchange rate volatility but "at what price?"

The terms chosen by the specialists were “weird, atrocious, botched and a time bomb,” also exposing this government’s communication problems since “the market does not understand this measure," which would explain Wednesday’s sovereign bond trends.

“An atrocious measure leaving a time bomb for the next government. They are pulling dollar bonds out of public entities like the pension system in exchange for unpayable public bonds which will require rescheduling. With those dollars they will intervene in dollar money markets,” economist Natalia Motyl pointed out to Perfil.

“It‘s a botched measure. It seems the act of a desperate man driven by the market cycle and that is a signal which an Economy minister cannot give – that he is desperate,” observed Alejandro Bianchi, CEO of Asesor de Inversiones.

“Instead you need to be very well prepared in advance for what you are going to do. Right now there is much uncertainty as to what these measures are going to imply because they are talking about unlisting global bonds when in reality the Argentine government does not have all these global bonds in circulation but these global bonds have many owners. So if the global bonds are not totally in their power, how are they going to unlist them?” warned the analyst. 

“Today’s global bondholders are right now plunged into uncertainty because they do not know if they will be able to sell out. Hence the market reactions. In my view, the government has no clear idea of what it is going to do,” Bianchi concluded.

 

– TIMES/PERFIL

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