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ECONOMY | 20-12-2023 22:08

Argentina pulls off record sale of peso debt amid Milei rework

New government stages largest-ever auction of local-currency notes.

Argentina’s new government continued its series of bold policy steps with the largest-ever auction of local-currency notes as President Javier Milei tries to pull the economy back from the brink of its sixth recession in a decade. 

The nation’s Treasury sold 2.96 trillion pesos of debt in a Wednesday auction, considerably more than the two trillion initial offer that was already the rough equivalent of one third of all banknotes currently circulating in the South American country. It got offers for a total of 13 trillion pesos, according to an emailed statement. 

Most of the proceeds will be used to buy back government debt held by the Central Bank, which should help absorb pesos and avoid further fanning inflation.

Cleaning up the Central Bank’s balance sheet, transferring its debts to the Treasury and stopping the overflow of pesos is a key part of Milei’s plan. The libertarian was elected in a landslide in November promising radical change — including shuttering the central bank and replacing the country’s currency with the US dollar. 

Argentina sold two trillion of pesos of 27-day notes, which were expected by markets to be in high demand, with an effectively monthly rate of 8.66 percent. It also sold 893.6 billion pesos of inflation-linked bonds due in 2025, and another 71.3b pesos in similar notes due in 2026 — while both have negative rates, they offer investors a chance to profit from inflation that’s already running at 160 percent a year and expected to accelerate even further after a 54 percent currency devaluation announced earlier this month. 

The country’s existing restrictions prevent banks from opting for the parallel exchange rate, which trades at around 954 per dollar, compared with 800 per level at the official rate. To many lenders, sticking with peso debt is the “least damaging” option, said Juan José Ciro, the chief financial officer of local lender CMF. Before the sale, he said the operation would be “super-successful” amid an abundance of pesos in the economy. 

The Central Bank’s announcement earlier this week that it would stop issuing Leliqs — until recently its main debt instrument — was expected to have stoked investor appetite, as it frees up pesos banks have to put to use. 

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by Ignacio Olivera Doll, Bloomberg

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