Clamour for pesos leads banks to tap repo market

President Javier Milei wants Argentines to use more dollars. But for the first time in years, his countrymen are clamouring for pesos.

A surge in demand for the local currency in recent months has left commercial banks needing access to pesos, leading the Central Bank to revive a liquidity window that hasn’t been tapped since the 2018 financial crisis.

Activity in the repo market started increasing in September and skyrocketed earlier this month, when banks borrowed more than US$1.6 billion in one-day term loans, Central Bank data shows. The demand for peso loans is an early sign of a tepid economic recovery, though Argentina is still mired in recession. Milei, who had radical plans when he took office, is facing a complicated reality.

Declining interest rates, which fell from a record high of 133 percent to 40 percent, are fuelling the demand for credit. The ratio of consumer loans to deposits increased 64 percent this month, up from 42 percent at the end of 2023, according to 1816 Economía y Estrategia, a local consulting firm.

Consumers are seeking out loans as banks offer mortgages again, the first time since 2018, said Gastón Rossi, a director at Banco Ciudad in Buenos Aires. They are also tapping bank funding because interest rates are low, he said.

Still, bank credits — at 12 percent of gross domestic product — at the end of 2023 remained low compared to other countries in the region, for example Brazil, where it stood at 72 percent of GDP, according to data by the World Bank. “Credit is recovering from the fifth basement,” Rossi says.

The Central Bank reopened its liquidity window to ensure that banks aren’t forced to unwind their holdings of Treasury debt or raise deposit rates, which could result in higher borrowing costs for consumers.

A spokesperson for the Central Bank said active repo loans are part of the process of normalising the financial system. A spokesman for Banco Galicia, the country’s largest private lender, said it prefers to tap the repo line so that it can gradually sell bonds and other notes.

Argentines’ appetite for loans has been on rise since the Central Bank cut interest rates, said Fernando Milano, chief business officer at Banco Supervielle. His bank accelerated its lending activities since the beginning of the year. “We expect this to continue in the future,” Milano said.

Tricky choices

But, the reopening of the repo facility isn’t just a sign of a more buoyant Argentine consumer. It also highlights how difficult it is for Milei to stop printing money, despite promising to do so after the previous government used quantitative easing to pay for all sorts of things, fueling inflation.

Despite recent successes in curbing that inflation, there’s still an abundance of peso debt in the system. That “monetary overhang,” as some describe it, poses devaluation risks to the currency and could result in a resurgence of inflation. It also hinders the government from easing its currency controls, leading Milei to pursue an “endogenous dollarisation” strategy instead.

Companies and individuals for years were forced to invest their money in government bonds and bank deposits as better uses of cash were limited and currency controls made it difficult to get hold of foreign exchange. That resulted in over US$100 billion in peso assets, according to PPI, a local brokerage.

Unwinding positions

Milei’s plan was to move those assets from the Central Bank to the Treasury, and entice holders — including banks — to sell their holdings by lowering interest rates. But so far, that hasn’t happened.

Banks in the past 30 days increased their stock of Treasury notes, known as “Lefi”, to 11.2 trillion pesos (US$11.4 billion), up from 7.5 trillion pesos, according to official data. And in each debt auction, the Argentine Treasury sells more bonds than those that mature, causing the peso debt pile to rise. The only exception to that was September 26, when the latest Treasury auction resulted in a net decline in peso bonds, according to local brokerage Facimex Valores.

At the same time, the quest for peso liquidity could trigger a rise in interest rates. “Interest rates should be under more pressure in a scenario of higher demand and scarcity of pesos,” says Martín Polo, chief economist at Cohen Sociedad de Bolsa.

“That will be a headache for the National Treasury, which has to refinance its debt with the market. But there is no road to happiness without tension.”