Economy

Central Bank buys reserves, but not enough to pay debts

21st November 2019

By Ignacio Portes

Central Bank buys reserves, but not enough to pay debts

The rapid leaking of foreign currency reserves from Argentina’s Central Bank is reversing, as the monetary authority started buying US dollars following the post-election tightening of currency controls.

But although an immediate collapse might have been averted, those reserves could plunge again soon if a favorable agreement on how to re-program Argentine debt payments is not reached soon, as the country is facing massive maturities over the coming months, far bigger than the amount bought so far by Central Bank chief Guido Sandleris.

</p> <h2><strong>Sandleris, the sole bidder</strong></h2> <p>Since October 28, when individuals’ purchases were <a href="https://gettheessential.com/economy/2019/10/31/peso-bounceback-unlikely-to-last-long-currency-controls-macri-clamp-cepo-dollar-inflation">limited</a> to US$200 per month among other new regulations, the Central Bank shifted from massive seller to steady buyer in Argentina’s currency markets, bringing in a fresh <a href="https://www.planm.com.ar/contenidos/informes/con-sper-cepo-el-bcra-ya-compr-us-1600-millones-el-20-de-lo-que-vendi-entre-las-paso-y-el-27-o-2019-11-20">US$1.6 billion</a> to its coffers, in contrast to the more than US$7 billion sold between August and October.</p> <p>With hardly anyone (except importers) authorized to purchase and all exporters strongly incentivized to sell their goods before the new government likely re-introduces <a href="https://gettheessential.com/economy/2019/10/17/alberto-fernandez-looks-at-new-tax-sources-to-help-plug-fiscal-gap-export-duties-wealth-taxes">stronger export duties</a>, Sandleris suddenly found himself in control of the market, making his balance sheet recover part of what it had lost.</p> <p>Despite those purchases, however, the Central Bank only gained US$200 million overall in November, as part of its reserves were used to pay the fraction of debt maturities that President Mauricio Macri’s government did not “<a href="https://gettheessential.com/economy/2019/08/29/debt-renegotiation-argentina-imf-foreign-bonds-local-law-imf-default">re-profile</a>”.</p> <p>Macri’s re-profiling in late August basically amounted to a unilateral extension of maturities for local holders of short-term debt, postponing most payments until after the new president took office. The decision was part of a series of rushed reforms after Argentine markets collapsed earlier that month following Macri’s landslide defeat in the primary elections, including a run against the peso and a massive selloff of the already beleaguered Argentine bonds, which are now being traded at near-default prices.</p> <p>Although the combination of this partial default and the stringent capital controls helped Macri reach the end of his term with a minimum amount of market stability, it will now be up to Alberto Fernández administration to deal with the aftermath, which includes a particularly steep <a href="https://gettheessential.com/economy/2019/10/03/argentinas-uphill-bond-maturity-schedule-default-debt-payments-2019-2020-2021-2022-2023">bond re-payment schedule</a> in 2020, as that year’s original payments are now combined with the ones postponed in 2019.</p> <h2><strong>Quick negotiations needed</strong></h2> <p>One of Fernández’s top economic advisers, Guillermo Nielsen, said in a <a href="https://www.ambito.com/nielsen-dio-mas-indicios-la-negociacion-la-deuda-y-la-estrategia-minimizar-danos-n5065901">recent presentation</a> that “the negotiation of the debt with both private bondholders and the International Monetary Fund must be quick, because the maturities before 2020 amount to US$15 billion”.</p> <p>According to Nielsen, the incoming administration doesn’t want to declare default, but for that to be possible debt renegotiation must be hurried, as there are not enough reserves to deal with the payments Argentina is due between now and May.</p> <p>If an agreement is reached, Argentina’s partial default of local debt might stop short of turning into an international default as well, as interest payments on sovereign bonds have so far been followed to the letter.</p> <p>Reportedly, Fernández’s team is considering that, if the amount of freely-available Central Bank reserves is not enough to deal with all 2020 maturities, sovereign bonds (such as the Bonar and Discount series) will be prioritized over local short-term debt (such as Letes and Lecaps). Re-payment of the latter might be postponed yet again following on Macri’s footsteps, in order to at least stave off a full-on international default.</p> <h2><strong>Nielsen or Kulfas</strong></h2> <p>Nielsen’s words with regards to debt re-negotiation are obviously relevant, as he was part of former Economy minister Roberto Lavagna’s team during Argentina’s debt renegotiation in 2005, and Fernández (who was cabinet chief at the time) trusts him to assist with the matter again.</p> <p>But no one still knows whether the more orthodox and pro-market Nielsen will be Fernández minister, or if it the more interventionist Matías Kulfas, the other main candidate according to press reports, will take the position instead. There might even be room for a surprise name that has not been making the biggest headlines.</p> <p>Fernández met with Cristina Kirchner at her Buenos Aires city apartment late on Monday, and told the press after the meeting that the cabinet had now been fully decided. But nothing has been publicly confirmed, so the Argentine press is still running on contradictory rumors.</p> <p>According to La Nación newspaper’s most influential columnist Carlos Pagni, Nielsen has <a href="https://www.lanacion.com.ar/politica/fernandez-nestor-sin-soja-nid2307565">reached out</a> to a series of center to right-wing economists in case he is chosen for the position, including Hernán Hirsch (who worked under the pro-market Estudio Broda think tank for over a decade), Adrián Cosentino, Matías Isasa, Germán Plessen (who all served under the Kirchnerite administration, though not under its most heterodox economists), Federico Furiase, Martín Vauthier (former analysts at Estudio Bein, a centrist consultancy agency) and Gabriel Rubinstein (a supporter of many of Macri’s policies).</p> <p>But merely a day after those reports, journalists closer to the Kirchnerite camp <a href="https://twitter.com/tunykollmann/status/1197139278419169280">said</a> Nielsen was actually losing ground and would not end up with the position. At the moment, it’s all a matter of speculation, and the level of secrecy and mixed signals regarding the position is among the highest of the future cabinet, in contrast with other areas whose leaders look closer to being <a href="https://www.lanacion.com.ar/politica/el-gabinete-alberto-fernandez-nombres-ministros-confirmados-nid2307777">confirmed</a>.</p> <p>At the Central Bank, the most consistent rumor so far points to <a href="https://www.perfil.com/noticias/politica/pesce-un-historico-del-bcra-con-influencia-cerca-de-alberto-f.phtml">Miguel Ángel Pesce</a>, a low-profile economist who worked there between 2004 and 2015, acting as liaison between the institution&#8217;s career analysts and its political leadership, with the latter responding directly to the Kirchners.</p> <p>

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Ignacio Portes

Ignacio Portes is The Essential's General Editor. Former Economy editor at the Buenos Aires Herald, he has also written for publications such as Naked Capitalism, NSFWCorp and Revista Debate.