Editorial: Leliqs Are Out, Bonds Are in, a Substitution with Impact
Last Thursday, the Central Bank decided to change its reserve requirements policy. From now on it gives banks the option to use sovereign bonds with a maturity above 180 days and below 450 days, instead of Leliqs, which have a monthly maturity. The mechanism is voluntary and has consequences for the organization of monetary policy. Today the part of the reserve requirements that is in Leliqs represents 10.3% of deposits, that is, about 730 billion pesos.
We do not believe that banks will go massively for the full 730 billion, but will surely use a part, since sovereign bonds pay around 3 points more interest and are also exempt from gross income tax, a difference in profitability that can reach 6 points at a time when the system’s profits are in the doldrums. Some banks (especially international ones) will hold their cards on making this change, but the Argentine banks whose profitability equation is played exclusively on the local court will probably bet on the sovereign bonds.
Increasing (and incentivizing) the banking system’s exposure to the Treasury can be dangerous. After the 2001 crisis, the different boards of the BCRA agreed on two basic principles: not to lend dollars to debtors with income in pesos and not to expose the banks to the State’s financial problems. In fact, Argentina had two defaults in the period (2014 and 2019-2020) and the banks did not feel the effect. Profitability remained positive and there was no run on deposits in pesos at any time.
Also, there is an issue with deadlines. The function of the reserves is that they must be available to face a shock in the deposits. With bonds that is relative. Although the Central Bank agrees to buy them back, the effect on the price can be much greater than with an instrument that has a much shorter average life such as the Leliq.
This measure can be problematic for monetary policy, both from a stock and a flow POV. The amount which banks decide to pass from Leliqs to sovereign bonds will have to be issued by the BCRA, which in this way would abandon the monetary austerity that it showed in recent months. In other words, there will be a discrete increase in the monetary base. With flows there are two opposing effects. On the one hand, as the Treasury receives more financing, it is expected that the issuance requirements to finance the deficit will be lower and at the end of the year the effect will be neutral. On the other hand, the Central Bank could run into trouble (potentially) when it wants to sterilize dollar purchases because Leliq marginal buyers may be buying treasury bills.
However, there is some complex arithmetic for the government. We believe that one of the reasons (probably the main one) for this rule change is that the Treasury was not getting the financing in the market that it wanted. Our assumption that the private sector was going to increase its stock of peso bonds by 600 billion in 2021 looked challenging. As the Central Bank was the second-instance financier of the treasury, one might think that the path at the end of the year is similar. This is: the Central Bank issues more now because the money leaves Leliqs and goes to Treasury bonds, but issues less later on. That may be the solution for December, but things can happen along the way. The power of monetary policy and of the policy rate as a signal is further weakened, giving more room to the Treasury to define monetary policy. Banks are also weakened by incentivizing them to be more exposed to the Government.
The BCRA gets rid of the problem of its balance sheet by paying less interest since the stock of remunerated liabilities shrinks, but that number becomes transparent in the fiscal accounts. This also enables more financing to the Treasury than the BCRA issuance rules would have allowed. We do not believe that they would have been necessary, but the Government now has insurance in case the deficit is larger. Perhaps the most difficult question to answer is whether this measure changes the demand for money. We do not know, but if it does it is probably not on the right side. And that is potentially another problem. The good news is that at least the share of the deficit obtained by the Goverment should grow.
Econviews Weekly May 31st 2021