This Monday, it was finally known how the debt swap launched by the Government will work and one of the elements that generated the most debate was how the operations agreed with the banks would be, which the opposition had been criticizing and that the president of the Association of Argentine Banks (ADEBA), Javier BolzicoHe came out to defend. He clarified that, “banks have a lower percentage of total debt” and explained that ‘Put’ is an option to sell an asset at a predetermined fixed price and that, until today, the Central Bank (BCRA) has never bought bonds at a price other than market. But what is this operation about?
A put option it’s a financial derivative instrument that grants the holder (in this case a bank) the rightbut not the obligation, to sell an underlying asset at the price established in the contract, on a certain date or at any time until expiration and to the writer of this option the obligation to buy it under those same conditions.
It is not something new. It was already in force in Argentina, given that it is a mechanism approved on July 12, 2022, during the brief management of Silvina Batakis as Minister of Economy, and as the BCRA explained to Ámbito, “this instrument was offered to banks in the search to develop the capital market”.
Some novelties of the put applied by the BCRA
However the BCRA reported in a statement that a series of changes were introduced to the operation of the instrument that seek to improve its operation before an important national government debt swap tender to improve the profile of its maturities. Thus, this tool that was in force for the titles that expired this year and, based on the adaptation of the standard that was carried out, contemplates those that will expire in 2024 and 2025.
The purchase price, contained in the instrument, does not change with respect to the fact that it is still the lower of the closing price and the weighted average traded for the instrument on the business day prior to the exercise of the option and, at said price, it is 30 basic points of equivalent rate will be added. But they indicated that “yes, the selection of the market and term of the instrument to define the price is modified, since the one with the greatest depth (traded volume) will be taken”.
The settlement terms are also modified: once the price is established, the liquidity option may be exercised at t0, t+1 or t+2 as chosen by the holder of the derivative.
It happens that, from the Government they consider that it is essential to generate a deep and liquid government securities market in Argentina and, although, to achieve this objective, the BCRA operates in the securities market, in order to guarantee that it is sustained and avoid its volatility, and it seeks to maintain an attractive interest rate, they assure that “its credibility must be built using this type of instrument” (in reference to the put).
On the other hand, the BCRA will continue to be present in the securities market, avoiding its volatility.
This is how the swap works with banks
In short, what is being offered is for entities to accept the exchange of bonds with the possibility that, in the event of a crisis situation, they choose to sell them to the BCRA at a low cost.
how has it been BCRA with the put options so far? Until now, the puts sold have rarely been executed and it is presumed that the few cases that were executed have been used to verify the operability of the system, since it has a cost.
As Fabio Rodríguez explains, “at this moment, the level of prices and rates that arise from the secondary market is still not so convenient (beyond the incipient improvement that part of the curve showed in pesos, including 2024 positions) to launch said exchange for a significant amount.” For this reason, he maintains that “the Government detected the need for actions of the BCRA guaranteeing to be the lender of last resort for holders who want to leave at some point”, through the put.
And it is that, Rodríguez observes that, today, “the back of the BCRA it seems to be the only link to be able to make a voluntary exchange, given the current conditions of the debt market in pesos”.
Source: Ambito
