The growth of debt in Argentina: a mirror of excess pesos and the exchange rate

The Argentina gross debt continues to rise. According to the recent report from the Ministry of Finance, as of September 30, 2024, the debt reached US$460,068 million, which represents an increase of US$1,661 million in the month and US$89,395 million in so far this year. Of this total, 99.5% is classified as debt in “normal condition.” Regarding the composition, 44.3% is denominated in local currency, while the remaining 55.7% is in foreign currency.

Part of this increase, however, is due to an accounting reconfiguration. Debt that was previously found as remunerated liabilities in the Central Bank (BCRA) was transferred to the National Treasury, with the objective of “cleaning up” the BCRA’s balance sheet. The consolidated debt of the Treasury and the BCRA is:

• Treasury u$s 460,068 million
• BCRA u$s 10,574 million
• Total US$ 470,642 million

A contradictory increase: fiscal surplus and debt growth

This growth raises a key question: why does debt continue to grow if Argentina has registered both primary and financial surpluses so far this year? Part of the explanation lies in inflation-adjusted debt indexation.

While the crawling peg has maintained a devaluation rate of 19.51% so far in 2024, inflation has been much higher, reaching 101.6% in the same period. This disparity causes an adjustment of the debt in pesos that follows the CER index (inflation adjustment) when measured in dollars, generating a higher growth effect.

In addition, there is a more technical and controversial aspect. In instruments like Lecaps, Implicit interests are not accounted for within the financial deficit, which generates an accounting image of a financial surplus that does not reflect the fiscal reality of the country. In this context, Argentina may have a primary surplus, but it continues to carry a financial deficit that, instead of being covered by issuance, is financed with new debt.

The exchange rate and the true excess of pesos

The policy of transferring debt from the BCRA to the Treasury may seem reasonable, given that a large part of these remunerated liabilities were issued to absorb the pesos issued to finance the fiscal deficit of previous administrations. However, this strategy masks an underlying problem: the real magnitude of the peso surplus in the Argentine economy. Exchange restrictions (stocks) keep these pesos trapped within the local financial system, making it difficult to accurately evaluate the volume of surplus currency. While before the BCRA could use its remunerated liabilities as an indicator of this excess, today part of that surplus is found in Treasury instruments such as Financing Bills (Lefis) or in local currency debt.

At the recent Monetary and Banking Conference 2024, President Milei reiterated that the lifting of the stocks will only occur once the problem of peso “stocks” is resolved. Gustavo Cañonero, former vice president of the Central Bank, estimated that this excess is around US$100,000 million and that it is currently contained within the government’s debt. This data is crucial, since these pesos represent a potential demand for dollars, which could unleash significant pressure on the exchange rate once the stocks are lifted.

The potential effect of lifting the stocks

The lifting of the stocks in 2015, for example, generated an immediate demand of US$ 4,000 million on the BCRA reserves in the first three months afterward. And, at that time, the excess weight was half of what is estimated today. Although at that time the strong inflow of capital between 2016 and 2017 helped contain the impact, the lack of a coherent fiscal program led to a new crisis in 2018.

Today, Argentina faces a different scenario. The government has implemented a fiscal policy that, although it exhibits a primary surplus, continues to carry a financial deficit. This deficit, which is currently financed with debt, cannot expand indefinitely without putting economic stability at risk. The containment of excess pesos thanks to the stocks has temporarily made it possible to finance part of the financial deficit, but this tool has limits. The necessary lifting of restrictions must consider these conditions to avoid destabilizing both the economy and efforts to balance public accounts.

Conclusion: A Fragile Balance

In short, Argentina faces a delicate balance. The growth of debt, driven by a combination of indexation, fiscal policy and the Lecaps accounting trap, is also a reflection of the excess pesos in the economy. The exchange rate continues to be a determining factor in maintaining these pesos in the system, but the challenge for the government will be to design a strategy that allows a gradual and orderly exit from the restrictions, avoiding an exchange crisis. However, true stability will depend on Argentina’s ability to balance not only its fiscal accounts, but also the sustainability of its debt.