Since the week prior to Buenos Aires elections, the dollar threatens to approach the band’s roof. To avoid this, the government intensified its interventions. Its interference was not limited to the indirect channels to which we had accustomed us (interest rate and sales of futures contracts), but also resorted to the direct sale of dollars in the market.
The decision contrasts strongly with the logic of the scheme, what was announced and even signed with the International Monetary Fund (IMF). Why does the government intervene before the roof? What is the risk that Central Bank (BCRA) defend with reservations the upper limit of the band if, a priori, is it expected?
The answer to these questions should be sought in the government’s own decisions and in the characteristics of the agreement with the IMF. The government’s decision not to respect the accumulation goals of reserves complicated the exchange scheme and today have severe consequences. Defending the band’s roof implies spending the background loan on improper use, and increases the problems of an already damaged scheme.
The BCRA dollars paradox
The BCRA currently has a significant amount of dollars to defend the band’s roof. The problem, however, is that the dollars are not its own, but of the IMF. Discussing the fund’s loan, net reserves are located today in very negative values (around -u $ S7.3 billion). In other words, each intervention of the BCRA defending the roof of the band is equivalent to consuming the resources provided by the body.
The relevance of this point is crucial. At the time of approving the new loan, The fund highlighted the importance of accumulation of reserves. The new loan granted to Argentina was, clearly, extraordinary. Our country was already the main debtor of the agency, that already added a New loan of US $ 20,000 million that exceeded the main traditional risk metrics of the background.
In that context, the agency highlighted the need to strictly meet the accumulation goals of reserves as a way of preserving before the risks of non -compliance. That is to say, The accumulation of reservations is a central piece in the agreementsince it is the only tool that exists to avoid misuse of the background resources.
The problem of not accumulating reservations when it corresponded
Argentina decided, shortly after starting the program, breaching the agreed commitments and ignoring the reservations goal. During the months of the year that seasonally they are more favorable for the purchase of reserves, the Government encouraged a nominal decrease of the dollar to consolidate the disinflation process. Failure complicated the relationship with the IMF and gave rise to the postponement of the first review of the agreement, scheduled for the end of June. The government was forced to modify its position, but it was already late: the time to buy reservations had passed and the purchases were insufficient.
Despite the downward review of the reservation goal that brought the review of the agreement, Argentina is currently US $ 4,200 million below the new committed goal. The detour increases to US $ 6,700 million if debt matches are considered until December.
If the reservation goal had been reached, the BCRA would today have a mattress of own reservations to defend the band without compromising the IMF dollars. As he did not, defending the scheme puts the agreement and strength the relationship with the IMF.
A scheme in crisis: prelude to a vicious circle?
The situation reminds that of 2018-2019, when the use of dollars from the fund to supply the market derived in questions about the fulfillment of article VI of the IMF statute. This article expressly prohibits using the funds of the fund to finance the departure of capital.
Since defending the band’s roof implies using the background silver, it cannot be ruled out that, given strong exchange pressure, the IMF raises objections or even demands a review of the band scheme.
Spending the dollars in the background not only weakens the exchange strategy and the relationship with the organism. In addition, it affects the ability to pay and the perception of risk on foreign currency debt. With a very large debt with the IMF, a very demanding calendar and without access to international financing, the probability that the Government should face a restructuring increases by using IMF dollars. The market has been reflecting this process in bond prices and country risk dynamics. The electoral result pronounced the process.
The forward perspectives reinforce the vulnerability table. In the coming weeks, the seasonality of the agro -export supply will imply less foreign exchange income, while the contributions of financial flow dollars (commercial and financial debt) will naturally diminish as the elections approach. Everything points to a significant unbalance in the change market.
In that context, the roof defense of the band threatens to trigger a vicious circle. Selling IMF dollars increases the probability of rupture of the scheme and can accelerate the demand for dollars. Therefore, it cannot be ruled out that, even before the elections, the exchange scheme must be modified.
Since its inception, the band regime expresses more discrepancies than the coincidences between the government and the fund. The amplitude of the bands (unpublished with respect to other experiences) and the search for a free flotation scheme between them, express the disagreement between the parties with respect to the magnitude of the external adjustment that the Argentine economy needed.
The Government lacked its commitments to prioritize an electoral result that seems elusive today. Meanwhile, breaches, not only with respect to the reserve goal, but also in terms of interventions in the futures market, altered the spirit of the program and damaged a scheme that today is very difficult to defend. The coming weeks will raise capital challenges to the exchange scheme. Without own dollars to defend the scheme, the external signals will be defining.
Pablo Moldovan and Federico Pastrana Directors of CP Consultor
Source: Ambito
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