The crisis began with a bailout of funds, which had to quickly divest their securities (mostly CER-adjustable), causing debt prices to plummet and yields to rise. This being the case, the Treasury cannot extend duration and has prohibitive rates to lengthen terms. Taking T2X3 (due in August 2023) as an example, if the Treasury wanted to obtain financing between now and the time of the PASO, it would have to offer a title that yields 12.3% + inflation. Rates that make any Financial Program unsustainable. To prevent a further collapse of securities, the BCRA came out in its role as “lender of last resort” to put a floor on prices. The monetary authority was “effective” in stabilizing prices, but at what cost?
The monetary issue to buy bonds exceeds $700 billion (0.9% of GDP) in the month. As an example, this amount practically equals the $705 billion annual limit of the original goal agreed with the IMF (recently revised to $765 billion) of financing from the BCRA to the Treasury (only) for the primary deficit (since on paper the local debt market would contribute 2% of GDP). This puts white on black that, yes ok de jure the second trimester goal can be met, de facto has been flagrantly breached. Barely three months after its signing, the spirit of the agreement was lost.
In parallel, the monetary issue to cover the June primary deficit, which promises to be explosive, reaches $377 billion (0.5% of GDP) as of 06/27 and $757 billion (1% of GDP) so far in year, bordering on the recently “revised” goal. However, knowing this, the Treasury had already used, at the end of May, the accounting device of selling its SDRs to the BCRA, with the proceeds canceling Temporary Advances and having more space to take future Temporary Advances. This will allow the government to meet the goal for the second quarter, but hardly for the year, even exhausting the “accounting trick” it would have room to issue up to $530 billion, when a primary deficit of more than double is expected in the second semester and a debt market in pesos that will remain closed. The data for the period 2003-2021 shows that gross monetary assistance from the BCRA to the Treasury in a year is distributed, approximately 1/3 in the first semester and 2/3 in the secondin line with fiscal seasonality.
going clean, the BCRA ended up assisting the Treasurybetween open market operations to contain the collapse of bonds and Temporary Advances for its fiscal deficit, with a whopping $1.1 billion pesos, equivalent to 1.4% of GDP (remember that the goal for the entire year was 1%) or 28% of the current Monetary Base. This cannot have any other trigger than a new acceleration of inflationfrom 30-year record levels of 5% monthly or 80% annualized, and an overheating of parallel dollars. As always, given its nature as a financial asset, the dollar has begun to reflect it almost immediately. Later will inflation.
The peculiar thing is that, although today’s “photo” looks more than worrying, the second semester’s “movie” could be much more so. The condition sine qua non to abort these unfortunate events will be for the government to make a 180° turn in its fiscal policy, at least meeting the primary deficit target of 2.5% of GDP, and giving rise to the gradual reopening of the local debt market. If there is no reduction in the deficit, there will be no voluntary financing, so it is only possible to expect a greater monetary issue both for the Treasury debt and to cover the fiscal deficit. The less fiscal adjustment, the higher inflation and rise in free dollars. There is no magic.
PPI Macroeconomics Team Leader.
Source: Ambito
