The main objective of this new monetary policy is to bring endogenous issuance to zero. This issuance is the one that is automatically generated by the mere fact of having to face the interests of the sterilization instruments (Leliqs at the time, Pases at present). Every month the BCRA had the commitment to pay the interests of these instruments.
The issuance of interest on remunerated liabilities reached a level of 8.1% of GDP in 2023, with year-end rates exceeding 10 points of GDP. This is the magnitude reached by endogenous issuance, a process that began in 2018 with the replacement of Lebacs and reached its maximum level at the end of 2023.
From then on, the decline in nominal interest rates and the impact of inflation on nominal GDP gradually diminished.
The last two steps in that process were the gradual replacement of the Passes by the subscription of Lecaps and the final elimination will occur with the issuance of the new “Liquidity Tax Letter” (LeFi).
How will LeFi work?
When the creation of new monetary regulation instruments was announced two weeks ago, several questions arose about the fine print of the new instruments. Many of these points were clarified with the regulations already published.
What are LeFi?
They are bills with a maximum term of one year, issued by the National Treasury and which accrue the monetary policy rate daily. The BCRA sets the rate, but the Treasury pays it.
How is the issuance of LeFi implemented?
The Treasury issues the LeFi and delivers them to the BCRA in exchange for other debt instruments of the National Treasury that are currently on its balance sheet. This operation may include the following: Non-transferable letters that the Treasury placed with the BCRA every time it used international reserves to pay debt. In this way, the Treasury avoided increasing its total debt and the BCRA exchanged one Treasury instrument for another in its assets. If they are Non-Transferable Bills, it loses coverage in foreign currency and the Treasury pesifies part of its debt.
How is interest paid?
The LeFi The interest is capitalized, therefore, the total stock will grow at the pace of the interest rate defined by the BCRA (Monetary Policy Rate). The objective of this is to prevent the accrual of interest from impacting the fiscal result. When capitalized, it directly impacts the debt stock without affecting the cash-based result. This helps to show more solid fiscal numbers, but requires greater economic growth so that the debt stock measured with respect to GDP does not increase. Additionally, the Treasury will make a deposit in BCRA accounts so that the entity has those pesos available for the payment of interest.
Who can subscribe to LeFi?
The operation is limited to banks and what they subscribe does not count as exposure to the public sector. Financial institutions will be able to acquire the bonds on a daily basis. LeFi and sell all or part of their holdings to the BCRA, ensuring that the mechanism allows liquidity to be adjusted to the needs of the economy. Operations between the BCRA and financial institutions will be carried out at technical value, which eliminates any risk of price fluctuations due to changes in the interest rate.
Preliminary analysis of the impact of the new monetary policy
On July 22, repo transactions between the BCRA and financial institutions will cease, and at that time the new scheme will come into full force.
A few weeks later we will be able to evaluate its initial impacts, but, a priori, due to the nature of the proposed measures, we can begin to analyse their possible implications.
- For Financial Institutions: It does not generate a significant change. In practice, the new instruments operate in the same way as the Pases. They have daily subscription and redemption at the same interest rate and technical value, so they are not subject to price fluctuations. This same thing is passed on to depositors, who will not perceive any change in their operations with banks.
- For the BCRA: It improves its balance sheet, because it returns the Remunerated Liabilities and stops paying interest on that debt. That is to say, it exchanges a liability with a cost (pases) for a liability without cost (pesos). But those pesos are again captured with the LeFi, where the financial cost now falls on the Treasury. It loses the accrual of the securities that it gives to the Treasury in exchange to obtain the LeFis.
- For the Treasury: Swap one liability for another. Redeem debt currently held by the BCRA for the LeFis. Depending on the instrument that is redeemed, the impact on the accrual of interest will depend. Since they are capitalizable bills, the financial cost will have a direct impact on the debt stock and not on the cash-based financial result. It remains to be understood how the guarantee deposit for the payment of interest will operate. Given that the BCRA will keep the LeFis and their capitalization, it requires those pesos for the operation with the financial entities.
What does this imply for Monetary Policy (Monetary Aggregates, Interest Rates and Inflation)?
In order to answer this question in more depth, we need to look at the first few days of trading, especially to understand whether the current rates are still being traded or whether some recalibration is taking place.
If rates remain at the current level, there will be a bias among banks to try to extend the term of their placements in the BCRA to capture the rate differential that the banks currently pay. Lecaps and limit the operation of LeFis to short-term funds. That would put a relatively low ceiling on the amount of these instruments. Today, the amount issued is at $13 trillion and the amount LeFis is $20 trillion.
Cutting off endogenous issuance does not mean zeroing issuance. There are still other mechanisms that can expand or contract the total amount of pesos in the economy. The first and most important will be the purchase and sale of foreign currency in the exchange market. But the new LeFis will not be exempt from generating issuance or sterilization either. Not because of the interest but because of the subscription or redemption of these. Every time a financial entity needs liquidity, it will turn to the BCRA to redeem the money. LeFis and the monetary authority must credit the pesos and buy back the LeFis. This implies an injection of liquidity, but it will be preceded by a real demand for pesos beforehand. Therefore, Its inflationary impact will be limited. The same happens with the purchase and sale of dollars, which are emissions or absorptions that are preceded by adjustments in the real demand for money.
In terms of interest rates, if financial institutions can adjust their position to place the largest possible amount of their excess liquidity in longer instruments, as the operation of Lecaps and resolve liquidity needs with the Lefisthe opportunity cost of money will continue to rise. This means that they may exert slight upward pressure on fixed-term interest rates, as has been happening in recent weeks, and this will impact on lending rates.
In the coming weeks, we will be able to monitor how this entire scheme is put into operation to check whether the final impacts are as we have described or whether there are differences. For now, We are faced with an operation that limits the issuance/absorption of pesos to movements in real demand and therefore should significantly limit its impact on the price formation process. The final effect will depend on how the correction of relative prices progresses and how the exchange rate unification is addressed, the central issues that remain pending.
Source: Ambito
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