Argentine banks raise position in one-day notes

BUENOS AIRES: Argentina’s banks are fleeing central bank notes meant to absorb pesos from the economy, rolling over the lowest amount on record of the instruments in the lead up to the inauguration of President-elect Javier Milei.

Lenders rolled over only 1.8% of the 1.6 trillion pesos of the so-called Leliqs at an auction on Tuesday, according to people with direct knowledge of the matter.

That’s the lowest renewal rate since 2018, when the notes were first offered, and compares with a rate of more than 100% prior to the Nov 19 election.

While markets welcomed Milei’s election and concerns about a surge in withdrawals amid his pledge to dollarise the economy failed to materialise, the growing pullback has been stirring tension in local markets.

If banks continue to flee Leliqs, which have 28-day maturities and are used by the central bank to absorb pesos, the move could unleash more pesos into the economy and boost inflation that’s already at 143% a year.

In the short-term, seasonal demand and holiday spending is likely to absorb that additional liquidity, according to Juan Manuel Pazos, chief economist at TPCG Valores in Buenos Aires.

But once that period passes, pressure will begin to mount.

“Without a real effective exchange rate correction large enough to flatten depreciation expectations in the following months, that mass of liquidity will probably add to inflationary and parallel forex pressures,” Pazos said.

The parallel peso, which Argentines use to skirt currency controls, trades at around 943 per US dollar, compared with 363 per US dollar on the official rate.

Investors widely expect Milei’s government to devalue the currency, which has lost more than 80% over the past four years and which the president-elect has called “something nobody wants”.

Argentine lenders currently have US$16.6bil worth of Leliq holdings at the official exchange rate, about half of the amount they held just after the election.

As they ditch the notes, banks have been increasing positions in so-called “repos”, one-day peso notes, to ensure that they could accommodate potential policy changes or a jump in peso withdrawals.

Repos now account for around 70% of the interest-bearing liabilities held by banks, from less than 32% at the beginning of October. — Bloomberg