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Summary of Argentina: Fourth Phase of Lebac Reduction Programme

Core Content

On 21 November 2018, the Argentine Central Bank (BCRA) executed the fourth phase of its Lebac (Ley de Emergencia de Bonos de Tasa Fija) reduction programme. The objective of the programme is to reduce excess liquidity in the financial system and stabilize the monetary base.

Key Details

• Lebac Maturity: A total of ARS160.5bn in Lebacs matured on 21 November 2018.
• Roll-over Amount: BCRA decided to roll over only ARS40bn of the matured Lebacs, leaving ARS120.5bn to mature.
• Auction Outcome: The actual auction amounted to ARS39.7bn, resulting in an excess liquidity of ARS120.8bn (~USD3.3bn) in the system.
• Lecap and Lecer Offers: To absorb excess liquidity, the National Treasury offered ARS30bn in Lecaps (short-term deposits) and ARS4bn in Lecers (inflation-linked bonds).
• Mutual Funds Allocation: An estimated ARS16bn was allocated to mutual funds, further reducing liquidity.
• Monetary Base Shrinkage: As a result of these measures, the monetary base was reduced by approximately ARS33.7bn, leaving around ARS71.1bn (~USD2bn) in the system.
• FMI Agreement: The BCRA aims to maintain a zero growth in the monetary base as per the FMI agreement, though it has flexibility due to seasonal factors.
• Monetary Base Adjustments: The BCRA has room to increase the monetary base by 6.3% month-to-month in December and 1.7% in June 2019.

Structural Outlook

• Interest Rates and Growth: The combination of current real interest rates and negative economic growth is expected to negatively affect public debt dynamics.
• Credibility of Devaluation Reduction: The credibility of the devaluation reduction is crucial; if perceived as temporary, market agents may anticipate a resumption of higher devaluation rates.
• CDS Position: The team maintains a long 5-year CDS in relative value with other countries, indicating a view on Argentina's credit risk.

Excess Liquidity Absorption

• Lecaps and Lecers: The National Treasury absorbed liquidity through Lecaps (ARS30bn) and Lecers (ARS4bn), though not all offers were accepted.
• Accepted Offers: The Economy Ministry accepted ARS30bn in Lecaps and ARS3.7bn in Lecers.
• Mutual Funds: Mutual funds received an estimated ARS16bn in allocations, contributing to liquidity reduction.

FX and Market Outlook

• FX Regime: The current FX regime is analyzed in detail in a separate report titled "Argentina FX regime - Understanding target zones".
• Depreciation Trends: The expected depreciation trend of the Argentine Peso (ARS) is summarized in Fig. 2, which shows the percentage to lower and upper bands, NDF implied yields, and the no-intervention area.
• No-Intervention Area: The no-intervention area is expected to be at 58, with the USDARS FX rate at the spot level.

Legal and Regulatory Information

• Non-Independent Research: This document is non-independent research and is subject to the UK Financial Conduct Authority (FCA) rules. It is a marketing communication and not investment research.
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Additional Disclosures

• Options and ETFs: The document includes important disclosures regarding options and ETFs, highlighting their risks and the potential for conflicts of interest.
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Conclusion

The fourth phase of the Lebac reduction programme resulted in a reduction of excess liquidity and the monetary base. Despite these measures, structural challenges such as real interest rates and negative growth remain. The BCRA has shown commitment to maintaining monetary base stability, but the long-term success of the programme depends on the credibility of the devaluation reduction and the effectiveness of the liquidity absorption tools used.