Argentina central bank creditworthiness questioned
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Argentina central bank creditworthiness questioned

Rapid growth in bond issuance; banks keen for returns.

by Rob Dwyer

The increasing tendency of Argentina’s banks to rely on income from the purchase of central bank securities is leading to questions about the financial system’s stability. 

The growth in the issue of these Lebac (Letras del Banco Central) and Bonac (bonds of the national treasury) notes has been rapid in the past year, as the central government seeks to partially sterilize the exponential growth in the monetary base to contain inflation ahead of the election. 

The central government has already issued over Ps31 billion ($3.4 billion) of Bonacs this year, having switched away from Lebacs after coming close to the ceiling that the central bank has for directly financing the treasury. Bonacs enable direct borrowing by the treasury and avoid direct assistance from the central bank.

The government is increasingly relying on Bonacs to finance the 15 percentage point gap between total spending and ordinary incomes – which is double the rate seen in 2004. Meanwhile, the government is finding a welcome source of demand from banks that are unable to generate the same level of return – albeit still below inflation – through other sources because of regulations and caps on the level of interest rates and fees they can charge customers.

Moody’s notes that regulation and inflation have combined to reduce the real income of banks to close to zero or negative. The ratings agency projects nominal loan growth to slow to 18% in 2015, from 20% last year, in response to concerns about the impact of the country’s weakening economy on borrowers’ credit worthiness. 

Moody’s says: “This will result in a slowdown in nominal earnings growth and a contraction of the loan book in real terms, as banks continue to reduce their exposure to riskier, but more profitable, classes of borrowers. Instead, they will increase their holdings of liquid assets such as central bank bills, which yield negative real interest rates.”


“[Local banks] don’t see a risk. Some of the foreign banks [operating in the system] see the risk and have set limits because the balance sheet of the central bank has been deteriorating”

Maria Valeria Azconegui, Moody’s

Increased exposure

Maria Valeria Azconegui, banking analyst at Moody’s in Buenos Aires, says she has raised the issue with banks. 

“There has been this increasing exposure to the central bank through these notes, which are short-term but are just being rolled over – they are never cancelled,” she says. “But when we ask if banks are concerned about this exposure, they say they are not: they say it is attractive because it matures in 90 days, has no credit costs and there is liquidity there. They don’t see a risk. Some of the foreign banks [operating in the system] see the risk and have set limits because the balance sheet of the central bank has been deteriorating.”

Some observers also suggest there has been a crowding-out effect, with the government absorbing liquidity in the banking system at the expense of credit in the wider system, which could be a partial cause of the current recession.

When asked, Enrique Cristofani, president of Santander Río, says: “The bank has set itself a limit to the amount of Lebacs and Bonacs we can keep on the balance sheet. Therefore, each deposit we get from the private sector is lent to finance families and private sector companies.”

Azconegui says the banks are likely to have even more appetite as they retrench from segments that aren’t subject to mandated lending requirements and instead opt to invest in these instruments to keep their balance sheet liquid and reduce credit-risk exposure. 


The risks of inherent in these securities relates to the underlying solvency position of the central bank and treasury. Javier Ortiz Batalla, chief economist at Banco de la Cuidad de Buenos Aires, says it is important to draw a distinction between gross and net foreign exchange reserves. While gross reserves are reported at about $35.5 billion, Ortiz estimates the net figure is around $17 billion. The difference reflects liabilities contained within the reserves – such as inflows from China, the issuance of Lebacs in US dollars, and USD reserve requirements from the banks. 

Ortiz says there are different estimates of the net position, reflecting how strict interpretations are, and there is lack of clarity around some of the data.

Crucially, Ortiz projects at the end of the year the gross position will have fallen to between $27 billion and $28 billion and the net position will be $14 billion. In 2016 there are $17 billion of amortization and debt payments due which will push the solvency of the central bank.

The stress on the government’s finances next year is the main reason why whoever wins the presidential election at the end of this year is expected to negotiate with the holdouts and seek re-entry into the international markets. However, there will be obstacles for securing agreement for either likely winner: former vice-president Daniel Scioli will have difficulties in securing agreement given his closeness to the Cristina Kirchner, while mayor of Buenos Aires Mauricio Macri may face a political challenge to secure a majority in congress. 

Meanwhile, analysts say that banks that continue to rely on the income from these securities should begin to question the assumption that these are risk-free products. As they grow in volume there are fears they could pose a systemic risk to Argentina’s banking system.

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