Argentina: Central bank turns counterparty on debt swaps

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By:
Jason Mitchell
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The Argentine central bank will shortly start operating as a counterparty in the local swap market traded at the country’s main fixed-income exchange, the Mercado Abierto Electrónico.

Argentina has weak long-term capital markets and the central bank will start intervening in the swap market within the next two months as a way to stimulate greater medium- and long-term commercial lending at fixed rates.

Eventually, it wants to improve the liquidity in maturities of up to five years and a combined sum of up to Ps12 billion ($4 billion).

MAE will trade standardized interest rate contracts, whereby one intervening bank – at first the central bank – will pay on a monthly basis its financial counterparty a fixed interest rate in exchange for a 30-day Badlar, time deposit rate. The difference between the rates is paid or received at each maturity date.

Alberto Saravia, chief executive of Saravia Financial Management, a local fund manager, says: "Swaps are a new instrument at MAE and the active participation of the central bank is necessary for several months until the member banks gradually begin acting on both sides of the marketplace.

"The bulk of commercial bank funding in Argentina is made up of time deposits of up to 180 days, with a very high concentration in 30-day maturities. This maturity structure tends to shorten even further with inflationary expectations like the ones we are seeing in Argentina."

Until now, the Rosario Stock Exchange has operated the Rofex market, a forward market for three types of 30-day Badlar, time deposit rates which are calculated by the central bank on the basis of the levels paid by private banks to their clients, the rates paid by state banks to their customers, and an average of the two.

However, these contracts are short term and lack daily volume and liquidity. Under the new initiative, bank deposits will still have short-term tenors but, by means of the swap market, their level will become more predictable. With banks’ liabilities pricing under more control for longer periods of time, longer-priced fixed-rate products should develop, including residential and commercial mortgages, corporate loans, and leasing contracts.

"Furthermore, the securitization of these products could expand the domestic capital markets by attracting issuers and offering more alternatives to potential investors," adds Saravia.

Argentina’s long-term capital markets are still quiescent, as the country lacks a credible agency to report inflation, is widely seen as markedly under-reporting their true level, and continues to have capital controls in place. Official inflation stands at 8.8% annualized but leading local economists estimate that it is at more than 20%.

The country recently experienced a 21-day farmers’ strike, following the government’s move to raise the tax level on soya exports. Economists believe the strike pushed inflation levels even higher and are afraid that the country is on the verge of "accelerating inflation".

The lack of credible inflation figures has resulted in the aggressive selling of bonds adjusted for the official inflation rate (known as CER-adjusted). Some of them have market prices providing yields of 20%, more than double the official inflation rate.

In April, Argentina issued a bond, called Bonar 2013, for a nominal value of Ps867.2 million with a yield of 13.3%, the most expensive rate since the country re-entered the financial markets after restructuring its sovereign defaulted debt in mid-2005. This was the first bond issued under Cristina Kirchner’s presidency.