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Argentina auctioned around 2.96 trillion pesos ($3.7 billion) in government bonds in its national currency on Wednesday. This is a significant step forward as the government seeks to resolve a spiraling pile of short-term arrears at the central bank from local creditors.
Investors, mostly Argentine banks whose short-term notes had recently expired, bought 964 billion pesos worth of new government bonds due in 2025 and 2026. The bonds have yields of minus 15.95 percent and minus 4.53 percent. They are linked to inflation and partially protect holders from the rampant inflation in Argentina.
They also purchased 2 trillion pesos worth of 27-day Treasury bills with a yield of 8.66 percent, according to the Department of Economic Affairs. The total value of the tender was $3.7 billion at the official exchange rate.
The short-term banknotes that Argentina is trying to phase out were issued by the central bank to absorb surplus pesos in the economy created by the previous government's reliance on money printing to finance its chronic budget deficit. The central bank has resorted to more money printing to pay the skyrocketing interest rates on this mountain of debt, which now totals 26 trillion pesos – almost 10 percent of gross domestic product.
However, Argentina's new President Javier Milei, a libertarian economist, is keen to stop money printing and avoid a scenario in which creditors suddenly exit short-term bonds. Cleaning up the central bank's balance sheet is an essential prerequisite for lifting the country's strict currency controls and ultimately fulfilling his campaign promise to dollarize the economy, he said.
The tender came after Argentina's central bank – led by Economy Minister Luis Caputo's former investment bank colleague Santiago Bausili – took measures on Monday to stop banks from holding short-term instruments. It stopped issuing 28-day notes, called Leliqs, which paid 133 percent annual interest, and instead only offered one-day notes, called Pases, paying 100 percent annual interest.
With an annual inflation rate of over 160 percent, the real interest rates on short-term bonds slide deep into negative territory.
Analysts had said the new government bonds would have to offer interest rates above Pases' monthly rate of 8.2 percent to entice local banks to abandon the one-day notes.
Argentine banks questioned Milei and Caputo's focus on paying off short-term debt, arguing that it was not a pressing issue. They said it would be liquidated by inflation and eventually resolved as demand for pesos and government debt rises if Milei's ambitious economic reforms succeed.
Milei has promised sweeping austerity measures to eliminate Argentina's budget deficit by the end of 2024.
“Increasing the national debt burden while offering high interest rates and fulfilling the promise of balancing the budget means they will have to double down on austerity measures,” said Amilcar Collante, an economist at the National University of La Plata. “This will be very hard on the Argentine economy, which has had a high deficit for years.”
Santiago Manoukian, research director at economic consultancy Ecolatina, said banks were relieved that Milei and Caputo did not opt for a more extreme solution to the short-term debt problem, such as a forced swap similar to the “Plan Bonex” adopted by the Argentine government in 1990 carried out.
However, he added that banks were still “very upset” about their declining profitability as inflation liquidated their assets.
“The banks are not happy, but they have no choice, they cannot invest their excess pesos anywhere else,” Manoukian said.