Argentina auctions $3.7bn worth of peso debt

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Argentina auctioned about 2.96tn pesos ($3.7bn) worth of treasury debt denominated in its local currency on Wednesday, a significant step forward as the government seeks to unravel a spiralling pile of short-term central bank arrears held by local creditors.

Investors, primarily Argentine banks, whose short-term notes had recently expired, bought 964bn pesos of new treasury bonds maturing in 2025 and 2026. The bonds have yields of minus 15.95 per cent and minus 4.53 per cent. They are linked to inflation, partially shielding holders from Argentina’s rampant inflation.

They also bought 2tn pesos’ worth of 27-day treasury notes with a yield of 8.66 per cent, according to the economy ministry. The total tender was worth $3.7bn at the official exchange rate.

The short-term notes Argentina is trying to phase out were issued by the central bank as a way of soaking up excess pesos in the economy, created by the previous government’s reliance on money printing to finance its chronic fiscal deficit. The central bank has resorted to more money printing to pay exploding interest on this debt pile, which is now 26tn pesos — almost 10 per cent of gross domestic product.

However, Argentina’s new president Javier Milei, a libertarian economist, is keen to halt money printing and avoid a scenario in which creditors suddenly exit the short-term notes. Clearing the central bank’s balance sheet, he has said, was an essential precondition for removing the country’s strict currency controls and eventually fulfilling his campaign promise to dollarise the economy.

The tender came after Argentina’s central bank, — directed by economy minister Luis Caputo’s former investment bank colleague Santiago Bausili — on Monday moved to discourage banks from holding the short-term instruments. It stopped issuing 28-day notes, known as leliqs, which paid 133 per cent annual interest, instead offering only one-day notes, known as pases, paying 100 per cent annually.

With annual inflation running above 160 per cent, that takes the real rates on short-term notes deep into negative territory.

Analysts had said the new treasury notes needed to offer rates higher than the 8.2 per cent monthly rate of the pases to entice local banks to abandon the one-day notes.

Argentina’s banks have questioned Milei and Caputo’s focus on clearing the short-term debt, arguing that it was not an urgent problem. They said it would be liquidated by inflation and eventually resolved as demand for pesos and sovereign debt rises if Milei’s ambitious economic reforms succeed.

Milei has pledged sweeping austerity measures to eliminate Argentina’s fiscal deficit by the end of 2024.

“Increasing the public debt burden, while offering high interest rates and fulfilling the promise to reach fiscal balance means they will have to double down on austerity,” said Amilcar Collante, an economist at La Plata national university. “This will be very tough for Argentina’s economy which has been running a high deficit for years.”

Santiago Manoukian, head of research at economics consultancy Ecolatina, said banks were relieved that Milei and Caputo had not opted for a more extreme solution to the short-term debt problem, such as a forced swap similar to the “Plan Bonex” that Argentina’s government carried out in 1990.

But he added that the banks were still “very annoyed” about their falling profitability as inflation liquidates their assets.

“The banks are not happy but they have no other option, there is nowhere else to put the excess of pesos they have,” Manoukian said.