BCRA seeks to promote demand for government bonds

BCRA seeks to promote demand for government bonds

From June 1st the Banco Central de la República Argentina (BCRA, the central bank), will allow banks to hold Treasury bonds as part of their reserve requirements. The move, which seeks to deepen the domestic market for public securities, is likely to yield modest results.

Under the previous rules, banks could hold their reserve requirements as current-account deposits, Leliq notes (short‑term BCRA securities), or BONTE 2022 government bonds. The new regulatory framework expands the universe of government bonds that count towards banks' reserve requirements to include all peso-denominated Treasury bonds with maturities of 180-450 days.

The monetary authorities hope that banks will take advantage of the change to rebalance their portfolios and migrate from BCRA debt to central government debt. Banks currently hold about Ps760bn (US$8bn, or 2% of GDP) in Leliq notes that count towards reserve requirements; the BCRA intends banks to exchange these notes for higher-yielding Treasury securities. This would allow the government to reduce its reliance on central bank financing, which has increasingly been driving inflationary pressures. The move comes at a time when the government faces heavy maturities, with more than Ps1.2trn (US$12.7bn) falling due in June-August.

There are various factors that will encourage banks to migrate to Treasury securities. One is that government bonds pay an annual interest rate of about 41% on average, compared with 38% on Leliq notes. Another is that migrating will enable banks to boost their profitability by avoiding a local government tax imposed by the city of Buenos Aires (the capital) on purchases of Leliq notes. However, critics of the new policy argue that it will increase the banking sector's exposure to the public sector and compromise the health of the financial system.

On balance, we believe that banks' migration from Leliq notes to Treasuries will be moderate, as government securities carry greater implicit risk (statutorily, BCRA debts must be paid in full through monetary emission, whereas government securities issued under local law can be unilaterally reprofiled). We also believe that risks stemming from banks' exposure to the public sector will be contained somewhat by a backstop mechanism that allows banks to sell Treasuries to the BCRA if liquidity pressures emerge.

Our forecasts are unchanged. Domestic private demand for government securities is unlikely to rise sufficiently to obviate the need for central bank financing. By the same token, however, we do not expect the measure to materially increase banking sector risk.

www.prensa.cancilleria.gob.ar es un sitio web oficial del Gobierno Argentino