BUENOS AIRES, April 24 (Reuters) - Argentina’s central bank is ramping up issuance of short-term debt to soak up pesos and contain one of Latin America’s quickest inflation rates, but risks creating another financing headache for the next government.
So far this year, the central bank has issued far more short-term “Lebac” securities, which typically range from three-months to one-year in maturity, than in all of 2014.
This is helping mop up some of the liquidity resulting from President Cristina Fernandez’s expanding the money supply to finance populist subsidies and far-reaching welfare programs.
Between January 1 and April 1 the central bank issued “Lebacs” worth 310.70 billion pesos, compared with 261.45 billion pesos worth in the whole of 2014, Thomson Reuters data showed. To attract takers, it has also nearly doubled interest rates payable on the Lebacs in the past two years.
By doing so, the central bank is containing the upward spiral in prices that is a top voter concern ahead of October’s presidential poll. Fernandez cannot run for a third term, but her ruling party is seeking to hold onto the presidency.
But the cost of this quick fix, rather than reducing the deficit, is a swelling of the central bank’s debt holdings and a sharp rise in interest payments financed from its profits.
This means fewer profits to transfer to the next government at year-end. Those profits accounted for between 7 and 8 percent of government revenues last year, economists estimate.
“The central bank’s strategy is to delay real solutions. The next government will be the one paying the price,” said Aldo Pignanelli, a former chief of Argentina’s central bank who is now advising opposition presidential aspirant Sergio Massa.
The central bank declined to comment.
By issuing so much debt, the central bank is also crowding out loans to the private sector, economists say.
Buenos Aires-based think tank Estudio Bein estimates the central bank’s profits will tumble to about 7.6 billion pesos this year from 95.6 billion in 2014 in the light of interest payments on those Lebacs.
“Once you have paid the interest, there will be no profits left,” said Federico Sturzenegger, economic adviser to Mauricio Macri, a pro-business front-runner in the presidential race and mayor of Buenos Aires. “Also, the interest on these Lebacs creates money supply dynamics of its own.”
Sturzenegger underscored that his camp’s aim was to reduce reliance on central bank transfers quickly and instead raise funds through subsidy cuts, stronger economic growth and possibly sovereign debt issuance.
However, the next president will take over the helm of an economy that faces restricted access to capital markets due to Argentina’s battle with New York hedge funds in U.S. courts over debt it defaulted on in 2002.
Thus the additional financing constraint caused by the central bank’s inflation quick fix will likely put more pressure on the new administration to strike a deal with the funds.
“They will be desperate for financing and there are now fewer and fewer financing options,” said Siobhan Morden, emerging market debt strategist at Jefferies. (Additional reporting by Hernan Nessi, Jorge Otaola and Walter Bianchi; Editing by Richard Lough and Dan Grebler)