Why does the Central Bank issue Leliq?

In one month, Leliq’s expansion was $ 344 billion. Analysts wonder how much room there will be to take that ball apart without inflationary shock

Miguel Pesce gave the market a forceful signal: even if the official speech tends to detract from the mega monetary issue and question their inflationary potential, the facts of the central bank They show that a naive stance on this issue is not adopted either. Quite the contrary, in recent weeks the official had a turn in his policy, which has made it clear that it is aware of the limits of expansion, because while a quill was pouring pesos into the market, at the same time the vacuum cleaner started to get liquidity.

The instrument to make that counterweight was, once again, the issuance of the Leliq, which in one month had an expansion of $ 344,526 million.

Among analysts, this change in attitude left some relief, after the Central had in the first five months of the year drawn to the Treasury $ 1.2 trillion between transfer of profits and transitory advances. But now the reverse side of relief is beginning to be seen, because the cost of this absorption of pesos is the growth of “Leliq’s ball.”

The fear that exists among economists and market analysts is that the Leliqs will end up becoming a real “snowball “like the Lebacs, its predecessors. According to data from the Central Bank, as of June 18 (the date when the last Leliqs tender was held), the Central Bank’s stock of liquidity bills amounts to $ 1.68 trillion, when a month earlier it was $ 1.33 trillion. A year ago, Leliqs’ stock was $ 1.11 million.

Can the bomb be disassembled?

That is why – in light of how the Lebac experience with Federico Sturzenegger and his successors – the question is already being installed as to whether the remedy could be more serious than the disease, to the point that a quasi-fiscal bomb destined to explode in the medium term is being assembled.

“The Leliqs stock increased strongly this year, but could not expect less after the strong issue that took place this year, “said Gustavo Neffa, analyst at Research For Traders. And he warned: “The Central Bank contracts the currency through the Leliqs auctions, which are already taking again a dimension of a potential bomb “.

The memory of Federico Sturzenegger returned to the financial market due to the new letter bomb that the Central Bank set up.

For Ramiro Castiñeira, from the consultant EconometricLeliqs are also a source of concern, due to the impact they could have on the inflationary process. “After the quarantine goes through Covid-19, it is likely that a significant inflationary process will come,” he said.

And he warned: “If in the first part of the year a little more than a trillion pesos was issued and in the second part of the year an equal amount is issued, with that level of monetary issue we may have three-digit inflation in 2021. The role of the Leliqs and how the central bank manages them it is vital to avoid the inflationary process. ”

However, Castiñeira admitted a favorable point regarding the situation that existed with the Lebacs: “Although the Leliqs stock is worrying, until now we are not at the levels reached when Sturzenegger was at the head of the Central. Today the stock of Leliq is equivalent to 30,000 million dollars. But we are not yet halfway through the 70,000 million that Sturzenegger issued

In the same sense, Gustavo Neffa said, who stressed that “we are not yet at the levels of danger that the Central Bank had during the Sturzenegger administration because the exchange rate is different, and also because the relationship with the reserves is lower. ”

Clearly, the concern of analysts – and of the conduct of the Central Bank – about the Leliqs stock lies in how it will be done. when the time comes to disarm that “snowball” of letters issued by the BCRA without going directly to the exchange rate (which occurred when during the Macri government the dollar went from $ 18 to $ 70) or generated an uncontrollable level of inflation.

Gradual devaluation, a key factor

The vision in the market is that, despite the volume that the Leliq ball is acquiring, there is a certain margin of management that is given by the recession that caused the pandemic. And that this allows the Central Bank a margin of maneuver without taking drastic measures in interest rates or in the exchange rate.

“That will depend on many variables, some of which are managed by the Central Bank and others that depend on other areas of the Government, such as the issue of the parity and the product prices“says Leonardo Chialva, partner of Delphos Investment.

He refers to the fact that there are several ingredients that can add to the rise in inflation, something that most analysts foresee to happen when quarantine is lifted and consumption begins to recover.

“Today, as the crisis plunged us into a deep recession, we have inflation falling to a level of 1.5% for several months, with an interest rate of 38% of the Leliqs and Fixed Term of 30%, has temporarily led to the interest rate -when you look at it month by month- be real positive. And that allowed the BCRA to absorb pesos and control this higher emission level in the short term, “Chialva said.

But he warns that we will have to see what happens when we get out of quarantine. “Everything will depend on when inflation starts to appear,” he said. And he remembered that “in 2008 inflation began to revive when the joint, which rose more than inflation. So we will have to see what the Government does with the joint ventures, with the public employees, with the adjustment to the retirees. ”

According to the Delphos Investment analyst, if the Government maintains “a certain orthodoxy on that front, it will be able to pilot, in a very depressed context, that the return to normality inflation is more gradual, With which don’t have to dramatically adjust rates of interest and that way you can manage it “.

As regards the Central Bank specifically, Chialva considered that “as long as it goes marginally devaluing the exchange rate -as you are doing-, that is to say, do not cling to a fixed exchange rate, and go somehow accompanying and having that political capacity, it will be less complex. You will have to be very pragmatic, not stick to dogmas. ”

Some analysts argue that, hand in hand with a possible increase in inflation, also there will come a greater demand for money as a result of increased consumption. Cast would save the Central Bank a little effort at the time of sterilizing the weight plaza.

The City, attentive to the management of the Central with the rates and the exchange rate

The City, attentive to the management of the Central with the rates and the exchange rate.

However, not everyone is so optimistic about the recovery in consumption and the demand for money. “It’s like thinking, good, in the middle of the pandemic there were only four companies open and then there will be eight. But when we look back and see how many there were before the pandemic and the quarantine we see that there were 10 companies open. So no there will be reason to be happy if we go from 10 to eight, “said Ramiro Castiñeira.

And he assured: “After the pandemic and the quarantine the economy will be left with a fiscal deficit of seven points of GDP. If it is not corrected quickly, Argentina is heading to triple digit inflation

Slightly less pessimistic, but also clearly with a significant level of concern, Chialva maintained that “it is clear that all the projections that the government of Alberto Fernández inflation was going to go down, it is not going to be possible.

This situation, even well managed, is going to leave Argentina with very high inflation levels for quite some time. If it is very poorly managed, that will be bad news in a very short time. If it is well managed, may be deferred -pay in installments- the costs of this coronacrisis “.

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