The Government authorized the issuance of $20 billion in Treasury bills to absorb the debt of the BCRA

Minister of Economy, Luis Caputo. (Photo: Gustavo Gavotti)

This Wednesday, the Argentine government officially announced the creation of the **Liquidity Fiscal Letter (LeFi)**, an instrument designed to transfer debt from the **Central Bank (BCRA)** to the **Treasury** and eliminate one of the “taps” of monetary emission. Specifically, this involves the interest payments made by the BCRA on its remunerated liabilities. Official sources told **Infobae** that the full operation will take “a few more weeks.”

The measure was announced in **Decree 602/2024** issued by the **Executive Power** and published in an addendum to the **Official Bulletin**. The decree authorizes the issuance of new bills with a one-year maturity and a maximum nominal value of $20 billion. The initiative was first mentioned in late June during a joint press conference held by the Minister of Economy, **Luis Caputo**, and the president of the BCRA, **Santiago Bausili**.

The ultimate goal of this measure is for the central bank to stop issuing pesos to pay interest on its debt to banks and for the Treasury to assume that cost, requiring an additional fiscal effort from the government.

Luis Caputo and Santiago Bausili. Photos: Gustavo Gavotti

The decree authorizes the Treasury to exchange public debt instruments with the BCRA for the LeFi, which will be capitalized daily. These instruments will only be traded between the BCRA and banks. The monetary authority will continue to manage the reference interest rate, but the Treasury will bear the cost. The regulation also confirms that interest payments will be deposited in a special account as guarantee of payment to the banking entities.

“The MINISTRY OF ECONOMY, through the SECRETARIAT OF FINANCE, shall cover the financial cost of the operations that the CENTRAL BANK OF THE ARGENTINE REPUBLIC carries out for the management of liquidity, as specified in article 4 of this decree. Said cost shall be equivalent to the daily accrual of the monetary policy rate reported by the CENTRAL BANK OF THE ARGENTINE REPUBLIC. The amount to be covered shall be calculated by the CENTRAL BANK OF THE ARGENTINE REPUBLIC and shall be deposited as collateral in an account established for that purpose in the aforementioned institution,” the regulation states.

In parallel, the Finance Ministry also launched a new tender for debt in pesos on Wednesday, facing limited maturities.

The payment calendar for the debt in pesos indicated that on Friday, Finance was due to pay **just over 1 billion pesos** on some Lecap. Before the placement of Treasury bills on Wednesday, the market debated how the Ministry of Economy would adjust the interest rate.

In recent hours, the economic team fine-tuned details for the issuance of the new fiscal letter that will replace the BCRA’s remunerated liabilities. The Ministry of Finance also proceeded with a new tender on Wednesday.

“The Ministry of Finance announces that in today’s tender **$4.24 billion was awarded** with offers received totaling $5.91 billion. The proceeds of this tender, above the maturities of $1.05 billion, will be deposited in the Treasury account at the BCRA,” posted the Secretary of Finance, **Pablo Quirno**, on his X account.

Unlike other operations, this tender did not set a minimum rate in advance. All rates were determined by the auction conducted by Quirno’s secretariat. The instruments awarded on Wednesday were three Lecap: one maturing on September 13 at a rate of **4.08% monthly**, another on October 14 at **4.19% monthly**, and a third in January at **4.50% monthly**.

The economic team is moving forward with the transfer of the BCRA debt. Gustavo Gavotti

“This week we expect to have some news regarding the new monetary policy letters that would replace the repos. According to the press, these will be called “Fiscal Liquidity Letters” and the Central Bank will obtain them by exchanging adjusted sovereign bonds for CERs (inflation-linked bonds) maturing in 2025, 2026 and 2027,” mentioned PPI (an economic consultancy firm).

Following the announcement by Caputo and Bausili ten days ago, the stock of remunerated liabilities of the BCRA to be eliminated **fell by 30 percent**. This brought the total to 11 billion pesos, of which regarding 7 billion correspond to the public sector and another 4 billion to private financial entities, estimated **Romano Group**, another economic consultancy firm.

A report by **EcoGo** indicated that “on the first business day following the announcement of Phase 2, the payment of Treasury bonds (dual bond + Lecap) and the settlement of last week’s tender took place simultaneously. Reserves in the Central Bank increased by $4 billion (attempting to balance figures at the beginning of the month) while the Government’s deposits in the BCRA increased by $2.8 billion, totaling $6.8 billion. The monetary base temporarily rose to $24 billion,” the firm estimated.

“The other side of the coin was a $4.9 billion drop in remunerated liabilities and a $1.9 billion sale of bonds to the BCRA (dismantling of the majority of PUTs by a bank), so net financing to the Treasury amounted to only $1 billion. From a monetary perspective, the Central Bank expanded by almost $2 billion due to the dismantlement of PUTs and then contracted $2.8 billion due to an increase in zero-rate deposits at the BCRA (net financing of the tender). In the aggregate, the Government’s actions were slightly contractionary in this last round regarding pesos.

“Meanwhile, the Central Bank issued a communication that exempted the LECAPs acquired in the secondary market from the cap on exposure to the public sector, continuing to prepare the ground for the new monetary policy instrument,” concluded the consultancy firm.

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Argentina’s New Fiscal Liquidity Letter: A Move Towards Monetary Stability

The Argentine government recently took a significant step toward reducing monetary expansion by introducing the Liquidity Fiscal Letter (LeFi). This instrument aims to transfer the debt held by the Central Bank of Argentina (BCRA) to the Treasury, thereby curtailing one of the primary avenues for monetary emission – the interest payments on the BCRA’s remunerated liabilities.

Key Features of the LeFi

The LeFi, authorized by Decree 602/2024, will be issued in the form of new bills with a maximum value of $20 billion at nominal value. The LeFi is designed to be a short-term instrument, lasting for one year, and it will be traded exclusively between the BCRA and commercial banks. The BCRA will continue to manage the reference interest rate, but the cost will be borne by the Treasury.

Here are some key aspects of the LeFi:

• The Treasury will acquire LeFi by exchanging public debt instruments held by the BCRA.
• The interest accrued on the LeFi will be capitalized daily.
• The BCRA will deposit the accrued interest in a special account as collateral for the payment of liabilities to banks.
• The Treasury will be responsible for covering the financial cost of the LeFi operations.

Objectives of the LeFi

The LeFi initiative serves several crucial objectives:

• **Reduce Monetary Expansion:** By transferring the BCRA’s debt to the Treasury, the LeFi aims to eliminate the monetary expansion associated with the BCRA’s interest payments on remunerated liabilities.
• **Enhance Fiscal Discipline:** The Treasury’s responsibility for the cost of LeFi promotes fiscal discipline and ensures transparency in government debt management.
• **Strengthen Monetary Policy:** The LeFi facilitates the BCRA’s ability to effectively manage monetary policy by removing the constraint of having to generate pesos to fund interest payments on its own liabilities.
• **Support Economic Stability:** By controlling monetary expansion and improving fiscal health, the LeFi is expected to enhance economic stability and foster long-term growth.

Implementation and Market Impact

The implementation of the LeFi has been carefully orchestrated by the Argentine economic team. The Treasury issued a new tender for debt in pesos, seeking to absorb the existing debt obligations. The auction was successful, raising $4.24 billion.

The LeFi has been met with mixed reactions in the market. While the initiative is generally seen as a positive step towards fiscal discipline and monetary stability, some investors have expressed concerns regarding the increased fiscal burden on the Treasury.

Potential Benefits and Challenges

The LeFi has the potential to deliver significant benefits to the Argentine economy, including:

• Reduced inflationary pressures
• Improved fiscal sustainability
• Enhanced credibility in financial markets
• Strengthened economic growth potential

However, some challenges need to be addressed for the LeFi to achieve its full potential:

• The Treasury needs to ensure that it has sufficient resources to meet the cost of LeFi operations.
• The government should communicate clearly with investors to mitigate potential concerns regarding the LeFi’s impact on fiscal and monetary policy.
• The LeFi should be accompanied by broader structural reforms aimed at addressing Argentina’s long-standing economic challenges.

Conclusion

The introduction of the Liquidity Fiscal Letter (LeFi) represents a significant milestone in Argentina’s efforts to achieve monetary stability and fiscal discipline. While challenges remain, the LeFi has the potential to significantly improve the country’s economic outlook and enhance its standing in international financial markets. The success of the LeFi will depend on careful implementation and a commitment to broader economic reforms.