Soaring interest rates on peso notes are putting banks under pressure as a liquidity crunch unfolds, driven by government actions to defend the local currency. The interest rates on Argentine peso notes are experiencing a significant increase, exerting pressure on banks in the context of a liquidity crunch that has arisen from government initiatives aimed at defending the local currency.
The one-day peso repo rate increased significantly to an average of 65 percent on Tuesday, marking the highest level since May 2024, after briefly reaching triple digits during the final hour of intraday trading last Friday. Simultaneously, the yield on short-term Treasury notes, referred to as Lecaps, attained 59.5 percent, marking its peak since October 2024, a period characterized by an inflation rate of 193 percent, nearly five times the present rate. “The Treasury left very few pesos in the market, and several banks – especially smaller ones – ran out of liquidity and had to scramble for cash, offering higher rates on interest-bearing accounts, selling Lecaps, or borrowing via repos and bank calls at steep rates,” stated Emiliano Merenda, chief executive officer of local broker Pharos Capital.
The Central Bank has implemented a tightening of monetary policy, while the government has established mechanisms aimed at absorbing pesos to stabilize the currency. This comes in response to a seasonal decline in exports and growing investor apprehensions regarding the upcoming congressional elections in October. The monetary authorities of the country have engaged in the sale of Lecaps while simultaneously increasing reserve requirements for money market funds. Although the strategy might entice carry trade flows, it has resulted in a liquidity drain, compelling numerous banks to seek funding in the repo market at elevated rates.
“Liquidity dried up and right now there’s no lender of last resort,” stated Belisario Álvarez de Toledo, head trader and partner at True Grit Capital in Buenos Aires. “No one is stepping in to provide liquidity.” The National Bank Association and the Central Bank refrained from providing comments, whereas the Foreign Bank Association did not promptly address inquiries.
The measures have provided a degree of relief for the peso, which is currently valued at approximately 1,273 to the dollar on Tuesday, having strengthened from an intraday low of 1,293 observed on Monday. The pressures on the peso have intensified due to month-end dynamics, during which banks are required to fulfill reserve obligations, resulting in reduced flexibility in the management of short-term liquidity. “This is going to affect banks’ solvency, especially the smaller ones, because funding costs have soared,” Merenda stated. Merely a fortnight ago, their borrowing rates were under 30 percent. Now they are required to pay 55 percent.
Some analysts have cautioned that a stringent monetary policy may impede the central bank’s ability to augment foreign currency reserves in accordance with its agreement with the International Monetary Fund. The government’s reluctance to purchase dollars in order to avoid printing pesos has resulted in a failure to meet its end-June reserve target, necessitating a waiver from the IMF. Currently, the exchange rate is experiencing pressure, and local liquidity is constrained, prompting the Treasury to purchase dollars. However, this is occurring at a relatively elevated exchange rate due to the peso’s depreciation in recent months.
In light of recent developments, a significant number of investors are avoiding peso assets entirely. Despite the potential for high returns, the prevailing volatility and policy uncertainty are prompting funds and savers to opt for borrowing pesos instead. This strategy is employed to dollarize portfolios rather than maintain investments in local instruments. The decline in demand for local currency surpasses the government’s attempts to control the money supply, indicating a challenging future for Argentina’s financial system during this critical election period.
Álvarez de Toledo remarked that the surge in funding costs cannot persist for an extended period without posing a significant risk to the solvency of banks. “Argentine banks depend significantly on very short-term funding, thus a sudden increase in short-term interest rates exerts considerable pressure on their profit margins,” he stated. “This issue requires resolution – the system cannot operate effectively without liquidity.”