Newly imposed liquidity measures aimed at containing a nascent peso sell-off have stoked tensions between President Javier Milei and the country’s banks, a sector that was largely aligned with his policy goals but now sees its profitability under threat. Bankers argue that the new provisions, which require institutions to hit reserve requirements on a daily basis instead of monthly, are inefficient and costly. Major financial institutions are preparing a document with recommendations for operational changes to present to the Central Bank, according to two people with direct knowledge of the matter.
The discontent became evident during a virtual meeting on Thursday, when Darío Stefanelli – the Central Bank’s head of issuance and regulation – addressed more than 100 investors from institutions including Banco Galicia, Banco Santander, Banco Macro and BBVA Argentina, said the people, speaking on the condition of anonymity to discuss private conversations. Stefanelli, who is known for patiently explaining regulations using audio clips, responded to a barrage of complaints, stating “I only explain the rules,” according to one of the people.
Galicia, Santander, Macro and BBVA declined to comment. Neither leadership from the monetary authority nor C-suite executives of private banks participated in the call on Thursday, according to a Central Bank official who asked not to be named. Argentine policymakers routinely organise monthly calls at a technical level to clarify new norms, the person added. Tensions started building in late July, when the government decided to drain pesos from the market to curb demand for dollars by selling local-currency debt. The peso lost more than 12 percent last month, its worst performance since Milei devalued the currency upon taking office in December 2023. The government’s moves triggered a liquidity crunch that pushed real interest rates to double digits.
The standoff escalated August 13, when the government managed to refinance only 61 percent of maturing peso debt, covering a portion of the remainder with holdings at the Central Bank. That effectively injected about six trillion pesos (US$4.6 billion) into the economy. As a result, the monetary authority ordered banks to meet reserve targets daily, raised certain types of reserve requirements and toughened penalties for non-compliance. The hike in reserve requirements forced banks to dash for pesos to meet their targets, which in a liquidity-starved market drove up funding costs. The one-day repo rate quickly jumped to 80 percent annualised after the debt auction, while the government’s one-month LECAP notes in the secondary market reached 71 percent, according to data compiled by Bloomberg. Top-rated corporates in search of ultra-short-term financing ended up paying more than 100 percent annualised, according to two people with direct knowledge.
Economy Minister Luis Caputo said this would be the government’s response whenever excess pesos remain in circulation. “If incomplete rollovers are interpreted as monetary expansion, those pesos will be absorbed – whether through remunerated reserves, non-remunerated reserves, or other tools,” he said last week in a post on X, referring to requirements that can be met by holding securities instead of cash. The measures helped reverse some of the recent peso depreciation, which had threatened to derail Milei’s push to quell inflation and, as a result, the administration’s prospects in the upcoming midterm elections. “What did they expect? That I’d free up cash so they could attack the exchange rate? No way,” the President said in a July 28 livestream.
Higher rates and stricter reserve requirements cut directly into banks’ margins. After a year of rapid credit growth, many institutions extended long-term loans funded with short-term liabilities, the costs of which have risen sharply. Profitability, already under strain, has shrivelled further. The expected drop in profitability will only become evident in upcoming earnings reports, but the market is already pricing it in. Argentine bank stocks have already fallen as much as 8.2 percent in New York over the past five days. “Large-cap lenders such as Macro, Galicia, BBVA and Santander may be able to withstand the shock,” Walter Stoeppelwerth, chief investment officer at local brokerage Grit Capital Group, said in a report to investors. “But smaller institutions risk being squeezed to the point of failure.” With funding costs above 44 percent – compared with expected inflation of 21 percent over the next 12 months – bank margins are collapsing. “Systemic casualties cannot be ruled out,” Stoeppelwerth said.