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The government is already paying debt with Treasury dollars
Ambito Financiero
January 24, 2012

By Pablo Wende

It is because there are no freely-available reserves.
They are for payments due to the IADB and World Bank

The government because to pay debt maturities in 2012 by steering dollars from the Treasury acquired from the market, which is to say, without taking them from the Central Bank's reserves. While the amounts in this first part of the year are small, it's seen as relevant because it represents a change in policy from the last two years, in which it dipped its hands exclusively into the reserves to pay out principal and interest on debt.

The stumbling block the Casa Rosada faces is that there are no more Freely-Available Reserves (RLD) to make debt payments. The RLD are defined as the excess of reserves measured in pesos in relation to the level of the monetary base. The strong increase in the amount of money in circulation and the simultaneous drop in reserves from the latest payments of the year, especially the GDP coupon for US$2.5 billion in December, deteriorated this ratio. As a consequence, today there are not only no RLD, but the level of reserves doesn't even cover the monetary base.

New fund

The 2012 Budget assumes the creation of a new Debt Reduction Fund made up of reserves to pay debts for up to US$5.6 billion, something that is still pending. However, to pay debt with organizations doesn't require this structure. It happens that the modification of the Law of Convertibility in 2005 established the Freely-Available Reserves designation to pay debts with multilateral organizations. First it was done in the payment of the debt to the IMF, but starting in 2010 it was extended to others, particularly to the IADB and the World Bank.

However, now it isn't even using Central Bank resources to pay entities. For that, dollars accumulated by the Treasury are being used. As that money is found in accounts deposited at the entity led by Mercedes Marc del Pont, each payment equally impacts the level of reserves, already producing a drop in the "square" of minimum cash, as happened when deposits in dollars dropped in November and December held by the public.

The amounts are not, however, very relevant: in January US$62 million in principal comes due with entities, in February US$166 million and in March US$168 million, which totals US$502 million in the first quarter.

On the debts with the private sector, the first significant payment is at the end of April, when the government will have to pay US$243 million on the Boden 2013. And then in August it will have to face another US$2.3 billion to pay the last capital payment on the Boden 2012.

This explains why there is no rush in these first months to create the third Debt Reduction Fund: the reserves are not there, but nor are very big maturities coming in the first months of 2012.

But the main stumbling block is that probably the Central Bank cannot accumulate US$5.6 billion needed to make up the Debt Reduction Fund.

According to calculations done by the consulting firm, Quantum Finanzas, the accumulation of reserves this year will have to reach US$16.6 billion to fulfill debt maturity payments, but at the same time also support the monetary base.

Gap

The calculation made by one of the firm's executives, Jos Echag e, is eloquent in this respect:

The current monetary base is at 218.200 billion pesos. But it would increase around 25% this year, according to the BCRA Monetary Program, bringing it to 272.700 billion at the end of the year. Applying an exchange rate of 4.75, it would be equal to US$57 billion.

The current level of reserves is US$46.4 billion. But if one takes out US$5.6 billion committed to paying debt, it would drop to US$40.8 billion. As such, to cover the monetary base expected by the end of the year, the gap comes to the US$16.6 billion mentioned.

As the BCRA itself established, that it will accumulate around US$9.8 billion in 2012, the target to fulfill is practically impossible, unless there is a total ceasing of capital flight and at the same time there is an (unlikely) flood of cash into the country.

The other alternative, which seems more potable in these circumstances, is to once again modify the Law of Convertibility, taking out the need to back the monetary base with reserves to make the requisite RLD more flexible. But any move in this direction will be decided only in March, when the ordinary sessions of Congress begin.

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