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The farm sector conflict spiked the cost of financing for business and government
iECO
July 03, 2008

The dimension that the farm sector conflict has taken had a strong correlation in the cost of financing, as much for government as private business.

Since it began on March 11, the interest rate that the State must pay if it wants to go out to the markets to emit bonds rose 2.5 points on average during the last three months, which means a rise in financing costs from 10.54% to 13.09%.

But still, in June, the rate accelerated and "the cost" is found to be at a level above 14%, seen in the most representative bonds like the Boden 2015, according to a report from the Broda Firm.

In the last year and a half, the rates in Argentina weren't just affected by the domestic front (the farm sector conflict overcame the complaints over the INDEC numbers). The international crisis provoked a strong shock, which was particularly felt during the second half of 2007, when the financing costs for the country jumped from an average of 8% to a little more than 10%.

Thus, the cost of financing went up 6 points more than the rate in the previous 18 months, which obliged the government to change its plans and scrap the debt swap on guaranteed loans, which had been on the table for the second half of the previous administration of Martin Lousteau. As such, there will be no going to the internal market for financing, as was confirmed Wednesday by Finance Secretary Hernan Lorenzino.

The difference with the rest of neighboring emerging countries, who also suffered the effects of the First World crisis, is eloquent. For each 1 billion in bonds that are emitted through 2015, the yield of an Argentine bond rounds out to 13%, against 6% in Brazil. This is to say that, over those seven years, the country will end up paying 2.339 billion dollars while Brazil will cover 1.484 billion dollars, if the current maturity rates hold up.

Businesses

For private business, the rise in financing cost was higher. The prime rate, which the banks collect from top line businesses, was recalibrated during the year and suffered a strong hike since April. It went from about 12% annually at the beginning of March to a level of 23.5% at the end of June, after having hit a peak of 25%. The conflict with the farm sector produced, therefore, a rise of 11 rate points, despite that the call rate, which the banks agree among themselves to use for lending money to each other, rose only 1 point, to 9.59% during the same period.

The rise in rates is related to the exit of deposits in past months and the flight of dollars from businesses and savers, where the demand for the greenback moved the compass of the worsening relations between the farm sector and the government. This hit its peak last week, when deposits added to 2 billion pesos, according to Broda calculations, which is added to the 5.5 billion that went out in Mayo.

With all of this, the BCRA managed to hold the line on the currency and with the instruments of monetary policy fought off whatever attempts there were to destabilize the peso, which ended with a significant reduction in the value of the dollar, which hit a peak of 3.1845 pesos at the end of April and came down to 3.021 currently, on the exchange market.