Central Bank Buys Dollars and Pays the Bank in Basel

May 11, 2009

With US$90 million a day in dollar purchases, the Central Bank is going through a veritable “Indian summer” of foreign exchange activity.  In spite of these strong operations, and the parallel rise of the euro and other currencies, reserve levels have scarcely moved: they’ve gone from US$ 46.368 billion to a little more than US$ 46.5 billion.  Why did the logical increase in reserves not take place?  Simply because the head of the BCRA, Martin Redrado, took advantage of the opportunity to pay back to the Bank for International Settlements in Basel (BIS, in the English acronym) part of what that institution had been lending to the BCRA over recent months. 

Redrado traveled over the weekend to Basel to participate in the bi-monthly meeting of that institution’s executive committee.  There he took advantage of the opportunity to exchange ideas with other central bank presidents, and take away a first-person impression of what is happening with the international financial situation, after two months of strong recovery in asset prices.

At the same time, the Central Bank also took advantage of this context of greater ease to buy back bonds, although sources at the institution confirm that these purchases were not significant: “Last year, yes, there was a very solid program, but now the operations are more sporadic,” stated a director of the institution.

Soy

The improved international climate, and especially the rise in the soy price, accelerated the liquidation of foreign currency by exporters.  This generated a significant excess supply of foreign exchange, which was acquired in its totality by the BCRA.

The Central Bank received some US$4 billion from the BIS.  A good part of these funds arrived starting in March 2008, when the Government’s struggle with the farm sector caused very strong capital flight.  A significant amount of foreign currency was also borrowed when the nationalization of the AFJP was announced last October, which set off a new wave of distrust among investors.  The guarantees for the repayment of these loans are the reserves that the Central Bank has on deposit at the BIS – some US$40 billion.

These loans from the international organization helped smooth out the fall in reserves.  Thus, when the Central Bank had to sell 100 or even 150 million [dollars] a day, the reserves hardly fell at all, thanks to the help from the BIS.  And the reverse is true – now this level is hardly increasing because of the repayment of part of the short-term loans.

The goal of the Central Bank, therefore, is to not take advantage of this favorable moment, at least with regard to the level of reserves.  On the contrary, if June produces a strong demand trend for foreign exchange because of the coming elections, it is probable that this won’t be reflected in the numbers either, since the Central Bank will once again turn to the BIS for help. 

Over the last few months there have been strong polemics among analysts and economists at the Central Bank over what the true level of reserves is.  Critics were pointing out that the real number is somewhere between US$ 8 billion and US$10 billion below the level published in the official statistics.  The legal reserves corresponding to dollar deposits had strong growth between March and April. 

Arguments

But the BCRA also has its arguments: “The accounts are only one aspect.  We also have a large amount of contingent funds that we could access immediately to increase the reserves if that became necessary.”

This allusion is to the US$2.5 billion dollars in Special Drawing Rights that the IMF has to send, which could happen before October.  These funds will go directly to reserves.  But the monetary authority also signed a currency swap agreement against a sudden drop in reserves. 

The Central Bank’s strong purchases in the market caused the recovery of the dollar price, from $3.71 to $3.73.  And the market is not discounting that it could rise a few centavos more, in face of the elections.  The goal, they reason, is to make it more expensive for investors to seek refuge in the dollar in the run-up to June 28, rather than to facilitate their access to this insurance.

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