La Nacion

October 14, 2012

The national government speaks of “debt reduction”, but what it’s doing is changing creditors, filling up the monetary entity with bonds it’s never going to pay  

The President of the Central Bank of the Argentine Republic (BCRA), Mercedes Marcó del Pont, is already known for her extravagant theories.  She’s argued, for example, that monetary emission and inflation are not related and even has invented a new lexicon for describing a supposed new era of the world called “financialization”.   While one should assume that those theories are worthy of a Central Bank leadership lacking suitability and experience, the motives for which the government has designated them are far more down to Earth than their outlandish ideas suggest.

Since 2006, the Central Bank has begun to function as an auxiliary cash box for the Treasury.  The first step was taken that year when, upon paying off the debt with the IMF, the government used the BCRA’s reserves, paying it in exchange for a debt of 10 years at an interest rate of almost zero.  Thus, in only one year, the holdings of balances against the Treasury by the BCRA went from US$2.87 billion to US$11.66 billion between 2005 and 2006.  This way, the sum of the government’s bonds and transitory advances granted to the Treasury went up to 32% of the Central Bank’s assets, compared to 14% in 2005.  The international reserves of the Central Bank were still the main framework of its assets, representing 58% of them.

These figures remained stable at those levels until December 2009.  The decision to dismiss the then-Central Bank president and replace him with the current head determined that, starting in 2010, a true hecatomb was beginning for the monetary entity.  Government bonds increased strongly as assets of the Central Bank, delivered by the Treasury, in exchange for the exact amount of reserves; the granting of transitory advances sped up to finance the deficit of the national state and deteriorated the patrimony of the entity in relation to the size of its assets.  This happened because the Bank began to distribute all of its earnings to the Treasury, without reinvesting in its own patrimony, with the aggravating factor that most of those earnings are, also, purely on paper and never were realized.

To September 2012, the Treasury’s debt accounted for in the Central Bank’s assets totaled US$37.4 billion in bonds alone, to which one must add the equivalent of US$19.2 billion for transitory advances granted by the Central bank to finance the deficit of the Treasury.  The sum of both amounts, some US$56 billion, represents 51% of the assets compared to US$22.9 billion and 29% of Central Bank assets in December 209, before the current leadership of the monetary entity began.  Therefore, the international reserves, which in December 2009 made up 60% of its assets, now represent 39%.

We find ourselves, therefore, with the other side of the supposed debt reduction of the state: the increase in the government’s debt with the Treasury and the deterioration of all the financial indicators of our Central Bank.  We recall that the interest owed on the bonds delivered by the Treasury to the Central Bank are determined through the sum of the Libor rate minus one point.  With Libor at one percent currently, the Central Bank has no interest at all for its loans to the Treasury through which it is “reducing its debt”.  The colored little papers held by the Central Bank in its holdings represent a permanent de-capitalization.

It’s clear, therefore, why the government is referring to the payment of debt with reserves as “debt reduction”, when it is just changing creditors.  It’s doing this because the debt with the Central Bank will never be paid.  It is so by the liquidation that is generated by the non-payment of interest or by the refinancing that will be suffered by capital in the future.  It is strange that after the similar taking out of Central Bank reserves, the government interprets holders of pesos seeking dollars from the Central Bank in 2011 because there was some kind of “paradise”, and not because they were trying to anticipate the predatory voraciousness of the government itself.

To read this article in Spanish, visit: http://www.lanacion.com.ar/1517176-la-deuda-con-el-bcra-una-factura-impagable