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"There Are No More Dollars In The Central Bank": Argentina's New President Confronts Liquidity Crisis

Tyler Durden's picture




 

On Monday, Mauricio Macri, the son of Italian-born construction tycoon Francesco Macri, beat out Cristina Kirchner’s handpicked successor Daniel Scioli for Argentina’s presidency in what amounted to a referendum on 12 years of Peronist rule. 

A legacy of defaults combined with exceptionally high inflation and slow growth finally tipped the scales on the Leftists and now, Macri will try to clean up the mess. 

 

As Citi noted in the wake of Macri's victory (which was accompanied by some very bad dancing), "the most urgent challenge on the economic front is FX policy." The President-elect wants to unify the official and parallel exchange rates (~9.60 and 15.50 ARS/USD, respectively) and that will of course entail a substantial devaluation. Just how overvalued is the peso, you ask? "Grossly" so, Citi says. Here's their take:

Regarding the real overvaluation of the ARS, we estimate that real effective exchange rate has dropped (appreciated) 44% since 2011. Thus, for Argentina to have the same REER than four years ago, the USDARS should stand at 17. A different approach would be to compare the evolution of the real exchange rate vis-à-vis the USD in Argentina and other countries in the region. While the LatAm currencies (BRL, CLP, COP, MXN, PEN and UYU) real exchange rates relative to the USD have increased on average 36% since 2011, the USDARS has dropped 19% in real terms. Thus, from this point of view, the USDARS should stand 68% higher at 16.1.

 

A key figure in the execution of Macri's currency plan is former JP Morgan global head of FX research Alfonso Prat-Gay who will be Argentina's finance minister under the new Presdent. Prat-Gay was president of the country's central bank beginning in 2002 and, as Reuters reminds us, "won widespread acclaim for swiftly taming runaway inflation and championing central bank independence." If that sounds to you like characteristics that might rub a Peronist the wrong way, you'd be right, and Prat-Gay was ousted by the Kirchners.  

Over the course of Macri's campaign, Prat-Gay voiced support for the idea of unifying the official and black market peso rates. "There are no reserves left, and the capital controls don't make sense," the new FinMin said earlier this month. "They just destroyed local economies, exports and a good part of industry."

Here's a look at Argentina's reserves:

That chart would be bad enough as it is, but the unfortunate reality is that Argentina actually has no reserves. Consider the following from La Nacion (translated): 

While the Central Bank reported yesterday that its reserves amounted to US $ 25.918 million, that number includes loans, as having taken with China or with the Bank of France, which initially only serve to swell the accounts but which are not easy to translate into dollars; also includes, among other items, the foreign exchange part of reserve which by law must make banks increasingly taking a dollar deposit to the public, and those belonging to foreign bondholders who, by order of the judge in New Thomas Griesa York, have not yet been transferred.

 

"The dollars you have in reserve assets side are offset by liabilities of the Central Bank. The availability in terms of net cash reserves is zero," says the former head of Carlos Perez. "What happens is that, in terms of liabilities, there are some that are not payable immediately, as is the case of the dollars that were frozen by order of Griesa, which could eventually be used," says the economist.

 

According to private estimates, the $ 26,278,000 reported to the Central Bank last week, would be US $ 10.853 million of the loan (swap) with the Bank of China; US $ 1.2 billion of credit with the Bank of France; US $ 155 million would be committed to payments within ALADI (the Latin American Integration Association); US $ 50 million are due to Brazil by the system of local currencies for foreign trade); US $ 8.615 billion are funds of depositors that banks have deposited in the Central; US $ 199.2 million are debts to be paid off with international organizations to December 15; US $ 427.3 million are deposits in custody, and US $ 2,640.7 million are trusts with $ bondholders exchange, which conflict with vulture funds could not cash (US $ 539 million Bank of New York and US $ 2.1017 billion National Bank). In addition, there would be US $ 1.1 billion of Treasuries US Sedesa owned (society that guarantees the deposits of the financial system) and US $ 613 million Cedin titles, which can be cashed at any time.

 


So in reality, Argentina has about $424 million or, as La Nacion puts it, "less than you need for a week." Here's a look at World Bank data on import cover for selcted Latin American countries (note that Argentina was dead last going into 2015):

Argentina's reserves fell by more than $1 billion in November alone and as should be clear from the above, selling dollars to support the peso really isn't an option anymore because, well, because there are no more dollars. This rather precarious situation led central bank head Alejandro Vanoli to do two things this month, i) force banks to sell half their dollar assets, and ii) sell $17 billion of dollar futures. Earlier this month, police raided the central bank after Macri's allies lodged a criminal complaint against Vanoli for violating the bank's charter by basically turning it into a giant derivatives trading hedge fund.

Here's a bit of color from Barclays on central bank liquidity:

President-elect Macri will inherit low liquidity levels at the central bank. Reserves have been falling consistently in 2015, largely because of the political decision to prevent a nominal devaluation that would correct the current real exchange rate misalignment. The reserve drain has been substantial – averaging US$100mn – in the past two months, and reserves stood at just US$2bn as of November 16 (Figure 1). The ratio of reserves to the monetary base has fallen to a record low of 0.5 since the Boden payment in October. Since exchange rate controls introduced between end-2011 and the start of 2012, the ratio has halved. In addition, the central bank‘s net worth has fallen from US$12.7bn in December 2014 to US$4.6bn as of October 30 (Figure 2). The liquidity position is so low that, on Saturday November 21, the central bank published a regulation that puts three new limits on banks, effective on December 1. The first forces banks to reduce their foreign exchange positions – which include all assets in foreign currency including treasuries and gold – from 15% to 5% of adjusted net worth1 . The fact that the central bank is depending on this type of urgent measure would seem to confirm that the China swap is not liquid, and that liquidity is better measured by net reserves than by gross reserves. 

 

 

And here's Barclays on Macri's FX challenge:

Success in the liberalization of the exchange rate controls and unification of the market would be measured by the extent of the FX overshoot and inflation pass-through (and, hence, how much real wages fall). We think the central bank has room to limit the exchange rate overshoot, given the lack of financial dominance: it can increase local interest rates to very high levels, given that, due to low leverage in households, banks, and firms, it would not cause immediate financial risks. Furthermore, the more gradualist approach to the depreciation of the peso, the lower the risks. 

 

The size of any overshoot and FX pass-through to inflation once exchange rate controls are lifted is uncertain at this point. Given the central bank’s low liquidity position, we expect it to try to rebuild the liquidity position before fully lifting exchange rate controls, in line with president-elect comments. As a reference, in 2002, the monthly average overshoot was 22%2 . The value of the ARS depends on several hard-to-forecast variables. First, the currency will likely become stronger the more successful the new administration is in setting a credible monetary program and switching the nominal anchor of the economy from the exchange rate – as it is currently – to the interest rate. Second, it should become stronger the higher and faster the inflow of capitals, which in turn depends on the credibility of fiscal adjustment announcements and fluid external financing. Third, we expect it to be stronger if the FX passthrough to inflation is lower, as a lower nominal devaluation will be needed to achieve the same correction of the real exchange rate.

 

 

So good luck Mr. Macri. You'll first need to oust the central bank chief and sort through the implications of billions upon billions of USD futures he sold and then, once you've determined how much the government will likely lose on those trades, you'll need to figure out a way to rebuild the coffers. 

Only then can you attempt to reform the FX regime on the way to unifying the official rate with the black market. 

For now, we'll simply leave you with the following hilariously straightforward assessment from Macri which came across the wires late Tuesday evening:

  • ARGENTINA’S MACRI SAYS NO DOLLARS LEFT IN CENTRAL BANK
 

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Wed, 11/25/2015 - 15:55 | 6839642 moneylover3
moneylover3's picture
"There Are No More Dollars In The Central Bank":

==========

No Problemo. Dial D for Dollars(Dial Aunt Yellen)

Wed, 11/25/2015 - 16:04 | 6839676 CrazyCooter
CrazyCooter's picture

This is not only an easy fix, but also highlights the leverage China has with their huge FX position - which they can liquidate much faster than most folks realize.

If China and Argentina buddy up and book a big deal, say equal to Argentina's total current dollar liabilities, and China writes a check (so to speak) from their reserve FX pile - the problem is solved. China gets whatever they negotiate to offset the transaction. Ports? Exclusive trade zones/deals? What leverage do Western bankhers have at this point. No interest. Debts paid in full. And China and Argentina have new trade relationships - not in the dollar.

One day, this is going to happen in mass - and China is going to execute trillions of dollars of debts in exchange for new trading partners.

Regards,

Cooter

Wed, 11/25/2015 - 16:38 | 6839787 AchtungAffen
AchtungAffen's picture

>> China gets whatever they negotiate to offset the transaction. Ports? Exclusive trade zones/deals?

ICBM bases controlled by Chinese military on foreign land?

Oh wait, they already did... For over 25 years for free's yo!

Wed, 11/25/2015 - 16:35 | 6839813 Salah
Salah's picture

that strategy's played out; US deep state does same to Vietnam, Phillippines, Indonesia, et al. 

Argentina came "this close" to dollarizing in early 1990's; revelations on their jicky accounting queered the deal

Carlos Menem's son was assassinated in 1995, probably to settle up with his asshole father

Wed, 11/25/2015 - 16:39 | 6839834 AchtungAffen
AchtungAffen's picture

Argentina effectively dollarized from 1990 until 2001, when an immovable peg was made between USDARS. 1ARS = 1USD.

Wed, 11/25/2015 - 17:00 | 6839920 researchfix
researchfix's picture

"There Are No More Dollars In The Central Bank":

Sounds like good news.

Wed, 11/25/2015 - 15:55 | 6839643 moneylover3
moneylover3's picture
"There Are No More Dollars In The Central Bank":

==========

No Problemo. Dial D for Dollars(Dial Aunt Yellen)

Wed, 11/25/2015 - 15:56 | 6839648 Max Steel
Max Steel's picture

Just Print it Bitchez

Wed, 11/25/2015 - 16:31 | 6839794 AchtungAffen
AchtungAffen's picture

Printing was what Argies did. They can't print dollars though, that's why 2 digit inflation is structural...

Wed, 11/25/2015 - 15:59 | 6839656 GhostOfDiogenes
GhostOfDiogenes's picture

"Peronist"

They are ultra left wing communists who work for goldmen et al.

This guy is the right wing bankster scapegoat.

Wed, 11/25/2015 - 16:05 | 6839688 COL Jackson
COL Jackson's picture

Thats a bit of an oversimplification.  The Peronists are the establishment in Argentina.  They have there right and left wing factions but their all Peronists.

Wed, 11/25/2015 - 17:10 | 6839959 GhostOfDiogenes
GhostOfDiogenes's picture

Whatever.

Kirchner and her hubby are the Argentine version of bill and hillary.

And they are heavily involved in labor and communist and other left wing groups.

Calling them 'shit' is a put down on a sewer.

Wed, 11/25/2015 - 16:34 | 6839811 AchtungAffen
AchtungAffen's picture

Peronism is ideollogically closer to fascism. It got the "lefties" through their appeal to the worker, same as those old populisms did. But in the end, Perón threw them (Montoneros et.al) out of the Plaza de Mayo in his return to pure ideology (more or less what he also did in '53 when he militarized the railway unions and applied martial law on strikers). Perón comes from the army. An army that was way too imbued in "Prusian" culture of nationalism and historical revision (as in, no to those librul individual liberties - corporativist society was their choice). Perón participated in 2 military coup de etat's too, don't forget. Ah, and he also spent 3 years as attache in Mussolini's Italy.

Wed, 11/25/2015 - 16:02 | 6839670 SmittyinLA
SmittyinLA's picture

Argentina Abengoa

Coincidence?

"Located in the northern region of Argentina, in the province of Santiago del ... Abengoa has been engaged in social action programs in Argentina since the 40s ..."

Wed, 11/25/2015 - 16:03 | 6839672 Spiritof42
Spiritof42's picture

It's almost a given that when an electee first comes into office, they play dumb and startled as if they didn't know it was that bad. Thus the sellout begins.

Wed, 11/25/2015 - 16:03 | 6839673 FreeShitter
FreeShitter's picture

Install computer, CTRL P....

Wed, 11/25/2015 - 16:04 | 6839682 The Spanish Amb...
The Spanish Ambassador's picture

Go figure, the Socialists spent all the money. lol

Wed, 11/25/2015 - 16:11 | 6839709 CHoward
CHoward's picture

No money?  WTF?  Don't you clowns have your very own Fed Res like the good ole US of A?  Now a days you can print all the money you ever wanted - it's FREE!

Wed, 11/25/2015 - 16:13 | 6839715 seek
seek's picture

I wonder how many of those dollars got moved to a Kirchner-controlled off-shore account prior to the election win.

Wed, 11/25/2015 - 16:37 | 6839824 AchtungAffen
AchtungAffen's picture

During the 2001 banking crisis, then governor of Santa Cruz province Néstor Kirchner moved the provinces USD reserves out of the country to "avoid confiscation" by the central state; in the amounts of several hundred million USD. Those moneys were never heard from again. That's a start. Also, a couple years after Néstor's death, Cristina (the wife) made a surpise visit to the Seychelle islands (famous offshore paradise), never officially explained (but most people suspect she went there to complete inheritance claims over Néstor's accounts)

Wed, 11/25/2015 - 16:32 | 6839801 BritBob
BritBob's picture

Macri favours creating a better working relationship with the UK and easing off on the Malvinas rhetoric so it looks like he will not use at ol Malvinas chestnut as an excuse. This is good news as that mythical Malvinas stuff is wearing a bit thin on the imagination: https://www.academia.edu/17799157/Falklands_-_Some_Relevant_International_Law

Wed, 11/25/2015 - 16:55 | 6839906 fudge
fudge's picture

Are you suggesting that the UK adheres to ' International Law '

Wed, 11/25/2015 - 16:39 | 6839823 jtg
jtg's picture

The new governments' solution to Argentina's economic problems will be austerity for the people and more wealth for the rich.

The usual US and EU 'indispensable and exceptional' solution.

Wed, 11/25/2015 - 16:40 | 6839840 alexcojones
alexcojones's picture

Out of $Dollars?

I know EXACTLY how they feel.

Most of mine are wasted on stuff now at the bottom of the lake.

Wed, 11/25/2015 - 16:46 | 6839863 alexcojones
alexcojones's picture

Interesting Claim here. Hitler & Kirchner

Hitler lived in South America and used the surname Kirchner
Wed, 11/25/2015 - 17:06 | 6839939 Itsthetiming
Itsthetiming's picture

Are you always such a mouthpiece of bullshit?

Wed, 11/25/2015 - 16:51 | 6839892 Doppelganger71
Doppelganger71's picture

Ruh Roh Raggy..................................

Wed, 11/25/2015 - 17:00 | 6839913 gaoptimize
gaoptimize's picture

My friends in the 1980's and I use to play a board game by Steve Jackson Games called "Junta".  One of the things that was de rigeur was to award all the money in the treasury to yourself and your key supporter(s) when you knew you were going to be overthrown.  So, the treasury being empty of dollars is no big suprise.

Wed, 11/25/2015 - 17:05 | 6839935 Itsthetiming
Itsthetiming's picture

They can print money if only they had something to back it.

I don't see they have anything solid to back it with.

Who would buy their bonds?

What assets does the government own that it can swap for currency?

It wasn't central bankers that screwed this country, it was the previous administrations last decade of theft - much like Venezuela . Soon will the claims of conspiracy arise to offset the clear evidence of theft and massive mismanagement?

Wed, 11/25/2015 - 17:28 | 6840023 Mr.Kowalski
Mr.Kowalski's picture

Back when I was a kid, robbing banks was the big thing. Somehow we as a species have evolved to looting entire countries from stem to stern. Marcos, Duvalier, Kirchner, Putin, Kim, Qadaffi... Putin has a personal worth of somewhere between $70bln and $200bln. When Chavez ran Venezuela into the ground, he at least gave the money to the people.. a true saint amongst these thugs.

Wed, 11/25/2015 - 17:29 | 6840031 No.Fifth.Turning
No.Fifth.Turning's picture

¡Chíngame! ¿Y no hay oro también?

Wed, 11/25/2015 - 17:30 | 6840037 Vin
Vin's picture

Just do a currency swap with the bastards at the Fed.

Wed, 11/25/2015 - 17:48 | 6840088 NoWayJose
NoWayJose's picture

Anytime you 'throw da bums out' you cannot expect the bums to do you any favors. Given the amount of graft, you can be sure that they will be filling their pockets on the way out the door.

Wed, 11/25/2015 - 19:33 | 6840386 Grandad Grumps
Grandad Grumps's picture

I guess that I find it difficult to believe that Argentina has a negative balance of payments.

Wed, 11/25/2015 - 19:53 | 6840451 MasterControl
MasterControl's picture

Well I guess get ready for a shit load of Argentinians.

Wed, 11/25/2015 - 19:56 | 6840457 honestann
honestann's picture

To Argentina:  If you have a central bank, the question is not WHETHER you will be royally screwed and manipulated, but only IN WHICH WAYS.

The only choice is:

#1:  freedom from central banksters...

... versus ...

#2:  permanent abject slavery and poverty.

Wed, 11/25/2015 - 20:15 | 6840525 tarabel
tarabel's picture

 

 

What could possibly go wrong with a Finance Minister named Prat-Gay?

Thu, 11/26/2015 - 00:34 | 6841322 onmail1
onmail1's picture

Argentina must leave the dollar dominated  central banking system & join BRICS & BRICS must abandon dollar asap & start trading with these countries as an alternate system because west is hell bent on destroying developing nations economies.

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