Interest rates on Argentine peso notes are soaring across the board, piling pressure on banks amid a liquidity crunch caused by government efforts to defend the local currency.<\/p>\n
The one-day peso repo rate surged on average to 65 percent\u00a0on Tuesday \u2013\u00a0the highest since May 2024 \u2013\u00a0after briefly touching triple digits during the final hour of intraday trading last Friday. At the same time, the yield on short-term Treasury notes known as Lecaps reached 59.5 percent, its highest level since October 2024, when inflation was running at 193 percent, almost five times the current rate.<\/p>\n
\u201cThe Treasury left very few pesos in the market, and several banks \u2013 especially smaller ones \u2013\u00a0ran out of liquidity and had to scramble for cash, offering higher rates on interest-bearing accounts, selling Lecaps, or borrowing via repos and bank calls at steep rates,\u201d said Emiliano Merenda, chief executive officer of local broker Pharos Capital.\u00a0<\/p>\n
The Central Bank has tightened monetary policy and the government has introduced mechanisms to absorb pesos to stabilise the currency amid a seasonal decline in exports and investor concerns over congressional elections in October. The country\u2019s monetary authorities have been selling Lecaps and raising reserve requirements for money market funds. While the strategy may attract carry trade flows, it has drained liquidity \u2013 forcing many banks to turn to the repo market at sky-high rates.<\/p>\n
\u201cLiquidity dried up and right now there\u2019s no lender of last resort,\u201d said Belisario \u00c1lvarez de Toledo, head trader and partner at True Grit Capital in Buenos Aires. \u201cNo-one is stepping in to provide liquidity.\u201d<\/p>\n
The National Bank Association and the Central Bank declined to comment, while the Foreign Bank Association didn\u2019t immediately respond to questions.<\/p>\n
The measures have brought some respite for the peso, which is trading at about 1,273 to the dollar on Tuesday, strengthening from an intraday low of 1,293 on Monday.<\/p>\n
The peso squeeze has been worsened by month-end dynamics, when banks must meet reserve requirements and have less flexibility in managing short-term cash.\u00a0<\/p>\n
\u201cThis is going to affect banks\u2019 solvency, especially the smaller ones, because funding costs have soared,\u201d Merenda said. Just two weeks ago, they were borrowing below 30 percent. Now they\u2019ve had to pay 55 percent.<\/p>\n
Some analysts also warned that tight monetary policy will make it harder for the central bank to boost foreign currency reserves in line with its International Monetary Fund agreement. To avoid printing pesos, the government has been reluctant to buy dollars, missing its end-June reserve target and requiring a waiver from the IMF. Now, with the exchange rate under pressure and local liquidity tight, the Treasury is buying dollars \u2013 but at a relatively high exchange rate as the peso has depreciated in recent months.<\/p>\n
In response, many investors are steering clear of peso assets altogether. Even with high returns, the volatility and policy uncertainty are leading funds and savers to borrow pesos instead \u2013\u00a0using them to dollarise portfolios rather than hold on to local instruments. It\u2019s a sign of falling demand for local currency that outweighs the government\u2019s efforts to restrict money supply, and signals a rough road ahead for Argentina\u2019s financial system in a high-stakes election season.<\/p>\n
The spike in funding costs can\u2019t last much longer without seriously threatening banks\u2019 solvency, said \u00c1lvarez de Toledo.\u00a0<\/p>\n
\u201cArgentine banks rely heavily on very short-term funding, so a sharp rise in short-term interest rates puts their profit margins under severe pressure,\u201d he said. \u201cThis needs to be resolved \u2013\u00a0the system simply can\u2019t function without liquidity.\u201d<\/p>\n by Ignacio Olivera Doll, Bloomberg<\/p>\n \t\t\t\t\t\t\t\t<\/p>\nrelated news<\/h6>\n<\/p>\n<\/section>\n