The Plan to Save Argentina Helps Banks More Than Business

(Bloomberg) -- Argentina’s central bank has become a kind of borrower of last resort. It’s the only place where banks can safely and profitably park their money, as credit drains out of a slumping economy.

President Mauricio Macri’s latest rescue plan, supported by a record $56 billion International Monetary Fund bailout, has involved jacking the world’s highest interest rates even higher –- they’re now close to 70 percent. The goal is to pull cash out of circulation, curbing inflation and propping up a currency that lost half its value this year.

Policy makers want Argentines to hold pesos not dollars, and they want those pesos locked up in bank deposits. That’s starting to happen. The currency stabilized in the first month of the IMF plan, and time deposits spiked higher.

But after two decades of volatility, luring Argentines back into the local currency isn’t cheap. Banks are having to pay above 50 percent on those time deposits. To make a profit, they have to lend at even higher rates -- and it’s hard to find creditworthy borrowers in a recession.

‘No Risk’

That’s where the central bank comes in.

Reserve requirements for time deposits are high, at 25 percent. But central bank chief Guido Sandleris is allowing banks to keep part of those reserves in seven-day notes known as Leliqs, instead of cash.

The Leliqs are risk-free -- and they currently pay above 68 percent. The central bank has guaranteed that the rate won’t drop below 60 percent until December at the earliest.

That gives banks a respectable margin. They won’t be posting great returns on equity, given the 40 percent inflation rate. Still, it’s cushion against other pressures, from higher funding costs to plunging revenues from commissions and a likely spike in non-performing loans, says Valeria Azconegui, an analyst at Moody’s Investors Service.

Meanwhile businesses like CC Agro y Tec, which imports consumer electronics, are getting squeezed out of the credit system, according to Diego Valguarnera, its financial director.

“The banks are faced with the choice of putting funds to work on an investment with virtually no risk, or lending it to companies at a time when consumption is falling,” he says. “They choose the first.”

‘Suffocating’

Returning from a recent investor trip, JPMorgan analysts reported that both demand for loans and the risk-appetite to provide them were in short supply, in an economy that shrank 4 percent in the second quarter. Argentina won’t return to growth until 2020, Moody’s predicted in a report Thursday.

Mortgage origination has slumped 50 percent since May. Small businesses are getting pounded. Their preferred form of financing is through checks, which lets customers pay over a period that typically varies from 30 to 90 days. That’s now getting stretched to as many as 150 days, and companies have to pay a growing interest penalty for cashing early.

“It’s a suffocating combo,’’ says Pedro Cascales, a spokesman for the Chamber of Small and Medium Enterprises, which represents more than 500,000 businesses. “Companies can’t pay their providers because sales dropped, or clients are delaying their payments.”

Expecting a Boom

It’s all a far cry from a year ago, when the banks were celebrating what looked like the end of a long credit drought.

For more than a decade after its default in 2001, Argentina was frozen out of global finance and governed by left-populists who imposed capital controls. But the market-friendly Macri was elected in late 2015, and by 2017 the economy was picking up speed.

Argentina’s four publicly traded banks raised a combined $2 billion in international equity sales last year, to help meet a expected rise in demand for loans. They wallpapered Buenos Aires with ads for their mortgages.

Wall Street analysts from Morgan Stanley to Itau had touted the banks as the best way to bet on Argentina’s comeback. Through the end of 2017, they were right. This year has been a different story. Bank stocks have given up all those gains and then some.

The financial system isn’t in immediate danger, partly thanks to safeguards installed after the 2001 crash, which led to a traumatic forced conversion of savings from dollars to pesos. Regulators have placed stricter requirements on dollar lending since then, and currency mismatches are now at a 10-year low.

Bad-loan ratios have edged higher but they remain manageable, at 3.5 percent for household lending and 1.3 percent for businesses in August. Itau says they’re likely to keep rising, and predicts a peak NPL ratio of 4.5 percent at Grupo Financiero Galicia SA, the biggest listed bank, in the first quarter of 2019.

Before It Drowns

By then, if all goes to plan, the central bank may be lowering Leliq rates and releasing more pesos into circulation as confidence returns. But there are plenty of risks to the IMF program –- including a political one: Macri is up for re-election next October.

And while the banks may be able to wait it out, it’s questionable how long their real-economy clients can. Pedro Dragun, director of research at the Argentine Industrial Guild, says he understands that the high-rate policy is an attempt to reduce demand for dollars.

“But it has a very adverse effect on the productive sectors,’’ he says. “We need the rates to drop sharply, before the economy drowns.’’

--With assistance from Ricardo Strulovici Wolfrid.

To contact the reporters on this story: Carolina Millan in Buenos Aires at cmillanronch@bloomberg.net;Ignacio Olivera Doll in Buenos Aires at ioliveradoll@bloomberg.net

To contact the editors responsible for this story: Courtney Dentch at cdentch1@bloomberg.net, ;Vivianne Rodrigues at vrodrigues3@bloomberg.net, Ben Holland

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