Cut Off From Credit, Argentina Gets Central Bank to Pay Bills

(Bloomberg) -- Argentina’s money supply is surging as the country deals with the economic fallout of the coronavirus pandemic, stoking inflation fears and increasing the chances of a chaotic debt default next month.

Since the country is cut off from credit markets as it nears default, it can’t borrow to fund stimulus programs, as other countries in the region are doing. Instead, the central bank is emitting massive amounts of money to cover government programs, threatening to drive up an inflation rate that is already among the highest in the world.

Cut Off From Credit, Argentina Gets Central Bank to Pay Bills

“The risk of inflation is right around the corner,” said Marina Dal Poggetto, executive director at consulting firm Eco Go in Buenos Aires, in a phone interview. “Argentina is facing fiscal needs and the only tool in the short term I’d say is monetary emission.”

Since the lockdown was announced March 19, the monetary base has increased about 20%, with the central bank sending 340 billion pesos ($5.2 billion) to the government during that time as dividends and temporary transfers.

That’s causing the peso to lose value as companies and wealthy citizens try to convert excess pesos into the safe haven of U.S. dollars. Up until the quarantine, the so-called monetary base had only grown 7% this year.

Cut Off From Credit, Argentina Gets Central Bank to Pay Bills

While the U.S. Federal Reserve and other central banks are also emitting large amounts of money to support their economies during the pandemic, in Argentina the risks are greater since annual inflation is already 48%. In the past the country has suffered hyperinflation, and in 2013 was sanctioned by the International Monetary Fund for faking its inflation numbers.

ARGENTINA REACT: Money Issuance May Fuel Further Inflation Jumps

The government of President Alberto Fernandez was among the earliest in the region to impose strict lockdown measures to curb the coronavirus outbreak. Argentina has so far been relatively unscathed by the virus, with 3,031 confirmed infections, but the economic damage has been severe.

The economy will shrink 5.7% this year, according to the IMF, among the deepest slumps in Latin America, and this comes on top of contractions in 2018 and 2019.

The weakening currency makes it harder to pay dollar-denominated debts. This increases the likelihood of a disruptive default on $66 billion of bonds, according to Joaquin Bagues, head of strategy at Portfolio Personal Inversiones in Buenos Aires. Investors were already bracing for steep losses, with most of Argentina’s overseas bonds trading at about 30 cents on the dollar.

The official currency market is tightly controlled, but the peso has plunged in recent days in parallel markets, sending the gap with the official rate to its widest in five years.

Cut Off From Credit, Argentina Gets Central Bank to Pay Bills

“In Argentina, devaluation, even at the parallel currency level, is a one-way ticket to an acceleration in inflation,” said Bagues.

Fernandez is seeking a negotiated settlement with creditors to avoid a disruptive hard default. Argentina’s next coupon payments amount to about $500 million on April 22, with a 30-day grace period.

Economy Minister Martin Guzman formally presented his offer to creditors Friday, offering no interest payments for three years and no principal payments until 2026. Creditors have already panned the offer, setting the stage for tense negotiations in the coming weeks.

Central bank chief Miguel Pesce said in a TV interview last week that growth in the monetary base comes from a measure designed to boost lending to businesses.

Last month, the bank reduced the number of short-term notes in which commercial banks can invest, with the aim of freeing up funds to lend to companies. Rather than risk lending to businesses at a time of acute distress, banks preferred to leave much of their surplus cash deposited with the central bank. These deposits count toward the monetary base.

In a statement, the central bank said it doesn’t foresee a major short-term risk to inflation and that it can mop up excess pesos once the pandemic subsides. The bank said it is monitoring Argentina’s different exchange rates because a stable peso is critical to normalizing the economy, and that it is ready to provide additional support to the government if the lockdown is prolonged beyond April 26th.

Argentina’s primary budget deficit in March was nearly five times bigger than in February, according to data released Monday night. Spending shot up 70% from a year ago, while revenues only rose 31% over the same time.

Argentina can’t pay for all of its stimulus “only with money printing without generating a dangerous spiral up in inflation,” Bank of America analyst Sebastian Rondeau wrote in a note Monday.

The country will have another headache when the pandemic eventually abates, and the authorities need to try to mop up some of the money they’re creating, said Adrian Rozanski, director of Argentine consulting firm 1816.

“Some day coronavirus is going to pass, whether in two months or a year, and for all the pesos they’re emitting, you have to see what’s the exit strategy for all this printing,” Rozanski said.

©2020 Bloomberg L.P.

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