Argentina's Record Reserves Get Companies an Invite to Weekly Debt Sales

Argentina’s central bank sold debt to companies for the first time in three years in a bid to curb growth in the nation’s money supply.

Companies were eligible to buy 150 million pesos ($38 million) in central bank notes, known as Lebacs, due in as long as three months at an 800 million peso auction today after they were given permission for the first time on July 16 to take part in the auctions and bid alongside banks and brokerages.

Central bank President Mercedes Marco del Pont is seeking to step up debt auctions to drain cash from the financial system and curb inflation after dollar purchases pushed international reserves to a record $51 billion, said Carola Sandy, an economist with Credit Suisse Group AG in New York.

“With all of the dollar buying to build reserves, the monetary base is expanding quite quickly,” Sandy said in a telephone interview yesterday. “They need more agents, other than the banks, to buy the Lebacs.”

Foreign reserves climbed 3.5 percent since June 30, heading for the biggest monthly increase since November 2007, as the central bank bought dollars after a record 55 million-ton soybean harvest swelled exports. Argentina is the world’s biggest exporter of soybean oil.

The dollar purchases helped spark a 25 percent jump in M1 money supply, which excludes longer-term deposits and money market funds, in the past 12 months to 168.3 billion pesos, according to the central bank.

Inflation

Credit Suisse’s Sandy estimates annual inflation is running at about 20 percent, almost double the government’s 11 percent figure. Argentina’s inflation data have been questioned by economists and politicians including Vice President Julio Cobos since January 2007, when President Cristina Fernandez de Kirchner’s predecessor and husband, Nestor Kirchner, began changing personnel at the statistics institute. Economy Minister Amado Boudou said in an April 14 interview that the government inflation data is accurate.

Companies refrained from buying debt at the first auction they were allowed to participate in last week, said a central bank official who declined to be identified in accordance with bank policy. Policy makers expect companies to step up their participation in the auctions gradually, the official said.

The central bank sold a total of $2.2 billion pesos in notes in this week’s auction, down from $3.1 billion pesos last week, the institution said in an e-mailed statement. Lebacs due in 91 days yielded 12.25 percent, the same as two weeks ago.

Yields on Argentina’s benchmark dollar bonds due in 2015 slid eight basis points to 10.71 percent today, according to Deutsche Bank AG prices. Warrants linked to economic growth rose 0.3 cent to 9.7 cents.

Default Swap

The cost of protecting Argentine debt against non-payment for five years with credit-default swaps dropped 19 basis points yesterday to 826, according to data compiled by CMA DataVision. Credit-default swaps pay the buyer face value in exchange for the underlying securities or the cash equivalent should a government or company fail to adhere to its debt agreements.

The extra yield investors demand to hold Argentine dollar bonds instead of U.S. Treasuries today fell 43 basis points to 664, according to JPMorgan. The gap is down from 846 on July 1.

The peso was little changed at 3.9323 per dollar. The currency has dropped 28 percent since Kirchner took office in May 2003, the worst performance among major emerging-market currencies after Iceland’s Krona. Economists predict it will weaken to 4.2 per dollar by year-end, according to the median of 14 estimates in a Bloomberg survey.

Badlar Rate

Reserves accumulated since Nestor Kirchner took office seven years ago allowed the country to maintain a weaker peso that bolsters growth, Marco del Pont said in a July 15 statement.

Argentine companies may seek to buy Lebacs because the yields are above the benchmark Badlar lending rate, said Noelia Lucini, a portfolio manager with Capital Markets Argentina in Buenos Aires. The Badlar rate on deposits of over 1 million pesos was 8.625 percent on July 23, the central bank said in a report yesterday.

The weekly auctions will help the central bank limit inflation, Sandy said. Consumer prices may rise 26 percent this year -- the second fastest in the world after Venezuela -- from 15.3 percent in 2009, Buenos Aires-based company Ecolatina said last month.

“If they want to slow inflation, they should use contractionary monetary policy, but they don’t want to,” Sandy said. “Less expansive policy is better than more expansive.”

To contact the reporters on this story: Drew Benson in Buenos Aires at abenson9@bloomberg.net;

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