New Central Bank (BCRA) President Federico Sturzenegger has barely set foot in the door of his new post and already words like “default” are being thrown around by the banking associations of Argentina. The issue? Sturzenegger’s new administration has announced a plan to review the legitimacy of future dollar contracts sold by his predecessor and renegotiate payments. Understandably, he is not currently winning a popularity contest among banks that stand to lose quite a bit of money and face potential lawsuits.
Last month, former Central Bank (BCRA) president Alejandro Vanoli raised a lot of red flags when he sold an estimated US $10 billion worth of future dollar contracts. Except those futures were actually worth US $15 billion. The BCRA was suspended from issuing more futures on December 1st, but the damage had been done. Given his knowledge of President Mauricio Macri’s explicit intention to devalue the Argentine peso from 10 ARS/USD to 15 ARS/USD, Vanoli basically gave away US $5 billion to the original buyers of the futures contracts in question. Strurzenegger doesn’t think the BCRA should have to pay.
Sturzenegger met today with representatives of Argentina’s most important banking organizations, the Mercado Abierto Electrónico (MAE), the Asociación de Bancos de la Argentina (ABA) and the Asociación de Bancos Privados de Capital Argentino (ADEBA). He unveiled a plan to designate a date after which the allegedly illegitimate contracts were issued. Then, the BCRA will go contract by contract to determine each case that was flawed from the onset. Finally, the BCRA is asking the buyer of these identified flawed contracts to recognize the difference between the purchase price (AR $10) and the market price on the day of sale (AR $15). Without this renegotiation, the BCRA will be out AR $70 billion at a time when it needs cash to successfully remove dollar controls.
Bankers have basically told Sturzenegger to fuck himself. And laid out a few not-so-veiled threats.
The bankers are arguing that less than 5 percent of the futures contracts in question are in their hands, and the majority were bought on behalf of important clients in grains, automobile manufacturing and pharmaceuticals to hedge against an impending devaluation. Thus the banks would be forced to pay the difference from their own pockets or risk being sued by their clients. These contracts are also being traded daily by small investors on the Rosario Futures Exchange (ROFEX).
Bankers also point to the fact that if Argentina defaults (and yes, they are using the word “default” pointedly), foreign banks will lower the Argentine banks’ credit lines, making it impossible to buy short-term notes called lebacs from the BCRA. This would increase inflationary pressure on Argentina.
Finally, Macri’s administration has called on foreign banks to lend the country about US $8 billion to act as a cash cushion while he removes the currency controls that created the blue dollar, “blue chip swap” and plethora of parallel exchange rates.
In reality, Argentina will be best served if both sides are posturing with an underlying plan to meet somewhere in the middle. If the BCRA were to pay the contracts as they are written, it would have to print billions of pesos which would undoubtedly lead to inflation. On the other hand, the futures contracts were emitted by a legally recognized institution and governments cannot simply decide not to honor the commitments of their predecessors.