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The government is studying going back to using reserves to pay debt next year
El Cronista
July 12, 2010

With the payment of the Boden 2012 in August they will run out of the US$4.382 billion available to pay maturities to bondholders. They say that they will decide their strategy at the right moment, but they defend the use of reserves to pay debt and not taking high interest rates from the market.

Leandro Gabin, Buenos Aires

The Central Bank's reserves, which came to US$50.162 billion last Thursday and are very close to the record set in March of 2008, are a temptation for the government. In the halls of officialdom, they celebrated as their own triumph the fact that the Central Bank's coffers remain robust. It happens that the Executive, after creating the Fund for Dis-indebtedness, showed itself ready to take funds from the BCRA to pay debt in place of seeking financing that is expensive today on the markets. They did it this year: they've already used US$2 billion to pay off debt; and in August they will use another US$2.2 billion to face the maturity payment on the Boden 2012. Thus, they will have spent the whole fund directed towards paying bondholders, as they already didn't require "permission" to pay debts to international organizations (it was US$2.187 billion).

The new development is that in the government they don't rule out launching another fund next year to pay debt to bondholders. "We will see, each measure needs to be seen at the right time. This decision was correct due to the excess of reserves that the BCRA has, we are making that determination based on a technical analysis when it doesn't harm financial stability," said a high source at Economy.

The official logic is that it is less costly and more beneficial for the country to eventually go back to the BCRA reserves again (which yield 0.5%) than to go into debt in the markets to close the fiscal gap. "Paying with reserves is better than holding revolving debt. Even the market doesn't take it badly, perhaps the fundamentalists or the opposition, but it's better to finance yourself at almost 0 interest than to take an elevated cost from the market," they say at Economy.

In fact, still, this strategy is "conservative" to solicit the utilities of the BCRA last from last year, some 23.5 billion pesos, as only 1.5 billion were tapped to close the deficit at the beginning of the year, mostly in February. "We don't have a set date for asking for those funds, it will be done based on need," official sources respond. In any case, the market believes that in the second half it will be more palpable to direct gains towards closing fiscal accounts.

What is certain now is that they'll have to give this right to the government. Not only did the running of the fund not produce problems in the exchange rate, but the Central Bank had no problems continuing to obtain dollars.

Another issue is the almost endemic flight of capital that goes being even this issue. But this year, without counting what went out in July, when the monetary authority had brought in more than US$700 million, it then added more than US$5 billion through its interventions in the exchange markets.

The argument to recreate another fund with BCRA reserves next year has its weight. They'll have to pay, in addition to maturities that are repeating this year, some US$800 million for the reopening of the swap plus the GDP coupon that will pay out strongly due to 2010 growth (always paying after the year ends).

According to Barclays Capital, the bank that led the consortium of entities advising the government on the swap, the gap to finance in 2011 comes to US$13.5 billion. In fact, they not only speculate about another BCRA fund but they are talking about a sale of assets by the ANSeS to add dollars to the Treasury. This last idea is, for now, sharply rejected at the Economy Ministry.

The market also will add to the mystery. If the financial climate improves during the second half enough for it to be possible to emit debt at "reasonable" rates, the need to knock of the doors at Reconquista 266 {the BCRA address} will be less. That wouldn't only allow for placing debt but holding swaps for longer bonds to alleviate the burden of the maturities, the so-called "handling of liabilities."

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