Report Nº: 76410/07/2018
The Central Bank Notes (known in Spanish as LEBAC) are the debt issued by the Central Bank to absorb the excess of money supply generated by the high fiscal deficit. The main objective of the LEBAC is to reduce monetary surpluses that would add pressure on inflation and the exchange rate. To get an idea of magnitudes, the amount of cash held by the public is AR$ 740 billion, while the LEBAC stock amounts to AR$ 1.25 trillion. That is to say, if all the holders of LEBAC were given back the cash, the money supply would more than double.
The strategy agreed with the IMF is to stop the Central Bank issuing LEBAC. Thus the Central Bank will have more power to control the dollar and the inflation. The process began with bids for Treasury Bills (LETES) with which the Ministry of Treasure proposes to the public to change their LEBAC by LETES.
It is worth asking if this change in Central Bank debt for Treasury debt will generate tranquility in the financial markets and if it is sustainable over time. To approach an answer, it may be pertinent to analyze the evolution of the National Treasury debt in the last quarter of a century. According to the Ministry of Treasury, it is observed that:
These data shows that in the last quarter of a century the public debt of the federal Treasury measured in hard currency did not stop rising. At the time of the currency board (1991 – 2001), when the fiscal deficit was financed by external credit, the debt rose more than double. Once the currency board was abandoned, the Treasury debt maintained its rate of growth even though the country was in default (with closed access to international credit) and profusely appealed to the financing of the fiscal deficit through printing money (which restored the high inflation in Argentina). In only 2 years of management of the current authorities the national treasury debt rose again in proportions similar to the two previous stages. This systematic indebtedness is the consequence of persistent fiscal deficits.
The fact that the Central Bank stops borrowing to cover the imbalances of the public sector is a positive step in favor of transparency and institutionalism. But this does not solve the central problem which is the high fiscal deficit. Just as the government has fallen in the temptation of gradualism to avoid unpopular decisions, it is worrying that the reduction of the Central Bank’s debt through greater Treasury debt will lead to a fall in a new “comfort zone”. In other words, it is positive that the Central Bank stops borrowing to contain the excess monetary supply caused by the fiscal deficit, but the solution is not more debt for the Treasury but the lowering of the federal public spending.
Continuing to finance deficit with debt has higher social costs than an ordered fiscal adjustment. An indication in this sense arises from the Progress Report of the Executive to the National Congress in preparation of the 2019 Budget. There it is observed that in the first 5 months of the year 2018, debt interest payments have already become the second item of public expenditure behind pensions. It is quite suggestive that the government started to spend more in interest than in salaries of public employees. The counterpart is that the investment in public works was reduced by 12% in nominal terms, a fall that, correcting by inflation, would be equivalent to 30%.
The acceleration of inflation and the lethargy in production show that gradualism does not avoid social costs but rather worsen them. An alternative way is to approach with political courage a strategy of ordering the federal public finances with emphasis on cutting waste and privileges. This is the way to end the perverse growth of public debt produced by the systematic accumulation of fiscal deficits.