US$5.9 billion are due, but dollars are very tight at the moment.

By Bianca Fernet, Argentina:

Last Tuesday, Argentina’s securities regulator, the CNV, shocked markets by announcing Resolution 646 requiring that mutual funds price dollar-denominated assets in pesos at the official government rate rather than the market rate that is closer to the parallel or blue dollar. Despite efforts from banks and industry organizations to organize a longer time period in which to react to this change, Economy Minister Axel Kicillof refused to meet with representatives, and the law came into force on Friday.

Unlike other government interventions in the parallel market, this sudden “pesofication” of somewhere to the tune of US $15 billion worth of investor assets came as a real shock to the industry — as in, no one saw it coming.

So what would entice this government to force the conversion of dollar-priced assets held by mutual funds into pesos at the official rate? Mutual funds are investment vehicles created for small and medium savers. They have a low minimum entry point and up until last week were a way for Argentines to save money without squirreling away physical dollar bills in boxes buried under stairs. This measure actually hurt small savers and helped no one.

Previous interventions in the market have served to bring both the blue dollar and the bond-linked contado con liquidacion (ccl) or “blue chip swap” rates down. This shock caused bond prices to temporarily plunge and the blue-dollar rate to shoot up to record highs of 16.05 ARS/USD. Furthermore, the effects on the ccl market were short-lived. Before the announcement, the ccl rate was at 14.05 ARS/USD. It dropped to 13.19 before and has rebounded back to 13.85 ARS/USD. So in this case, the government temporarily brought down bond prices at the expense of small savers and the blue dollar. What gives?

Market participants in the City of Buenos Aires suspect the surprise move by the CNV was not in fact aimed at reducing the blue dollar rate or ccl rate at all — it was a way to buy back dollar-denominated bonds due next week on the cheap, and then roll them over rather than paying cash.

One of Argentina’s dollar-denominated bonds — the Boden 15 — comes due on October 3, 2015. And since you can’t pay bonds on Saturdays, that means the payment will be due this Monday, October 5, 2015. The payment is equal to about US $5.9 billion and will be paid out in cash in US dollars in Argentina. And US $5.9 billion is equal to a lot of dollar dollar bills, y’all.

Argentina faces four options with this payment:

1. Default — which would look bad, so is not on the table
2. Try to pay the bond in pesos at the official rate, which considering #1, would not go over well
3. Pay out US $5.9 billion in cash, putting a serious dent in reserves
4. Roll the debt over by exchanging the Boden 15 bonds for new bonds that mature later

Argentina will be pursuing a combination of options three and four, and the CNV’s move that forced mutual funds to quickly liquidate their bond holdings allowed the government to move more bonds into category four. ANSES, the state pension fund, likely bought the Boden 15s once the price fell. ANSES also purchased the Bonar X, a bond that they have been forced to sell in the past to keep the blue rate down.

Last week, volume of trading was up about four times normal daily volume, and brokerages were not able to sell all of the orders they placed. Last Wednesday, one day after the news hit markets, the Boden 15 actually gained 1.9%, while other short-term dollar notes lost around 1.1% and long-term notes fell up to 4.5%. On Thursday, the Bonar X rose 0.3% and the Boden 15 only fell by 0.8%, while other notes continued to plummet.

Investment houses reported receiving calls from government officials to “get out of the way” and not buy the bonds in question.

Even though Argentina’s reserves currently clock in a little bit above US$33 billion, it’s important to remember that the term “reserves” is more of an accounting concept than an exact figure. Just because reserves are US$33 billion does not mean the Central Bank has a pile of cash equaling that much sitting in a vault in downtown Buenos Aires.

At least US$10.72 billion or roughly 1/3 of Argentina’s reserves are made up of currency that is not US dollars, Euros, Japanese yen, or Great Britain pounds. Most of that chunk is made up of Chinese yuan credits from the swap agreement between Argentina and China. Yuan credits are only good for importing goods from China — not  fungible into physical dollar bills.

That leaves Argentina with US$23 billion. When you add owed-import payments, private deposits and blocked payments, estimates show that Argentina likely has less than US$14 billion in accessible reserves. You don’t have to be a mathematical genius to understand that 14 – 6 = 8. And US$8 billion is a small number of reserves indeed.

According to Reuters, somewhere between 10% and 50% of the US$5.9 billion owed on Monday is held by public funds like ANSES. Last week’s CNV stunt likely pushed that number closer to the 50% position. Argentina can’t realistically offer an attractive swap to private holders of the Boden 15 without offering a crazy high, but it can force the swap on government entities, which is exactly what it will do.

Even today, private investors in Argentina are still snapping up the Boden 15 because institutional investors with knowledge of the government are certain they will pay up.

It appears that this government will round out its tenure – elections are on October 25 – with close to zero accessible dollars in the tank. A recent study by Jefferies shows that by the end of the year, Argentina will actually have run out of cash.

In September, private analysts estimated the Central Bank sold US$1.8 billion to keep the blue rate around 16 ARS/USD. Even if half of the Boden 15 bonds due on Monday are rolled over, the US$3 billion or more will hurt. Experts and industry insiders suspect the government’s next move to make it past the finish line without running into an actual balance of payments crisis will be to “pesofy” the bond holdings of insurance companies in the same manner as the CNV resolution on mutual funds.

Reserves and available dollars are very separate concepts: Argentina is shelling out cash dollars and replacing them with Chinese yuan trading credits at a dangerously speedy rate indeed. Regardless of who replaces current president Cristina Fernández de Kirchner, I wouldn’t want to be his central banker. I imagine it will be fairly difficult to pay government employee salaries and energy subsidies with Chinese yuan importation credits. By Bianca Fernet, Argentina