Wednesday, December 16, 2015

Central Bank still likely to lose money with dollar futures contracts

The deal that the Central Bank clinched on Monday over dollar futures contract means that the monetary authority will save billions of pesos but still have to pay large amounts of cash if the coming devaluation puts the official dollar rate above 12.50 pesos per dollar.

The new government, which took office last week, accused the former leadership of the bank of selling the derivatives at below market rates. Prosecutors are investigating those claims.

Under new chief Federico Sturzenegger, the Central Bank had been considering not even recognizing those contracts. Instead it struck a deal with exchanges to raise the rates in the original contracts.

This would limit the monetary authority’s losses and the gains from the private sector.

“The negotiations were hard because everyone defended their own interests,” said the source, who asked not to be named.

Former Central Bank chief Alejandro Vanoli sold March contracts at 10.65 to 10.80 pesos per US dollar while these were trading around 15 pesos in New York. If the government devaluation reached 15 pesos per dollar as markets expected, the new authorities would have had to pay more than 4 pesos per dollar for each of the contracts sold. Without the discount agreed on Monday, that figure was seen as close to 70 billion pesos.

Vanoli quit last week under pressure from Macri.

Details of the deal

The government came to an agreement with the ROFEX and MAE private markets in Rosario and Buenos Aires which means that those who invested in dollar futures contracts sold by the Central Bank will receive smaller-than-expected profits.

In the case of the ROFEX market, where agricultural exporters and other smaller individual investors participate, an emergency was declared following the internal rules of the ROFEX. This allows authorities to change the rate at which those dollar future contracts were set.

Those who bought dollar future contracts sold by former Central Bank chief Alejandro Vanoli between September 30 and October 27 will see the price they agreed to for those contracts increase 1.25 pesos, while those who bought those contracts starting on October 28 will get a bigger discount of 1.75 pesos per dollar.

In the case of the MAE market, where banks and their clients operate, the Central Bank will re-purchase all the dollar-denominated contracts it had sold offering LEBAC notes in return. That return will include a similar discount to the one seen in the case of ROFEX, market sources told the Herald.

Legal conflicts are still possible, however. Although MAE and ROFEX authorities agreed to the deal, individual investors could sue MAE and ROFEX demanding full returns on their investments.

Not everyone will be sympathetic if they complain, however. “They knew they were taking a risk by accepting such an undervalued contract,” one market source told the Herald.

No gradual devaluation

The deal also opened the door for the new administration to reduce the costs of a sharp devaluation instead of a gradual one.

Devaluing the official peso below the rate at which dollar future contracts were signed in order to avoid paying the difference that the previous authorities promised was considered by analysts as a way of not paying without risking complaints about defaulting on their obligations.

A Central Bank source said yesterday that “the new team closed deals in which everyone had to give a little, but with the knowledge that it’s what’s best for credibility and confidence in this new chapter of the economy.”

Herald staff with Reuter