The banking system is the only intact jewel that we Argentines have left. Since the crisis of 2001 -more than 20 years ago- the banking system has managed to successfully overcome the successive fiscal, exchange and inflationary crises that Argentina suffered. The resilience of our banking system is a key asset to recover credit in the future, in pesos and dollars, which the Central Bank (BCRA) must not put at risk.

In recent weeks, on horseback from the debt crisis caused by several years of fiscal lack of control, the BCRA board has made an abrupt turn in its policies to become Treasury’s “lender of last resort.” In that eagerness, has decided to use the banks as a repository for recycling public securities.

In my judgement, the board of the Central Bank is breaching its charter and putting Argentines on the brink of “superinflation.” Specifically, it is subordinating the objectives set by its organic charter -which are the defense of depositors, financial stability and the preservation of the value of the currency- to the objective of financing the fiscal collapse of the national government.

In 2012, the reform of the Organic Charter of Mercedes Marco del Pontfamous for being the first central bank president on record to deny the link between emission and inflation – paved the way for the return of high inflation to Argentina. The reform turned the BCRA into the “relief wheel” of the Treasury, opening the tap to the issuance that deposited us in a inflation that today is close to three digits. With all its defects and effects, however, the 2012 reform established -in its article 20- precise limits on monetary financing to the Treasury, which in the last two years allowed printing pesos for more than 12 points of the product to finance the treasury. They are very generous limits, but limits nonetheless.

The BCRA is evading those limits and financing the Treasury indirectly. In recent days, it has bought public debt for more than $700 billion (almost 20% of the monetary base). It does so by invoking article 18 of its Organic Charter, which allows it to buy and sell public securities on the market “for purposes of monetary, exchange, financial and credit regulation.” But it is clear that these security purchases are not intended to regulate the money supply, or the exchange rate, or credit. It remains to interpret what is meant by “financial regulation”. It is clear that article 18 refers to avoiding a crisis of illiquidity in banks or other market operators. The measures to provide liquidity to the Common Investment Funds could be registered here.

What is not allowed in the letter and spirit of the Organic Charter is to finance a Treasury solvency crisis with an inflation tax. Because, in such a case, the limits imposed by article 20 would become abstract and irrelevant and the BCRA could monetize any fiscal or financial need of the Treasury, to the point of triggering hyperinflation. In practice, the BCRA seems to interpret that the limits of article 20 apply to the financing of the fiscal deficit (“above the line”), but not to financing needs (“below the line”). The circularity of the reasoning is so evident that it does not admit discussions.

Beyond the legal discussion, which is debatable, blowing up what little independence monetary policy retains is a terrible idea.

In its attempt to bail out the Treasury, it is no longer enough for the Central Bank to put its own balance sheet at risk. Since the crisis began, it has been launching a battery of measures to “encourage” banks to buy public securities. First there were the bonuses for the integration of reserve requirements, then the apportionment of the Leliq and the modification of the reserve requirement policy that will be in force as of October 1 and, in recent days, the implementation of a bond repurchase option (or put) that will allow banks to sell their bond positions until December 2023 in exchange for a cousin. In addition, for the entire market, it created a repurchase guarantee to set a floor for debt prices in the secondary market.

This policy has several contraindications. The first, quite obvious, is the increased systemic risk. If the exposure to sovereign risk is abused, the debt crisis could spread to the banks, as happened in 2001, which would now exercise the put option on the bonds, generating a monetary expansion capable of triggering an inflationary flash. It is probable that the most recalcitrant Kirchnerism dreams of this happening with the arrival of the next government, but the markets tend to anticipate it.

The second contraindication is less linear. The increase in banks’ exposure to the Treasury is a “shot in the foot” for monetary policy, because the banks will finance the purchase of public titles with the reduction of Leliq and repos, and the BCRA will have to print the pesos to return those instruments. The banks would turn around to buy the bonds and the “new pesos” would remain in circulation. So that there is no expansionary monetary effect, banks should renew their holdings, but not increase their exposure. Those who should do it are “non-bank” investors, that is, mutual funds, insurers, corporate and retail investors. But these less regulated players are less manipulable.

For this reason, in practice, with the double guarantee granted by the put and the repurchase commitment in the secondary market, the BCRA intends to use the bank balance sheet as “fronting” for the purchase of Treasury bonds. This triangulation will not be free, since the monetary expansion -the reduction of the remunerated liabilities of the BCRA that is applied to the purchase of bonds- must be sterilized with debt of the BCRA itself if you want to avoid an increase in the money supply and a lack of control inflationary. It would be cheaper to issue plain and simple to finance the treasury, but that would explicitly violate the formal limits of the Organic Charter. This is the point.

It is hard to find in history a more brutal example of “Fiscal Dominance of Monetary Policy”. In the 1980s, it was common for the BCRA to finance a very high fiscal deficit with an inflation tax. But now those extremes have been overcome: the BCRA has decided to finance the fiscal deficit and formally guarantee the amortization payments of the domestic debt.

Why this policy sui generis is it totally inflationary? The public debt of a State is valued discounting the future flows of primary surpluses. As the Government does not give any sign in that direction and, on the contrary, uses the BCRA as a lender of last resort, the market anticipates that there will be an increase in the future money supply to pay for the bonds and, therefore, more inflation and devaluation. For this reason, financial engineering games do not alter fiscal fundamentals or help make debt sustainable. They are, plain and simple, plus present and future inflation tax.

No one disputes the need to preserve the solvency and liquidity of the public debt. But that goal is the primary purview of fiscal policy, not monetary policy. It is unusual that in the midst of a dramatic debt crisis, the Government has not implemented any concrete measures to reduce public spending. Why would you do it if you have the unlimited guarantee of the Central Bank at hand?

In so many years of populism we Argentines have become accustomed to living in abnormality. It is time to say enough. The national State must take urgent measures to recover fiscal solvency, beginning by reducing the spending disaster generated in the last two years, slowing down the increase in the number of personnel, adjusting the deficit of public companies, suspending pension moratoriums and limiting special regimes. The Central Bank must comply with its charter, avoiding monetizing the irrational exuberance of public spending and refraining from pushing regulations that do not pursue another objective other than the defense of depositors. Only in this way can we avoid suffering “superinflation” and preserve the only “jewel” we have left, which is a solid banking system.

The author is an economist and national deputy of Together for Change