ICBC contributes $500 million to $1 billion repo arrangement with Argentina’s Ministry of Finance to address short-term financing needs and bolster foreign exchange reserves

📋 Staff Comments

1. Under the repurchase agreement, Argentina's Ministry of Finance agreed to sell 2024 government ('BONAR') bonds for $1 billion to Credit Suisse AG and the Industrial and Commercial Bank of China Limited (ICBC) and repurchase them at a later date.
2. The terms and conditions of the repurchase agreement are described in greater detail at http://servicios.infoleg.gob.ar/infolegInternet/anexos/280000-284999/280737/resconj8-1.pdf and http://servicios.infoleg.gob.ar/infolegInternet/anexos/280000-284999/280737/norma.htm and http://servicios.infoleg.gob.ar/infolegInternet/anexos/280000-284999/280737/resconj8-2.pdf3. The repo operation was governed by the laws of New York City in the United States.
3. According to a World Bank report (entitled 'Debt Transparency in Developing Economies'), '[a] repurchase agreement (“repo”) is the sale of securities to a counterpart in exchange for cash, under the agreement to repurchase the same or similar securities at an agreed price in the future. Repos are widely used in money markets including: (i) interbank lending, (ii) central bank open market operations with domestic commercial banks, and (iii) securities dealers to finance their inventories. Starting from the mid-90s, repos have been increasingly used in [low-income countries and developing countries] as they are a safer, more flexible, and often cheaper source of funding than unsecured borrowing for market makers […]. The “price differential” between the price at the start of the transaction and the price at the end of the transaction reflects the interest rate, whilst the “haircut” is the difference between the market value of the securities and the amount of cash lent against their transfer. The haircut depends on a number of variables such as maturity, quality, scarcity value, and price volatility of the underlying collateral; terms of the repo; and creditworthiness of the counterpart [...]. The economic nature of a repo is that of a collateralized loan. The market arrangements for repos, including the payments of margin, the ability to substitute securities, and the retention of market risk by the security provider, support the view that repos should be classified as loans, with the security remaining on the balance sheet of the security provider. However, from a legal perspective, a repo is a true sale/purchase of assets for a purchase price, with an agreement to re-purchase at a price differential; this is different to a loan that bears interest. As a result of this, the “legal owner” of the securities (i.e., the security receiver) in repos may differ from the “economic owner” for statistical purposes (i.e., the security provider). In the absence of adequate disclosure of the collateralization details, this difference may generate severe information asymmetries, particularly when the repo is overcollateralized and the securities used are not marketable. Overcollateralization of repos that utilize the seller’s own securities can lower the cost of borrowing by providing credit protection in case of default. [This report provides] examples of repos that, in contrast to normal repos (which use third party typically high-grade securities), utilized the countries’ own sovereign bonds as collateral for their borrowing with large haircuts. These repos—signed when the borrowers were experiencing difficult financial conditions—gave creditors the right to claim, in the case of default, a larger amount than was lent (i.e., paid as the initial purchase price), thus de facto diluting the rights of other creditors. Such transactions would only be cost-effective if the potential impact of the collateral in the case of a default (e.g., external securities increasing in value) is not observed by other investors. Otherwise, theoretically, their inclusion in the reported debt portfolio should trigger an increase in the cost of future un-collateralized debt.’ See https://documents1.worldbank.org/curated/en/743881635526394087/pdf/Debt-Transparency-in-Developing-Economies.pdf.

📚 Sources & References

• Debt Transparency in Developing Economies
• El Tesoro canceló un repo con el ICBC y las reservas cayeron u$s 500 millones
• Suben u$s 1000 millones las reservas por nuevo repo
• El Tesoro canceló un repo con el ICBC y las reservas cayeron u$s 500 millones
• Las reservas internacionales cayeron USD 533 millones por el pago de deuda al ICBC
• COMENTARIOS A LA EJECUCIÓN PRESUPUESTARIA DE LA ADMINISTRACIÓN NACIONAL
• Cuenta de Inversion 2017 Resumen, resconj8-1.pdf, resconj8-2.pdf
• Informe Nº 110 Honorable Cámara de Diputados de la Nación
• Bonos de la Nación Argentina en Dólares Estadounidenses. Aprobación.
• BONOS DE LA NACION ARGENTINA EN DOLARES ESTADOUNIDENSES - APROBACION
• Bonos de la Nación Argentina en Dólares Estadounidenses. Aprobación.
• Se trata de una operación de compras de bonos con una tasa de casi el 9 por ciento anual en dólares.
• Aprueban venta de bonos por mil millones de dólares a bancos externos
• El Gobierno se endeuda por mil millones de dólares con un banco de las Islas Caimán
• Argentina acuerda operación de venta y recompra de bonos por 1.000 mlns dlrs con dos bancos Loan applications and disbursements are still being received and processed as the projects continue to evolve. Ongoing monitoring and evaluation are in place to ensure project continuity.