Argentina's $24 bln Leliq pile pumps up inflation bubble

BUENOS AIRES, July 24 (Reuters) - Argentina’s 1.7 trillion-pesos ($23.7 billion) of short-term ‘Leliq’ notes have helped mop up liquidity in the market and hold back rising prices. Now the central bank faces a painful dilemma: how to rein in the debt without reigniting inflation.

Leliqs, auctioned to local banks in pesos at the benchmark rate of 38%, have doubled in volume since the start of the year in response to the government’s opening of spending taps to counter the impact of COVID-19.

The liquidity pent up in Leliqs will eventually need somewhere to go, according to economists and market analysts. That could force the central bank to either print money to pay the banks or hike interest rates, hitting an economy already mired deep in recession.

“There is no way to absorb everything that has been issued,” said Camilo Tiscornia, an economist at C&T consultancy in Buenos Aires. “The circulating money is going to go to the alternative (black market) dollar or inflation, or the central bank is going to have to allow higher rates of interest.”

The issue has shades of a similar wave of Lebac notes in 2018, when a debt crisis led the government to seek an eventual $57 billion credit line from the International Monetary Fund.

With the economy set to tank 10-12% this year due to the pandemic and poverty rising, center-left President Alberto Fernández has rolled out subsidies and handouts, lifting the M2 money supply by almost 50% in the first half of the year.

In response the issuance of Leliqs jumped 121.5%. The notes, which at a peak last year came with interest over 80%, are a tempting harbor for deposits. That is especially true given tight capital controls in place, squeezing access to dollars.

Roberto Geretto, an economist at CMF bank, said the country needed to have a strategic way to unwind the debt.

“A good exit strategy is as important as the assistance measures that the government has against COVID-19. That means returning to monetary and fiscal normalization,” Geretto said.

Reporting by Walter Bianchi; Editing by Nicolas Misculin, Adam Jourdan and Tom Brown