MercoPress. South Atlantic News Agency

Argentina issues 10bn Pesos in bonds to drain liquidity and contain inflation

The Argentine central bank lost only 621 million dollars in reserves during February compared to 2.9bn in January

Argentina's government will issue as much as 10 billion pesos (1.25 billion dollars) in bonds on Friday as it seeks funding from local investors and tries to drain liquidity from the local market as the harvest season approaches when traders begin selling the dollars of overseas shipments of grains and oilseeds.

 Unable to tap global debt markets because of a legal dispute stemming from Argentina's 2001 default, President Cristina Fernandez has used the central bank to finance spending and pay her government's creditors. But her reliance on money printing to cover deficits has kept inflation above 20% for years and undermined faith in the Argentine peso.

The central bank managed to head off a run on its foreign currency reserves in January by devaluing the peso and almost doubling interest rates to 30%.

The administration plans to sell three-year, peso-denominated bonds paying the benchmark Badlar wholesale deposit rate, now at about 26%, plus 2%, the Economy Ministry said Wednesday

While that is still below inflation that many economists say is above 30%, the bonds could be attractive to investors such as banks that see the floating Badlar rate as a hedge for their liabilities.

The size of the issuance could signal that investors are betting inflation might not go as high as previously thought this year because Argentina will be able to finance part of its deficit by selling debt rather than borrowing from the central bank.

The coming issuance also complements the central bank's efforts to drain pesos from the financial system to keep a lid on inflation. So far this year, the central bank has sold more than 40 billion pesos in short-term notes to mop up excess liquidity in the economy.

Higher interest rates and slower growth in the money supply have given Argentines more reasons to hold pesos instead of fleeing to the haven of the U.S. dollar. Reserves have fallen just 621 million dollars since the beginning of February, after 2.9bn left the central bank's coffers in January.

The government's return to the local capital market likely means less credit will be available for businesses and individuals. That is hardly welcome news for an economy already suffering from more than two years of government-imposed currency controls and import restrictions that have curbed growth.

The economy expanded 1.9% in 2012, and is widely believed to have performed only slightly better last year, even though the most recent government data put growth at almost 5%.