Argentina's President Milei Clashes with Top Banks Amid Liquidity Squeeze

Argentine President Javier Milei's newly imposed liquidity measures have sparked tensions with top banks, with bankers arguing that the daily reserve requirements are inefficient and costly. Major financial institutions are preparing a document with recommendations to present to the central bank. The government's moves to drain pesos from the market have led to a liquidity crunch, pushing real interest rates to double digits. Banks are struggling to meet reserve targets, driving up funding costs and forcing them to dash for pesos in a liquidity-starved market.

Argentine President Javier Milei's newly imposed liquidity measures have sparked tensions with top banks, with bankers arguing that the daily reserve requirements are inefficient and costly. Major financial institutions are preparing a document with recommendations to present to the central bank. The government's moves to drain pesos from the market have led to a liquidity crunch, pushing real interest rates to double digits. Banks are struggling to meet reserve targets, driving up funding costs and forcing them to dash for pesos in a liquidity-starved market [1].

The new provisions, which require institutions to hit reserve requirements on a daily basis instead of monthly, have been met with resistance from bankers. These measures were introduced to contain a nascent peso selloff and curb demand for dollars by selling local-currency debt. However, the daily reserve requirements have been criticized for their operational inefficiency and high cost. Major financial institutions, including Banco Galicia, Banco Santander, Banco Macro, and BBVA Argentina, are preparing a document with recommendations for operational changes to present to the central bank [1].

The discontent became evident during a virtual meeting on Thursday, when Darío Stefanelli, the central bank’s head of issuance and regulation, addressed more than 100 investors from these institutions. Stefanelli responded to a barrage of complaints by stating, "I only explain the rules," according to one of the people present. Neither leadership from the monetary authority nor C-suite executives of private banks participated in the call on Thursday [1].

The tensions started building in late July when the government decided to drain pesos from the market to curb demand for dollars. The peso lost more than 12% last month, its worst performance since Milei devalued the currency upon taking office in December 2023. The government’s moves triggered a liquidity crunch that pushed real interest rates to double digits [1].

The standoff escalated on Aug. 13, when the government managed to refinance only 61% of maturing peso debt, covering a portion of the remainder with holdings at the central bank. This effectively injected about 6 trillion pesos ($4.6 billion) into the economy. As a result, the monetary authority ordered banks to meet reserve targets daily, raised certain types of reserve requirements, and toughened penalties for non-compliance [1].

The hike in reserve requirements forced banks to dash for pesos to meet their targets, which in a liquidity-starved market drove up funding costs. The one-day repo rate quickly jumped to 80% annualized after the debt auction, while the government’s one-month LECAP notes in the secondary market reached 71% according to data compiled by Bloomberg. Top-rated corporates in search of ultra-short-term financing ended up paying more than 100% annualized [1].

Economy Minister Luis Caputo said this would be the government’s response whenever excess pesos remain in circulation. "If incomplete rollovers are interpreted as monetary expansion, those pesos will be absorbed — whether through remunerated reserves, non-remunerated reserves, or other tools," he said last week in a post on X [1].

The measures helped reverse some of the recent peso depreciation, which had threatened to derail Milei’s push to quell inflation and, as a result, the administration’s prospects in the upcoming midterm elections. "What did they expect? That I’d free up cash so they could attack the exchange rate? No way," the libertarian president said in a July 28 livestream [1].

Higher rates and stricter reserve requirements cut directly into banks’ margins. After a year of rapid credit growth, many institutions extended long-term loans funded with short-term liabilities, the costs of which have risen sharply. Profitability, already under strain, has shriveled further. The expected drop in profitability will only become evident in upcoming earnings reports, but the market is already pricing it in. Argentine bank stocks have already fallen as much as 8.2% in New York over the past five days [1].

Walter Stoeppelwerth, chief investment officer at local brokerage Grit Capital Group, said in a report to investors, "Large-cap lenders such as Macro, Galicia, BBVA and Santander may be able to withstand the shock. But smaller institutions risk being squeezed to the point of failure." With funding costs above 44% — compared with expected inflation of 21% over the next 12 months — bank margins are collapsing. "Systemic casualties cannot be ruled out," Stoeppelwerth said [1].

References:
[1] https://www.bloomberg.com/news/articles/2025-08-20/milei-clashes-with-top-banks-amid-argentina-s-liquidity-squeeze