translated from Spanish: Government joined projects to provide tools to the Central Bank in times of crisis

The Government, through the Ministry of Finance, has announced the entry of constitutional and legal reform projects aimed at empowering the Central Bank to, in exceptional circumstances and where required by the preservation of the normal functioning of internal and external payments, to provide liquidity through the purchase and sale of debt instruments issued by the Fisco on the open secondary market. As explained by a statement by the issuing institute, these amendments will allow the BCCh’s toolkit to be extended to address extraordinary situations in which the normal functioning of the payment system is at risk. This could be the case of an aggravation of the health emergency and the economic impacts of the Covid-19 pandemicThe purchase and sale of Fisco debt instruments on the secondary market, is a power available to the major central banks of advanced economies to fulfil their mandates. This attribution, especially used for financial stability considerations, allows monetary authorities to influence long-term interest rates through unconventional policies. However, the current constitutional and legal regulations prevent the BCCh from implementing such measures. For its part, the constitutional limitation of carrying out transactions only with financial institutions determines that the BCCh is only authorized to buy and sell on the open market instruments issued by the Central Bank itself or by banking companies, or by other entities provided that their purchase and sale is carried out through and with responsibility for the banks. For this reason, granting the BCCh the possibility of acquiring tax securities on the open secondary market, for the purpose of injecting liquidity in a general manner through it, is particularly necessary in exceptional situations where the preservation of macro-financial stability so requires. The draft reform of the announced Constitution proposes to amend article 109, providing for the necessary safeguards for this new tool to be used responsibly, without compromising the Autonomy of the Bank. First, that these are exceptional circumstances, in which it is required to protect the normal functioning of internal and external payments; and secondly, that such acquisitions are made on the open secondary market. This prevents it from being used to finance tax expenditure by issuing money. Furthermore, in order to ensure the correct use of these new powers, the draft amends Article 27 of the Constitutional Organic Law of the BCCh, providing that the exercise of such powers may only take place in exceptional and transitional circumstances, determined by the Council by agreement, adopted with the favourable vote of at least four directors, based on the reasons authorized by the constitutional rule. In turn, the disposal of the instruments indicated may also be carried out by the Bank on the open market, on the occasion and in accordance with the terms and conditions determined by its Council. Finally, it should be noted that projects entered into legislative processing do not alter the constitutional prohibition on granting financing to the State, its agencies or enterprises, through direct or indirect appropriations, except in the case of external warfare or danger thereof.

Original source in Spanish