(Bloomberg) -- Puts on Argentina’s peso debt issued by the central bank have surged under Javier Milei’s government, reaching a record and prompting officials to scale back their use amid growing investor concern in the debt.

The puts — pledges to buy back the notes if they fall below a certain price — have been in use in the South American nation for years to increase the appeal of the bonds at regularly scheduled auctions. They’ve shot up to 16.3 trillion pesos ($19.5 billion) as of Thursday, up by 11.3 trillion pesos since Milei took office just three months ago, according to estimates by local broker PPI.

The instrument has enabled Economy Minister Luis Caputo to not only roll over all of the debt coming due, but also to sell new notes to finance spending. But the sheer size of the outstanding position — larger than Argentina’s monetary base — has stoked concern and prompted the government to scale back their use and, in turn, reduced the appeal of the Treasury bond auctions they were meant to promote.

In its last auction, the Economy Ministry was able to roll over debt coming due, but failed to find buyers for additional notes. Argentina’s Central Bank and Economy Ministry didn’t respond to a request for comment on the data.

While the banks often exercise them to help finance further bond buys, concern could push down the price of the debt, which could then trigger a mass redemption that would leave the central bank with no alternative but to print money to repay the puts. That would then stoke inflation already running at over 250%.

“A bond sale event would force the central bank to issue pesos, flooding the street with pesos and increase dollarization pressure,” said Juan Manuel Truffa, partner and director in local consulting firm Outlier. 

Essentially, the puts push the liabilities onto the central bank balance sheet from the Economy Ministry, and increase uncertainty over the timing of any repayments. 

“The duration of the government’s peso liabilities — the Treasury’s and central bank’s — is much shorter than what is seen at first sight,” said Diego Chameides, chief economist at Banco Galicia in Buenos Aires. “The puts mean that long-term debt issued by the government can be sold in a day.”

To be sure, the central bank under Milei has quickly started digging out of the financial hole it inherited by buying $9 billion to add to its foreign reserves, which are still at negative levels compared to the bank’s liabilities. Building up reserves is a key step toward stabilizing the currency and economy.

The system of puts was first used by former President Alberto Fernandez’s government in July 2022 following a selloff of peso bonds. The aim was, as it is now, to restore investor confidence in the Treasury notes and fuel demand at the auctions — something it succeeded in doing.  

The banking sector is the only one entitled to buy bonds with puts in Treasury tenders. Its share of each auction has increased to 77% in Milei’s administration, compared with 50% in the previous government, according to data from PPI.

©2024 Bloomberg L.P.