shaping the new financial architecture…

Argentine battle over central bank reserves deepens

Posted in Deleveraging, Federal Reserve, TBTF by Kitty on January 9, 2010

BUENOS AIRES, Jan 8 (Reuters) – An Argentine judge blocked the president’s plan to use Central Bank reserves to pay public debt and ordered the bank chief’s reinstatement on Friday, deepening a dispute that has rattled financial markets.

Moments after a court ruled to reinstate former Central Bank President Martin Redrado, he returned to the bank, waving at television cameras. A day earlier, President Cristina Fernandez fired Redrado for opposing her debt plan.

Despite the court rulings, local media said an interim bank chief was taking steps to move $6.6 billion in foreign currency reserves to the treasury. “It’s like a science fiction movie,” a central bank employee told Reuters.

The conflict has highlighted persistent political instability in Latin America’s No. 3 economy just as Fernandez’s cash-strapped government seeks to charm investors and issue global bonds eight years after a massive default.

Argentine bonds, stocks and the peso closed down due to investor concerns over the strength of Argentina’s institutions ahead of a sovereign debt swap that is expected to launch later this month. [ID:nN08135180]

Fernandez urged opponents to let her govern and defended using part of the Central Bank’s $48 billion in reserves to service the nation’s debts.

“It’s much better to use the reserves than to take out loans with an interest rate of 15 or 14 percent. It’s common sense,” she said in a televised speech.

Opposition leaders have challenged her order for the central bank to transfer billions of dollars in foreign currency reserves to state coffers.

Emboldened by gains in a midterm vote last year, they vowed to try to overturn the presidential decrees that set up the debt repayment fund and ousted Redrado.

Government ministers accused Redrado of plotting with the opposition in a bid to destabilize Fernandez’s administration, while opponents say the episode shows she will go to any length to get her hands on extra state funds.


Legal experts are divided over whether lawmakers or the courts can overturn presidential decrees, but Fernandez’s opponents say the decrees are unconstitutional because both measures needed approval from Congress. [ID:nN08236201]

The two court injunctions, both issued by administrative law Judge Maria Jose Sarmiento, suspended the reserves fund decree until Congress gives an opinion and reinstated Redrado immediately. The government is expected to appeal.

“I’m going back to work, justice has been done,” Redrado, sometimes dubbed “Golden Boy” by local media, told reporters as he entered the bank building late on Friday.

Congress is in recess until March, but opposition lawmakers started to cancel their vacations and some vowed to seek an emergency session of the lower house on Jan. 20.

“People should be calm because even though we have a government that wants to grab everything in sight, there are limits that can’t be crossed and institutions that work,” said Deputy Alfonso Prat-Gay, a former Central Bank chief.

Fernandez, whose popularity ratings are languishing at below 30 percent, faces another tight financing year this year. Economists say her government may need to raise as much as $7 billion to meet total debt obligations of $13 billion.

Critics say Fernandez wants to use the reserves to pay debt to avoid cutting social spending that is key to boosting her popularity ahead of a 2011 presidential election. Some analysts say the strategy risks stoking political conflict as tax revenue grows more slowly than public spending.

“This has happened for two reasons: The government needs money and secondly, it’s about governing style. They can’t stand anyone saying ‘no’ to them,” said Manuel Mora y Araujo, a political consultant.

Tensions have been high in Argentina for much of Fernandez’s term, but Argentine assets had rebounded in recent months on hopes the government would soon settle with holders of $20 billion in bonds left over from a huge 2001/02 default.

But the risk spread on Argentine bonds compared to U.S. treasuries widened to a three-week high earlier on Friday, according to the benchmark J.P. Morgan Emerging Market Bond Index <11EMJ>. It dipped to end flat at 669 basis points.

Argentine credit default swaps, or the cost of insuring the country’s sovereign debt, jumped to their highest level since mid-December, according to CMA Datavision. The upfront cost to insure Argentine debt jumped to 18.2 percent from 17.3 percent at close on Thursday.

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