Argentina president changes tack to tap reserves

After more than two months of legal and congressional battling, Argentine President Cristina Fernández on Monday unveiled a new bid to tap central bank reserves to pay off debts.

In a surprise move at the opening of a new session of Congress after the southern hemisphere summer recess, the president scrapped the controversial decree she issued in December ordering the central bank to transfer some $6.6bn in reserves to a planned government debt-repayment fund.

Returning lawmakers were to have debated the validity of the original decree, and the government had looked set to lose the vote.

But instead, the president issued two new decrees: one, an ordinary decree transferring $2.18bn of reserves to the Treasury to service debt payments with multilateral creditors this year; and the other, an emergency decree authorising the use of $4.38bn in reserves to pay private creditors this year.

The government can use reserves exceeding the monetary base to pay off debts with multilateral creditors thanks to congressional approval of a similar move to cancel its $9.5bn debt to the International Monetary Fund in 2006. That was introduced by Ms Fernández’s husband, then-president Néstor Kirchner. He is now a member of Congress, but the government has lost its legislative majority.

The funds are already believed to have been transferred to the government fund. The row over the use of reserves led to the ouster last month of Martín Redrado as president of the central bank, and his replacement by Mercedes Marcó del Pont, a development economist close to the president.

Ms Fernández said she was scrapping her December decree because of the extent to which the judiciary had become involved. The fate of the decree had been in limbo for weeks since a judge suspended its application and ordered Congress to become involved. A further appeal last week left the matter in the hands of lawmakers and the Supreme Court.

The president also announced the formation of a bicameral commission to monitor payments made with the reserves, though it was not clear how a president could establish such a legislative commission.

Debt servicing to multilateral agencies this year adds up to about $2bn, with another $1.8bn due in 2011, according to Alberto Ramos, an economist at Goldman Sachs.

The new decree still requires congressional consideration so if the funds have been transferred before the measure’s publication in the official gazette, the opposition could declare it invalid.

“The opposition was caught off guard, but will likely react by trying to block the government’s efforts. In terms of the decree, the opposition has already said they will try to obtain an injunction from the courts,” noted Daniel Kerner, an analyst at Eurasia Group, a consultancy, who expected the new measures to fuel political tensions in the coming months.

The government is now likely to have to offer fresh explanations to US regulators who must approve its offer in the weeks ahead to the holders of some $20bn in debt still unpaid since the country’s $100bn default in 2001.

US approval is required because the offer is being made under US jurisdiction. The bondholders are owed $29bn including interest. As a result, there could be more delays to the debt offer, which the government has promised is imminent since the start of the year.

The government is also reportedly planning to transfer up to $6.5bn in profits from the central bank to the government by next month.