January 11, 2010

Row over Central Bank Foreign Currency Reserves Comes to a Head in Argentina

IHS Global Insight Perspective

11 Jan 10

Argentina is edging towards a major conflict of powers, torpedoing recent efforts to bolster confidence in economic policy making and underlying institutions.

IHS Global Insight Perspective

Significance

Argentina’s President Cristina Fernández de Kirchner has thrown down the gauntlet to the legislature and the judiciary over an intensifying row triggered by a presidential decree that seeks to draw on central bank reserves to pay off public debts.

Implications

The institutional standoff highlights the enduring weaknesses of Argentina’s political economy. Overwhelming executive power and a tendency for political confrontations to violate institutional rules decreases the predictability of key policy decisions and undermines long-term investor confidence.

Outlook

The battle over the use of central bank reserves is now fully underway, considerably increasing political and economic uncertainty over the short term.

Out and In

The battle over the use of foreign currency reserves for serving Argentine public debt has intensified, after a federal judge on Friday (8 January) ordered the re-instatement of Martín Redrado as president of the central bank (BCRA). Only a day earlier, Redrado was ousted by a presidential decree, which was also signed by the entire cabinet, after he refused to transfer some US$6.6 billion in central bank reserves to a fund aimed at guaranteeing debt payments over the course of 2010 (see Argentina: 8 January 2009: Argentine Government By-Passes Congress and Dismisses Central Bank President). Redrado, who had disregarded earlier calls from President Fernández to step down, filed an injunction against the decree that ousted him and on Friday federal judge María José Sarmiento suspended the controversial measure. In her ruling, she argued that there was no apparent sign of misconduct and non-compliance by Redrado and that, according to the central bank’s statute, a special congressional committee should have been consulted before the dismissal was carried out.

In another blow for the executive, the judge had earlier on Friday also blocked the application of the decree calling for the establishment of the debt-repayment fund. This followed an injunction presented by the opposition parties, which have argued that the emergency decree violates congressional authority over the use of public funds (seeArgentina: 7 January 2009: Row over Central Bank Funds Triggers Political Crisis in Argentina). According to local press accounts, the efforts of central bank deputy-president Miguel Pesce, a Kirchner ally who had been appointed on Thursday to temporarily head the BCRA, to rush through the transfer of central bank funds have been blocked by central bank staff.

Characteristic Reactions

In a characteristic reaction, the government moved heaven and earth to appeal as quickly as possible against the two rulings, although Judge Sarmiento had given the government two working days to present its appeals. In a press conference, the judge complained that the government had sent a police car to her personal residence in an apparent effort to speed up judicial proceedings. The Kirchners also accused Deputy President Julio Cobos, who is also the Senate president, and Clarín, a leading newspaper with which the government has strained relations, of "conspiring" against the executive. Cobos, who has been on uneasy terms with the president ever since he cast the decisive vote that struck down an agriculture tax bill in 2008, has called on presidents of all legislative groups in the Senate to meet today in an effort to prepare for a meeting of the bicameral parliamentary commission tasked with reviewing executive emergency decrees.

Outlook and Implications

Somewhat ironically, the original aim of the controversial decree—to assure financial markets that commitments to pay off public debt will be honoured—has been completely inverted, as the battle between powers escalates. Instead of greater confidence, the political panorama is now shaped by increased uncertainty. One major variable driving the short-term outlook is whether Judge Sarmiento will uphold her decisions against the government appeals and whether, in case she concedes the appeals, she will suspend the effect of her decisions until a final judicial solution is reached. Although unlikely, this could the give the government enough time to complete the transfer of central bank funds before Congress can reach its decision on the validity of the decree creating the debt-repayment fund. The government also faces proceedings before the Supreme Court, following the court’s acceptance on 30 December of a legal challenge filed by the San Luis province against the decree. The court had given the executive ten days to present its response, a deadline that expired by the end of last week.

At the same time, opposition lawmakers will attempt to use their control over the legislature to strike down the controversial decrees, but action in the legislature will be fraught with difficulties. The bicameral commission for reviewing emergency decrees is evenly split between pro-government and opposition lawmakers, making it unlikely that any decision will be reached. This implies that the issue will be passed on for a decision in the plenary, although Congress is in recess until March and the legal competence of opposition lawmakers to call for an emergency session in January or early February is highly contested. Government lawmakers contend that it is only the president who has the authority to call for an extra session during the congressional recess. The uncertain legal validity of any congressional moves to "summon itself" could, in turn, critically weaken the opposition, whose internal divisions have regularly been skillfully exploited by the government.

More broadly, the controversial actions taken by the government are set to further weaken investor confidence in both the independence of the Argentine central bank and its capacity to act as an independent banking regulator. As a result, government efforts to establish a sound regulatory framework could be severely affected over the long run. Private-sector banks backed the government decision to dismiss Redrado amid fear that the conflict of powers would lead to an increase in the cost of funding for private financial institutions.

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