IHS Global Insight Perspective
Argentine president Cristina Fernández de Kirchner yesterday ignited a major political row when she called on Martín Redrado, the president of the central bank (BCRA), to step down over his refusal to use BCRA reserves to pay back debt in 2010.
The forced removal of the BCRA top executive without respecting the correct procedure would be interpreted as an attack on central bank independence. It would also undermine the confidence of economic actors in Argentina’s political economy framework.
We do not expect the upcoming debt exchange offer to holdouts to be affected by the fresh row, but it could have considerable longer-term economic and political costs for the government, which is desperate to avoid any cutbacks in public spending ahead of the presidential election in 2011.
Action and Reaction
Argentine president Cristina Fernández de Kirchner yesterday triggered a fresh political row, pitting the central government against the central bank (BCRA), after she called on BCRA president Martín Redrado to step down over his refusal to support the government’s economic policy, as Cabinet Chief Aníbal Fernández phrased it. But Redrado, whose term at the top of the BCRA expires in September, has decided not to resign. He had drawn the ire of the president by delaying the transfer of approximately US$6.6-billion of central bank foreign reserves to the so-called Bicentennial Fund, an instrument aimed at guaranteeing debt payments in 2010 (see Argentina: 16 December 2009: Argentine Foreign Reserves Guarantee Debt Payments in 2010). While Redrado did not show major opposition to the creation of the fund, he is now against transferring the money because of the possibility of seizure; debt holdouts who decided in 2005 not to participate in the debt exchange offer might obtain court orders to retain Argentine government assets in foreign jurisdiction. The government considered this move a betrayal. Mario Blejer, a former director of the Bank of England and a close friend of Finance Minister Amado Boudou, was offered Redrado’s seat. He rejected, arguing that the central bank already has a president.
The market reaction was immediate, with local bonds shrinking over 5% after strong rallies were observed in previous sessions, while the Merval stock index sank by 2%. Pressure on the local currency was not significant, losing just 0.25%. Political reaction was equally immediate. Leaders of opposition parties rushed to support Redrado’s decision to ignore the presidential call to step down and slammed the government for attacking the independence of the central bank. Redrado had already been lobbied by the opposition, which deems the presidential decree establishing the Bicentennial Fund unlawful, to delay the transfer of the money.
Redrado’s position has been bolstered by the president apparently overstepping her competences by calling on him to step down. According to the law, removing a central bank director after a concrete case of misconduct has been identified requires the approval of a congressional commission. Yet the government’s chances of obtaining the green light from Congress for such a move are minimal. The government no longer holds legislative majorities, and the commission overseeing the procedure would be presided over the by Senate president Julio Cobos, who has highly strained relations with the president. The legal troubles for the government do not end here. On 30 December the Supreme Court agreed to review a legal challenge presented by the San Luis province against the decree that created the Bicentennial Fund. Opposition lawmakers argue that the measure infringes the principles of separation of powers and central bank independence by by-passing congressional authority over the use of public funds.
Outlook and ImplicationsThe BCRA has long suffered from a high turnover of top executives, as the bank has seen no fewer than six presidents since 2000. Likewise, lack of central bank independence is not a new problem in Argentina, and has come under the spotlight since 2007 when the government started to manipulate inflation statistics, limiting the need for monetary tightening. IHS Global Insight does not expect the upcoming debt exchange offer to holdouts to be affected by the row. But the country’s expected return to the financial markets to raise funds after the exchange concludes might be seriously affected as this is new evidence of weak rule of law and poor institutional framework, precisely when Argentina was giving off signals of good conduct. This might aggravate the financial woes of the government, which is desperate to maintain high public spending as the country starts to look ahead to the 2011 presidential election.