Argentina Central Bank crisis ends

Sources: Financial Times - Argentina debt battle intensifies / Financial Times – Argentina woes will prove costly for comeback / Business News Americas - Central Bank Chief Redrado fired, Blejer to take the helm - Argentina / Business Day - Argentina central bank row rattles markets / The Wall Street Journal - Argentina Bonds Drop as Central Bank Flap Rattles Nerves / Yahoo News (AP) - Argentina's Central Bank President Resigns

Argentina Central Bank President, Martin Redrado, ended the month long political crisis by resigning on Friday, January 29. The crisis started when Argentina President Christina Fernandez ordered Mr. Redrado to transfer $6.57 billion in central bank reserves to pay off sovereign debt dating back to Argentina’s 2001 default. Mr. Redrado refused to transfer the money, reasoning that the reserves would be subject to court judgments if the international community did not view the Central Bank as independent. Mr. Redrado also feared that transferring the money following the decree would open the funds to further government spending in the future. The Central Bank has approximately $48 billion in reserves.

Mr. Redrado stated that he brought monetary stability to Argentina for the first time in 30 years. Mr. Redrado submitted his resignation claiming that he could no longer perform his duties because “the government…disregarded the independence of the Central Bank.” He stated further, “We have arrived at this situation because of the national government’s permanent trampling of institutions.” Argentina’s economy minister, Amado Boudou rejected Mr. Redrado’s claim that his policies resulted in the accumulation of the reserves, asserting instead that Argentina accumulated the reserves through the success of President Fernandez’s policies.

President Fernandez fired Mr. Redrado on January 7 for failing to follow her orders. A judge blocked her order and reinstated Mr. Redrado. The Court held that the Central Bank Charter required a non-binding opinion of a special commission of legislatures for the President to fire the Central Bank President. Argentina subsequently convened a congressional panel to decide whether to approve or reject President Fernandez’s firing of Mr. Redrado. Mr. Redrado returned to work briefly, but the police locked him out of his office on Sunday, January 24. Analysts predicted the congressional panel would support President Fernandez’s decree ousting Mr. Redrado. The congressional panel will present its finding early this week, but Mr. Redrado’s resignation means that that the congressional panel’s findings will have no impact. The government installed Mr. Redrado’s deputy, Miguel Angel Pesce, as interim governor. Analysts assert that it appears that Mr. Pesce has aligned himself with the government because his first economic report showed lower than expected inflation.

President Fernandez hopes that Argentina can resolve its $20 billion in outstanding debt relating to its 2001 default this year so that it can return to the international capital markets. Argentina would like to tap the international capital markets to decrease the expense associated with financing its funding gap. The bond it sold to Venezuela to finance its funding gap in 2008 had an interest rate of approximately 15 percent. Argentina politicians hoped that Argentina could raise money in the international capital markets at interest rates in the high single digits.

President Fernandez’s inability to rein in public spending coupled with the country's unexpected policy moves make Argentina a risky investment. Argentina bonds fell by approximately 10% during the first week of the crisis. In 2008, President Fernandez nationalized Argentinean pension funds and economists around the world allege that the country has manipulated its economic data over the past few years concealing inflation. Argentina has a projected funding gap of $11.4 billion for this fiscal year. Argentina has relied on ally Venezuela to fund its funding gap in recent years; however, Venezuela may be unable to offer Argentina financial assistance this year as it continues to struggle with the recession. Analysts predict that this political crisis will increase the interest rate Argentina will have to pay once it finally gains access to the international capital markets.

Discussion Questions:

Will Argentina be able to return to the international capital markets this year?

Will Argentina stop manipulating its economic numbers (inflation, GDP) in 2010?