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The government will use Central Bank reserves to pay debt
La Nacion
December 15, 2009

Faced with the fiscal crunch, they will cover debt maturities in dollars this way in 2010; the measure intends to lower the interest rate that the government and businesses pay; they say that it doesn't affect currency exchange stability; support in the markets and caution at the monetary entity"

Mart n Kanenguiser
LA NACION

Due to the fiscal problems caused by the strong rise in public spending, the government will use the reserves of the Central Bank (BCRA) to pay debt in dollars in 2010, with the intention of lowering interest rates. Economy Minister Amado Boudou yesterday announced the creation of the Bicentennial Fund for Dis-indebtedness and Stability with US$6.549 billion that until now was part of the freely-available assets of the monetary entity.

Boudou pointed out that the measure criticized by the opposition and which the BCRA president, Martin Redrado, accepted without much enthusiasm intends to dispel all doubts "about Argentina's capacity to pay during the year 2010," in an event in which President Cristina Kirchner also used as a national television and radio broadcast to question the default at the end of 2001 and highlighted the economic accomplishments managed since 2003.

In an interview with La Nacion, Boudou characterized the decision as "heterodox, but moderate" in an intent to not cause unease in the market from which he's seeking to attract refinancing of US$15 billion in 2010. Part of this strategy involved next month's swap with the bondholders in default.

Also, he argued that the guarantee of the BCRA over the debt "should lower the interest rate as much for the government as for the private sector, generating at the same time less stress for the fiscal front."

The transfer of BCRA funds to a Treasury account will be done through a decree of necessity and urgency (DNU) that will modify Article VI of the law of convertibility, as happened with the payment to the International Monetary Fund (IMF) in January 2006. That decree will have to be ratified in Congress, where the government lost control of the majorities.

Boudou said that this measure will not affect the level of the BCRA's international reserves, which were fundamental in serving as a barrier to mitigate the heavy flight of capital in the last two years.

On that, the minister denied that the decision could weaken that line of defense, because the resources will not only be used once (as done in the IMF payment) and, also, the BCRA already will end up with 66% of the reserves at free disposal. At the Palacio de Hacienda they rule out a speculative attack and, on the contrary, believe that if the dollar rises a little (to 3.86 pesos, for example) the economy could have a competitive gain.

The amount that will be sent to the Treasury is similar to that which the BCRA projected as a platform of growth of the reserves in 2010. But still, Boudou said that those assets could yield a much higher return (3%) than currently (0.5%).

But in the BCRA they think that, in order not to generate noise, the reserves move must involve four axes by the Executive:

* Keep to the strategy of returning to the voluntary debt markets, which, according to Boudou, involves holding the swap with bondholders in default in the second half of January.

* Comply with the target for primary fiscal surplus in 2010, after a year ending in deficit, because otherwise the lowering of interest rates managed now will evaporate within months.

* Having to cautiously manage the demand for money, in a world that will grow more and, in particular, in a country that will face higher inflation.

* It has to preserve institutional backing, through the Congressional ratification of the DNU that will modify the use of the reserves.

In turn, at the monetary entity they agreed in pointing out that, a priori, the amount involved in this fund doesn't constitute a threat in itself for currency stability.

Redrado, whose mandate expires at the end of September, has defended in a systematic way the policy of accumulating reserves, faced with the absence of a loan of the last resort soon after the launch of convertibility.

However, at Economy they argue that, after some years, "the strategy has turned out to be inefficient." They also find that this decision doesn't block the way for the rationalization of spending, despite the deep lack of confidence from the better part of analysts. "This year, despite external difficulties, we will end up with a certain primary surplus, and next year as well," the economic team said.

The minister has pushed as his main mission, together with Finance Secretary Hern n Lorenzino, the idea of dispelling the financial situation of the year ahead of the next presidential elections. For that reason, they will launch the swap for the holdouts in January with a new bond that will be worth around US$47 and will try other ways toward "dis-indebtedness" like the auctioning of interest rates before bond payments.

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