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No reserve about reserves
Buenos Aires Herald
December 16, 2009

By Michael Soltys, Buenos Aires Herald Senior Editor

President Cristina Fern ndez de Kirchner's announcement that the government will be dipping into Central Bank funds to the tune of 6.5 billion dollars next year is intended to reassure international credit markets that they have a conscientious debtor in Argentina but the move also carries other messages. This gesture is designed as a confidence shock to jolt the interest rates which Argentina must pay on its bonds (currently around 12 percent or over twice Brazilian levels) into single digits but such an extreme measure as depleting Central Bank reserves risks sending out the message that Argentina is more insolvent and next year's debt repayments (manageable at under 15 billion dollars) more acute than is in fact the case. Above all, the impression is conveyed that the Kirchners would do anything rather than cut back on a public spending which has never increased by less than 30 percent annually since 2006 (50 percent in the presidential election year of 2007).

This bold move to transform the playing field was glorified with the name of Bicentenary Fund and considered so urgent that not even the death threats transmitted to a presidential helicopter last Friday (revealed earlier on Monday) could divert an often paranoid CFK but nevertheless the strategy hardly breaks new ground. Then President N stor Kirchner depleted Central Bank reserves far more severely in order to pay off the International Monetary Fund early in 2006 and CFK would have done the same to pay off Paris Club creditors 15 months ago if the global financial crisis had not peaked in the same month, plunging everything into confusion. Nor should the depletion of foreign currency reserves be taken too seriously (especially given their recovery since 2006) since next year's bumper trade surplus means that the Central Bank will be buying up export dollars almost automatically the worry is rather how to "sterilize" such monetary issue without more inflation.

Yet even in the best of cases, this strategy cannot be presented as an institutional gain. Using reserves at will (not for the first time) makes a mockery of Central Bank independence while Economy Minister Amado Boudou's chosen route to international credit access (mending fences with the IMF, the Paris Club and the 2003-5 bond swap holdouts, perhaps even reforming INDEC statistics bureau) is derailed overnight by the presidential couple, leaving him looking more like a toy boy than the genuine minister which Argentina has lacked since Roberto Lavagna's ouster in late 2005. In a word, a confidence shock which inspires neither feeling.

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