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Central Bank is analyzing legal effects of use of reserves
Ambito Financiero
December 21, 2009

Redrado asks for legal ruling.
Doubts over validity of authorization by decree.

Central Bank President Martin Redrado has sent the DNU which authorizes the use of US$6.569 of reserves for payment of debt in dollars, through the Bicentennial Fund, to his general counsel. The goal is to obtain a finding that determines the legality of the operation and to avoid future lawsuits.

Sources of the monetary authority explained to this newspaper that the legal finding was requested before a letter from legislators of the opposition that called on Redrado to block the transfer of reserves.

The most controversial point has to do with the fact that it would be done through a Presidential decree and not by legislative approval.

The precedent in this sent plays against the government: when they moved in December 2005 to pay the debt with the IMF with reserves, it was done through a law.

The DNU that was announced last Tuesday is practically a copy of the law of four years ago. It only added that the reserves, in addition to paying off obligations to multilateral organizations, could be used also to pay maturities on public bonds in 2010.

One of the points under discussion refers, obviously, to the autonomy of the Central Bank, and up to the point that the government could choose the destination of the reserves, for more than four years has been created the figure of "freely available" reserves.

According to official calculations, the Executive could put its hands on US$18 billion from a total of US$47 billion using the figures in the decree. The leadership of the entity want to know now if that is sufficient or if a law is needed to back the "swipe" of the hand.

Another aspect has to do with the legal protection of the reserves. To use them to pay debt in the hands of private bondholders, the funds could suffer embargoes, one of the more palpable dangers of the operation. In the Economy Ministry they say that for now there are no legal presentations, but they recognize that the vulture funds (for example, the one led by Dart) already included the issue last week in parallel suits that have been initiated against other Argentine assets.

The Central bank still has US$105 million in reserves under embargo, held at the Federal Reserve in New York. And while there are still decisions in favor of Argentina, they still haven't managed to free up the funds. But in addition to legal questions, at the BCRA they also have doubts over the consequences of using the reserves at the levels of covering money in circulation, and that they could be transformed into a high rise in public spending.

The allude, for example, to Article 33 of the charter, which obliges the entity to maintain reserves invested in instruments of adequate liquidity. The Treasurer, however, will deliver a bond at 10 years paid in full at the end (as such, it will be a totally illiquid instrument).

But at the BCRA they are ready to fight if they see themselves ultimately obliged to remit reserves to the Bicentennial Fund, which seems highly likely due to official pressure. The objective is passing now to limit the appetite by the Executive Branch for resources. The treatment that will be given to the assets of the institution is already being looked at.

According to the 2010 Budget, they will only remit yields of 3 billion pesos from the Central Bank. However, between the rise in the exchange rate and the rise in bond values they estimate that this level will amply surpass the 10 billion pesos and could reach 20 billion.

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