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Reserves: seeking to avoid embargoes
La Nacion
December 23, 2009

Economy placed a letter at the BCRA, which will hold the accounts of the Bicentennial Fund

Mart n Kanenguiser
LA NACION

Yesterday, the government placed a letter at the Central Bank for the reserves that will serve to pay the debt in dollars in 2010, according to a resolution that will leave these funds with the monetary entity to elude new embargoes abroad.

Resolution 419/2009 of the Economy Ministry, published yesterday in the Official Bulletin, moved to place a letter for US$6.569 billion that will make up the Bicentennial Fund for dis-indebtedness and stability.

The instrument is dated December 22, 2019, with total payment of principal at the end of the period, according to the official text.

One still must wait for the subscription to the letter by the BCRA, where the leadership will have to first validate the decree of necessity and urgency from the Executive Branch, it would seem, based on a finding from the Subdirectorate for Legal Issues.

A report from the Bolsa SBS firm said that "rumors are growing that it will be the Treasury counsel who will rule on the legality of the operation, in the sense that it's a DNU and not a Congressional law that is creating the Fund and making the Central Bank reserves available." Un informe de la casa de Bolsa SBS indic que "crece la versi n de que ser el procurador del Tesoro quien se expida sobre la legalidad de la operaci n, en el sentido de que es un DNU y no una ley del Congreso el que crea el Fondo y dispone de las reservas del Central".

On that, the opposition legislative blocks warned that they could go to court to seek the nullification of the DNU.

Yield

Also, it was reported that the letter will give the Central Bank a similar yield to the international reserves "up to a maximum of Libor plus one percentage point, paid out quarterly" in interest.

At the BCRA they explain that the reserves yield around 1.5% a year at Economy they had mentioned 0.5% - and they admite that, due to the low current level of the Libor rate, the interest on the letter from the Treasury will be conjuncturally negative.

The Economy Ministry's Office of Public Credit will be charged with calculating the rate "over yield of the international reserves in the corresponding half-year," according to the resolution signed by Minister Amado Boudou.

The rule records that Economy "is the authority designated with issuing rules on the operational aspects of the Bicentennial Fund."

Also, it allows the Revenue Secretary to open an account at the Central Bank, named as the Bicentennial Fund, with the subaccounts separated. One of them will be used for the payments of debt maturities for multilateral organizations, for US$2.187 billion, and the other for payments to private creditors, for "up to the sum of US$4.382 billion."

To place the money in BCRA accounts, it seems to have settled an internal debate around the vulnerability of those resources, facing the creditors that continue to sue Argentina over the default that began in 2001.

Lawsuit against the BCRA

Officials involved in the operation conceded to LA NACION that this could add to arguments by those bondholders in the United States, where in a few weeks there could be another decision around the reserves that remain embargoed.

In the lawsuit, the "alter ego" concept is discussed, by which the most hostile creditors argue that there is no real division between the BCRA and the Treasury. The Central Bank managed to unfreeze most of it, but there is still US$105 million stuck, whose future will be decided at the beginning of 2010.

The monetary entity doesn't want to risk a prediction around this complicated legal case, but they join in the fear around the use of reserves reinforcing the alter-ego argument. However, at the Palacio de Hacienda there are two views that spur a less pessimistic view:

If a group of bondholders in court blocks the payment of regular debt through the use of reserves, it could complicate the swap, just as the exit from the default nears. On that, it fits to say that the vulture funds like Elliot and Dart seem to be more interested in the swap being a success, leaving them "face to face" with the next government to negotiate from a stronger position. That at least is the attitude they showed at the beginning of this year, when they came to the country to present their ideas to some officials, while then toughening up with embargoing funds of the Argentine embassies in France and Belgium.

Argentina should not "be alone" in protecting its Central Bank reserves, as the international flow of those assets is continuous and other countries have to back its protection. "Otherwise, hostile creditors would have more power than governments in managing debt adjustments," they warned.

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