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The reserves, or your job
The Economist
January 07, 2010

The president's ultimatum to her Central Bank chief

TO SUSTAIN its expansionary fiscal policies, Cristina Fern ndez's government has developed an insatiable hunger for other people's cash. First she ramped up taxes on farmers, then last year she nationalised private pension funds. Now she is trying to lay her hands on the Central Bank's foreign-currency reserves.

Last month she issued a decree transferring $6.6 billion of the reserves to a fund to service the public debt. Although the government has run a (now diminishing) fiscal surplus for years, it cannot borrow freely in international capital markets. This is both because investors mistrust its policies and because it has yet to settle with bondholders who boycotted a previous debt restructuring in 2005 under N stor Kirchner, Ms Fern ndez's predecessor and husband.

The Central Bank is formally independent. By law any transfer of reserves requires authorisation by Congress. Mart n Redrado, the bank's governor, stalled, awaiting legal advice and the outcome of a legal challenge to the reserve grab by the opposition-controlled province of San Luis. On January 6th the government ordered Mr Redrado to resign. He refused, saying he would serve until his term ends in September.

"It wasn't Redrado who accumulated the reserves," said An bal Fernandez, the cabinet chief (who is not related to the president). "It was [the Kirchners'] government. In this country, it's not the governor of the Central Bank that makes the decisions." In fact it was Argentine exporters not the government whose labours accumulated the reserves. And Ms Fern ndez, who is deeply unpopular, is finding her decisions contested. In June the government lost its legislative majority in a mid-term election.

Mr Redrado has hitherto gone along with the Kirchners' dash for growth, while trying quietly to moderate some of their policies. If he remains defiant on the reserves, Ms Fern ndez can oust him only by appealing to a special committee of Congress, which would probably be led by opposition legislators. Ironically, had she sought the approval of Congress for the reserve transfer she might well have got it. Few Argentine politicians are prepared to pay the political cost of spending cuts or tax rises to pay off bondholders. As it is she may have turned the Central Bank chief into a martyr for the cause of integrity in public policy.

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