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An error in the decree that authorizes the Paris Club payment allows million-dollar lawsuits
El Cronista
September 04, 2008

Unintentionally, the government reinforced the argument of the creditors that are asking to collect on their debts with Central Bank reserves. It's working on annulling it.

JUAN CERRUTI Buenos Aires

The lone way that Cristina and Nestor Kirchner make decisions and the reduced group of collaborators charged with executing them at times plays a bad hand. In the decree that authorizes the payment to the Paris Club, and that was published yesterday in the Official Bulletin, appears something that for many specialists is a huge mistake that could be costly to the country.

It indicates there that the cancellation of the debt will be done with reserves of the Central Bank, when in reality the payment will be done with funds from the National Treasury, which obviously will buy its dollars from the BCRA.

The slip passes as a simple question of semantics, due to the argument that until now Argentina's lawyers used against the bondholders and the judgments throughout the world that the reserves of the Central Bank are not subject to embargo because they're not treated as funds of the Argentine government. But this thesis is weakened sensibly if the government publicly admits, and through a presidential decree no less, that it will discretionally use those reserves.

It's for this that it's speculated that soon Legal and Technical Secretary of the Presidency Carlos Zannini will go back and redact the decree and annul the original. In this new form, it will clarify that the Treasury will buy the dollars from the Central Bank.

While they amend the error, it's likely that the publication of the decree alone strengthens the judicial arguments of the creditors and vulture funds against the country, in particular before Judge Thomas Griesa of New York, where they are placing the majority of cases against Argentina. Article I of the decree in question proposes "the total cancellation of the debt contracted with the Paris Club with freely available reserves," while Article II instructs the Economy Ministry "to proceed with cancelling the total debt contracted with the Paris Club with application of aforementioned reserves, to such end will require the collaboration of the authorities of the Central Bank."

The case is different from the payment to the IMF, because the debtor to the Fund is the Central Bank of a country, for which it's logical to pay with reserves. But in this case, the debtor before the Paris Club is the Treasury.

In this context, it came out that in the next few weeks a team will depart for Paris that will be led by Finance Secretary Hern n Lorenzino, with the goal of sitting down with the head of the Club, Xavier Musca. The first task will be to conciliate the amounts of the debt with each of the member countries of the entity.

Another point that could generate a judicial roadblock is the use of freely available reserves. It's a legal figure created on the occasion of the payment to the IMF, but for the exclusive use with international organizations. The Paris Club doesn't fall under this last definition, for which the use of freely available reserves would not be usable.

Criticism

For his part, ex-Economy Minister Domingo Cavallo posted an article on his personal blog in which he said that the Paris Club payment raises the chances of a default. "It will be more difficult to place new bonds, because those who buy those bonds, with the exception of Venezuela, will interpret that the government dipped its hands into the Central Bank reserves, which don't belong to them, to avoid submitted to the audits of the IMF," he said.