BUENOS AIRES, (Reuters) – Argentine President Cristina Fernandez tried to force out the country’s central bank chief yesterday in a dispute over using billions of dollars in foreign currency reserves to pay rising debt obligations.
Martin Redrado, who refused to step down and said only Congress can remove him, has balked at handing over $6.6 billion in reserves despite a presidential order to use them to service debt at a time of a rising fiscal deficit.
Argentina’s bonds, currency and stocks fell and the news cast uncertainty over the country’s drive to regain investor confidence and return to global bond markets with a new issue for the first time since a massive 2001/02 default.
“Redrado has led the Central Bank and today that role is over,” Economy Minister Amado Boudou told a news conference. He added that the president had merely accepted Redrado’s previous offers to resign whenever she wanted.
Boudou said economist and former Central Bank chief Mario Blejer would take the post as soon as Redrado steps aside, but Blejer told El Cronista newspaper he could not take the job under the circumstances.
The peso currency weakened 0.33 percent to close at 3.875 per U.S. dollar while the benchmark MerVal stock index slid 1.63 percent. Argentine risk as measured by the spread between benchmark bonds and comparable U.S. Treasuries widened by 13 basis points, underperforming the J.P. Morgan Emerging Markets Bond Index, which narrowed by 10 basis points.
Argentine credit default swaps, or the cost of insuring the country’s bonds, rose by 100 basis points according to Markit Intraday.
Traders said markets read the president’s attempt to push out Redrado as a sign of desperation as the government seeks funds for debt payments.
Argentine bonds and stocks had risen in recent months in anticipation of a $20 billion bond swap, which aims to mop up leftover defaulted bonds and clear the way for the country to issue a major bond. A crisis over foreign reserves — which total about $48 billion — could raise Argentina’s borrowing costs just as it is tries to return to markets.
“Today’s events serve as a reminder of the acute political risks that still face investors in Argentina and … the government’s planned return to international debt markets is unlikely to be smooth,” Neil Shearing, senior emerging markets economist at Capital Economics, wrote in a report.
Opposition lawmakers had criticized the plan to tap foreign currency reserves to pay debt, and the Supreme Court had asked for an explanation of the plan. Under the central bank’s charter, the executive branch can dismiss a member of its board for dereliction of duties but must have a recommendation from a special congressional committee.
Congress is in recess. Fernandez allies lost their control of both houses of the legislature in 2009 but remain the largest bloc.
“It is very serious that the government is trying to manage the Central Bank,” said opposition Senator Ernesto Sanz of the Radical Civic Union party. The executive wants to handle Redrado “like a remote-control toy.”
Redrado, a Harvard-trained economist and former trade minister who has led the bank since 2004 and whose mandate was to end in September 2010, has traditionally been less autonomous than other Central Bank presidents.
He has quietly blocked some more radical economic proposals from the Fernandez administration, such as a plan to force local banks to buy bonds. But his role is largely limited to administering the exchange rate to prevent sharp movements and to regulating liquidity in the private banking system.
Argentina’s debt obligations rise this year to $13 billion, and economists see a funding gap of $2 billion to $7 billion.
At the same time, the rate of growth in government income has shrunk due to the economic slowdown.
The centre-left government rattled markets in the past by nationalizing the country’s main airline, soccer game broadcasts and the private pension system. Investors have also criticized policies such as price controls to try to tame inflation and intervention in grains and currency markets.
