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Argentine Opposition Fights Kirchner's Debt Plan
Wall Street Journal
December 30, 2009

By MATT MOFFETT and MATTHEW COWLEY

BUENOS AIRES -- Argentina's opposition sought a court injunction to block the government's plan to earmark some central-bank reserves to service the national debt.

The dispute over President Cristina Kirchner's decree to set aside $6.57 billion of foreign-currency reserves in a debt-payment fund is pitting the leftist Peronist government against a new opposition-dominated Congress. The outcome could affect investors' confidence in Argentina and help determine whether Mrs. Kirchner's government will be able o free up resources for spending projects to bolster its waning popularity.

The government announced two weeks ago that it would transfer some central-bank dollar reserves into the "Bicentennial Fund for Stability and Reduced Indebtedness," as a way of guaranteeing that Argentina would meet its 2010 debt obligations, estimated at about $16 billion.

On Tuesday, a group of opposition legislators filed suit in federal court to block Mrs. Kirchner's plan as unconstitutional, asserting that the central bank's reserves are under control of the legislature rather than the executive. Federico Pinedo, leader of the conservative PRO party in the lower house, said that by paying debt with reserves rather than resources from the budget, the government is trying to avoid taking tough steps to control spending, which economists say has been growing at about three times the rate of revenues.

"It creates the precedent that when it needs money, the government can grab reserves from the central bank, which won't be able to defend the value of the currency," Mr. Pinedo said.

Argentina's central bank declined to comment on the matter.

Opposition leaders previously wrote a letter to Central Bank President Mart[iacute]n Redrado asking that he not release the reserves. Over the years, Mr. Redrado has defended the accumulation of foreign-exchange reserves, now at slightly more than $48 billion, to give Argentina the wherewithal to stabilize the economy in the event of an emergency. During the global financial crisis, the central bank used some reserves to protect the Argentine peso from the volatility that affected currencies in Brazil and Chile.

Argentina's Congress is demanding a greater role in governing now that the opposition has the majority in the new legislature, which was seated on Dec 10. Mrs. Kirchner's faction of the Peronist Party lost a batch of seats in June midterm elections, reflecting voter discontent with her administration's populist economic policies and combative political style.

The government has defended the fund, saying it will reassure investors of Argentina's willingness to pay, at a time when the country plans to start borrowing again after nearly eight years of being largely frozen out of markets. Investors are wary of Argentina's track record, which includes declaring the largest sovereign debt default in history, on about $100 billion in debt, in 2001.

In President Kirchner's decree, the government justified tapping central-bank reserves, saying "a developing economy, like Argentina, would in part be sacrificing growth by maintaining those assets abroad with minimum interest."

If the decree is carried out, it wouldn't be the first time Argentina has channeled central-bank reserves toward debt payment. A few years ago, Argentina paid back the $9.8 billion it owed the International Monetary Fund by dipping into the central bank's dollar reserves. Venezuela has also transferred dollar reserves into a discretionary fund, which it has used for debt payment, among other purposes.

The PRO party's Mr. Pinedo said, "If this was reasonable, every country in the world would be doing it...Burn reserves to be happier." Argentina will post a budget deficit in 2009 for the first time since 2002.

Alberto Bernal, head macroeconomic strategist at Bulltick Capital Markets in Miami, said the opposition may end up conditioning support for the debt fund on receiving concessions from the government, such as a reduction in grain export taxes. He said the bond market could sell off somewhat if the fund is blocked, because earmarking the reserves for debt payment bolstered investor confidence that Argentina wouldn't default again.

Write to Matt Moffett at matthew.moffett@wsj.com and Matthew Cowley at matthew.cowley@dowjones.com

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