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Argentina's Bad Timing
Wall Street Journal
January 12, 2010

By RICHARD BARLEY

There is never a good time to have a public row between a country's leader and its central bank. Argentina has found a particularly bad time: President Cristina Kirchner's attempt to fire bank Governor Martin Redrado comes as the country is seeking to re-establish relations with international capital markets. The dispute centers on whether the government should use the country's foreign exchange reserves to pay down debt. Short-term, existing investors may feel they have most to gain from a Kirchner victory. But long-term, it would underline the existing doubts about Argentina's credibility.

If Ms. Kirchner gets her way, the transfer of $6.6 billion of the country's $48 billion reserves to a new fund aimed at paying down debt would eliminate Argentina's funding needs for 2010 -- and allow her to continue to spend freely ahead of 2011's presidential elections. Repayment would buoy debt investors. But a court Friday reinstated Mr. Redrado and barred the cash transfer. Mr. Redrado argues that Congress should decide on whether the payment should be made and says he is defending the bank's independence.

A debt repayment could signal a new willingness by Argentina to engage with creditors. But the method highlights that Argentina hasn't addressed the legacy of its 2001 default, unlike many emerging countries that spent the last decade building credibility, enabling them to weather the financial crisis surprisingly well. It is only thinking of using foreign-exchange reserves in this way due to its continued lack of market access and its failure to move the economy to a more sustainable footing.

It had seemed that Argentina was moving in the right direction: In November it announced plans for a debt swap with the holders of $20 billion in bonds who didn't agree to a 2005 exchange. A deal might open up access to markets that are keen to fund other emerging-market sovereigns. Russia, for instance, seems likely to have little trouble borrowing this year despite its default in 1998 -- showing that investors can have short memories. But that's only true when they aren't being given constant reminders of problems.

Until this latest row, Argentina had been benefiting from the fervor for emerging-market assets: The Merval stock index hit a record high Jan. 5, and its credit-default swaps and bonds had rallied sharply. That movement has reversed even as other risk assets have continued to rally. Ms. Kirchner's attempt to force through a debt repayment could yet end up backfiring.

Write to Richard Barley at richard.barley@dowjones.com

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