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The embargo of the BCRA reserves is possible
La Nacion
February 14, 2010

By Horacio T. Liendo
For LA NACION

It's time to analyze and comprehend the relationship between embargoes requested by Argentina's creditors on the accounts of the Central Bank (BCRA) in New York, and the decrees of necessity and urgency written by Cristina Kirchner in December and January.

Some 23.85% of the defaulted debt from 2002 did not accept the proposed swap in 2005. Some of the holders of that debt are ready to accept the new swap; others, who filed lawsuits against the country in New York, have obtained favorable rulings and, for some time, have tried to execute them. They haven't managed to because Argentina hasn't a single embargoable asset in New York.

The BCRA constantly operates in that arena. In fact, since 2003, the majority of the reserves have been found in accounts of the Federal Reserve in New York. Today they have been transferred to the Bank for International Settlements in Switzerland. The reasons for the BCRA having been able and should continue being able to operate freely in New York are twofold. First, the international community understands and this is reflected in various pieces of legislation that central banks are distinct subjects of countries that they represent and don't respond for their debts. Second, always and when central banks enact functions that are their own, the assets they use to enact them have immunity. While this remains, the BCRA could continue operating with freedom abroad.

The theory of "alter ego"

The distinction between the BCRA and Argentina is based on various issues. In the first place, the BCRA charter establishes that, in the development of its activities, "it will not be subject to orders, indications or instructions from the Executive Branch." It also establishes that the BCRA "cannot assume the obligations of any nature that imply conditioning, restricting or delegating, without express authorization of Congress, the exercise of its legal duties." It's clear that the general principle is autonomy and that the BCRA is not dependent on other organizations. The goals were fixed by law and, once the officials are named, they mustn't be interfered with in their activities.

There are precedents in which the American courts understood that the central banks involved hadn't acted in an independent manner, but had obeyed orders from the States, acting as shields or "front men" to avoid losses of assets that could be used in some other way. In those cases, the courts found that the assets didn't belong to the banks and didn't have the privilege of immunity.

The paradigmic case is from the Cuban Bank for Foreign Trade (Bancec) in 1983. In that case, the First Nacional City Bank sued Bancec for a debt from the Cuban government. Bancec defended its assets and said it was a different entity fro the debtor.

The U.S. Supreme Court said that the independence between a State and its organs will have to be judged according to the principles of international law, which agree with those of American law. That is to say, it doesn't matter what Cuban law says or Argentine law if it doesn't coincide with what foreign laws say. The international principles establish that independence is lost when an entity is controlled by the State. Therefore, its mandate changes. That presumption grows when the activities of the dependent allow the State to do things that it couldn't in another way. Bancec fel into that category and lost its assets.

Something similar happened with the Central Bank of Peru in 1994. In this case they had constituted a guarantee fund through which the Central Bank guaranteed various loans granted by The Riggs National Bank of Washington to three banks whose only owner was the Peruvian state. Soon after the default, the Central Bank of Peru tried to avoid the loss of the funds alleging immunity. The court rejected the request explaining that in the case, the Central Bank of Peru was an intermediary of those three banks and, indirectly, the Peruvian state and therefore the guarantee on deposit had to be considered an asset of the debtors, which the creditors could take for payment of their balances.

Vulnerable funds

With that reasoning, the funds placed as a guarantee of the State are vulnerable to the demands of all that State's creditors, including if they are found to be deposited in the name of a central bank.

In another case, which involved the Central Bank of Ecuador in 1993, the court said that the intermediation in relation between creditors and debtors is not an essential or proper function of a central bank and the assets involved have no immunity. Which brings us to the second point of this analysis: when does the BCRA act in accord with its essential functions?

What is the BCRA doing, or what should it be doing? The third article of the Charter is eloquent. "The primary and fundamental mission is to preserve the value of the currency." This is complemented by Law 23.928. Here it is established that the monetary entity will have to have reserves in gold and cash to back 100% of the monetary base. The reserves that back the monetary base will have to be affected only to that end and cannot be used to back other activities, like the emission of Lebac and Nobac or the celebration of operations of financial derivatives. The charter argues that the reserves which back the monetary base are not subject to embargo.

The clarity in this issue began to get cloudy in 2005, when through a decree of necessity and urgency, article six of Law 23.928 was modified to establish that the reserves which exceed those necessary to back the monetary base could be used to pay obligations contracted with international organizations.

The decree of necessity and urgency 2010/09 which created the Bicentennial Fund, modified this article again. It added at the end that the reserves that "are left over" after backing and maintaining the value of the currency could be used to "pay servicing on public debt of the national State" and ordered the BCRA to transfer US$6.5 billion from the reserves to the Economy Ministry. The functions of the BCRA must be defined by Congress and not by the Executive Branch. The use of reserves to guarantee the State's debt doesn't seem to be an essential activity of a central bank. As such, the assets used for that end couldn't count on the immunity that foreign law gives them. Thus, the first fundamental of defending free activity abroad vanishes.

The order contained in the decree doesn't help defend the principle of independence that allows the bank to act apart from the State's problems. Much less the removal of its president through another decree of necessity and urgency. These rules seem to indicate that the BCRA doesn't count on the necessary autonomy to repel the actions of Argentina's creditors and it seems much like the Bancec case.

The civilized world has created institutions that contributed to the development of States. Soon after much discord, the international community agreed to respect them. This allowed a greater coexistence and synergy between States, so necessary in this global age. To move away from such institutions implies the loss of those advantages.

The author was Legal and Technical Secretary to the Economy Ministry.

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