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SCENARIOS-Will Argentina gvt get foreign reserves?
Reuters
February 22, 2010

By Walter Brandimarte

BUENOS AIRES, Feb 22 (Reuters) - Argentine President Cristina Fernandez is fighting to tap billions of dollars in foreign reserves to pay debt.

The plan has led to the resignation of a central bank president and sparked legal challenges from opposition lawmakers.

Fernandez wants to transfer around $6.6 billion from the country's foreign reserves -- currently just below $48 billion -- to a fund to make debt payments coming due this year.

The plan was frozen by a court ruling earlier this year and the government has appealed.

Fernandez's critics say she is seeking the funds to increase public spending and shore up her beleaguered government ahead of next year's presidential elections.

The following are possible scenarios on the outcome of the reserves fund, including the impact on government finances and Argentine securities prices.

SENATE HOLDS VOTE ON GOV'T DECREE THAT CREATED FUND

Fernandez used a presidential decree to create the fund and needs the approval of one chamber of Congress to move forward with it.

Since her government has lost its majority in the lower house, she has focused efforts on trying to win passage in the Senate. However, Senate leaders allied with the government say for now they do not have the votes to approve the fund.

Argentine media have reported the government is two votes shy of majority backing in the Senate, which is scheduled to reconvene next week from a summer recess.

Fernandez's strategy has been to promise part of the funds to governors of cash-strapped provinces, hoping they will push senators from their states to back the plan.

APPEALS COURT UNFREEZES FUND PLAN

An Argentine court may soon rule on a government appeal of a court injunction that froze Fernandez's plan.

A favorable ruling could give the government a window to transfer the funds from the central bank to the Treasury. The case would likely be elevated to the Supreme Court for a final ruling.

It could also lead to more legal wrangling.

The opposition has threatened to call an emergency session in Congress to vote on the issue if the appeal court rules in the government's favor.

FERNANDEZ MAY TAP OTHER CENTRAL BANK FUNDS

Should her current plan fail, Fernandez reportedly is considering tapping other central bank funds that technically are not considered to be part of the monetary authority's reserves.

The government could tap some $2.2 billion of the country's reserves which are earmarked for payment of debt with multilateral institutions such as the World Bank and the Inter American Development Bank.

She could also tap into central bank profits, which Buenos Aires daily La Nacion estimated could have reached 24.7 billion pesos, or $6.3 billion, in 2009 -- an amount similar to that sought by the reserves fund.

The central bank will release its 2009 financial results in March, a government source told Reuters, adding the numbers reported by La Nacion seem to be too optimistic.

It is more likely that the bank's profits for 2009 hover around 20 billion pesos, the source said.

The central bank has transferred about 4.5 billion pesos to the Treasury each year during the past two years. Those are basically accounting profits resulting from mark-to-market gains on the bank's portfolio and the revaluation of Argentina's foreign reserves at a weaker exchange rate.

POSSIBLE MARKET AND POLITICAL IMPACT

Government bond prices would likely rise if the fund is approved since it would improve Argentina's ability to service debt in the short term.

It would be seen as a negative factor in the longer run, however, as it would deplete the country's foreign reserves, which stand slightly below $48 billion.

The fund might reduce the government urge to move forward with a planned swap of defaulted debt -- a necessary step for Argentina to return to international capital markets.

It could further fuel inflation, which is already expected to reach 20 percent this year, as it would increase the amount of pesos in circulation.

Failure to create the fund would strain government finances and increase political confrontation with provincial governors who did not back the plan.

(Additional reporting by Guido Nejamkis; Editing by Kevin Gray; Editing by Andrew Hay)

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