Argentina: Bank independence at stake as Redrado exits

COPYING AND DISTRIBUTING ARE PROHIBITED WITHOUT PERMISSION OF THE PUBLISHER: SContreras@Euromoney.com

By:
Jason Mitchell
Published on:

Governor leaves after stand off; $6.6bln transfer at root of conflict

See also: Argentina: Redrado’s era comes to an end

Martin Redrado’s resignation as governor of the Argentine central bank

Locked out: Martin Redrado leaves his home in Buenos Aires on January 25. He left the central bank four days later after announcing his resignation

Martin Redrado’s resignation as governor of the Argentine central bank marks the end of a period of relative stability at the monetary authority. His departure following a bitter struggle with the country’s president, Cristina Kirchner, over the use of the bank’s reserves, has led to fears that the central bank’s independence could become compromised with Kirchner and her husband, former president, Nestor pulling the strings.

Redrado’s exit can be traced back to December 14, when Kirchner passed an emergency decree to set up a Bicentennial Stability and Reduced Indebtedness Fund to finance public debt that matures this year. This involved the transfer of $6.6 billion in bank reserves to the national treasury. Controversially, she said that the central bank had $18 billion in "excess reserves". This sparked off one of the worst constitutional crises in Argentina since the country’s economic meltdown in 2001.

Redrado only learned about the decree a couple of hours before it was issued and was strongly opposed to the move. He was reluctant to instruct the bank to make the transfer and, on January 8, Kirchner signed another decree in which she fired him and accused him of "misconduct and dereliction of duty by a public servant".

The government lined up Mario Blejer, who was the bank’s governor in 2002 and subsequently became director of the Bank of England’s Centre for Central Banking Studies, to take over from Redrado.

"I am defending two main concepts: the independence of the central bank in our decision-making process and that the reserves should be used for monetary and financial stability"

Martin Redrado

"We took a few weeks to analyse the presidential decree given all the risks involved," said Redrado just days before his resignation. "The plan entails significant legal risks because public debt issues in Argentina are the main responsibility of Congress. I even got a letter from Congress suggesting not to implement the decree and wait for the discussion there.

"Also, the plan involves economic and financial risks to monetary and financial stability. Many times we have discussed the relevance of having a high amount of reserves for highly dollarized emerging market economies like Argentina."

Redrado added: "Basically, I am defending two main concepts: the independence of the central bank in our decision-making process and that the reserves should be used for monetary and financial stability. Also, there is a clear need for the intervention of Congress, which determines the legal authority of the central bank."

Under the bicentennial fund, the government would issue a non-tradable 10-year bond to the central bank in exchange for the $6.6 billion in reserves. The new bond would pay well below market rates: it would yield the same as international reserves, up to Libor minus 1% – basically zero. For the government, this produces a huge saving, as access to the market would require double-digit yields.

Court injunctions

Kirchner and her husband, Néstor, said to be the true power behind the throne, might have underestimated Redrado’s strong personality, for he was not prepared to go without a fight. In January, he managed to obtain court injunctions against both decrees on the grounds that the central bank’s charter says that Congress must be consulted before the governor can be dismissed. Much to the government’s annoyance, he was reinstated but Kirchner asked Congress to set up a special commission to examine his removal.

"It’s a bit odd," said Miguel Kiguel, director of local economic consultants Econviews as the commission was being set up. "Congress must be consulted but its recommendation is not binding. This means the special commission could suggest he stays in place but Kirchner can ignore its views and go ahead and sack him anyway. The constitutional process would have been followed and the courts will have no grounds for the injunction against his dismissal."

However, before the special commission could decide, Redrado submitted his resignation on January 29 saying it was in the best interests of the country and the central bank. Even then confusion continued to reign with the government refusing to accept the resignation on the grounds that it was waiting for the committee to advise on the matter. The committee included Julio Cobos, the country’s vice president and Alfonso-Prat-Gay, a former governor of the central bank who is now an opposition senator.

High grace

Although initially Redrado gathered plenty of support by the end most Argentines just wanted the saga to end – and if that meant Redrado’s resignation then so be it. "He will leave with high grace, as he did what he had to do and has defended central bank independence. But this situation cannot continue indefinitely," said Kiguel in mid-January.

Analysts believe that Blejer will eventually replace Redrado. He is understood to be in favour of the bicentennial fund and is an economic adviser to Amado Boudou, the economy minister. However, he says he will only consider the post once all the legal and constitutional hurdles have been cleared.

total reserves held by the central bank 
Even though the government has got Redrado’s head, it is not assured of obtaining the central bank reserves it seeks. One of the most controversial parts of the original decree was that there would be an initial transfer of $6.6 billion but it also enabled the government to draw on more than $11 billion of reserves at later stages from a total reserve of $48 billion. The president was only able to sign the decree because Congress was not sitting. It returns in March and is likely to vote on the transfer. Some members of Congress are pushing for it to be recalled early. The government is not assured of a majority in either of the two chambers, Deputies or the Senate.

Alberto Ramos, Argentina analyst at Goldman Sachs, says: "Using central bank reserves to pay government obligations is not a positive development and the concept of excess reserves is certainly open to debate. It weakens the balance sheet of the central bank and provides the wrong incentive to the government, as it weakens the incentive to control the rapid expansion of spending and to promote some consolidation of the fiscal accounts in 2010."

He says that investors would be more reassured if the payments of debt obligations were met with solid fiscal surpluses rather than from central bank reserves. In exchange for its international reserves, which are liquid and high-quality assets, the bank gets an asset that is illiquid and of much lower credit quality, and in net present value terms it must absorb a substantial loss.

Frozen account

The government has also run into another obstacle over the use of the reserves, which Redrado had warned it about: at the start of January, Thomas Griesa, a New York judge, froze the Argentine central bank’s account held at the Federal Reserve Bank of New York, which had $1.7 billion in reserves, following claims from two funds holding defaulted Argentine debt that the central bank was no longer an autonomous agency but under the thumb of the country’s executive branch. One of the reasons Griesa made this move was that the bicentennial fund had been designed to pay private creditors as well as multilateral ones. Reserves had never been used in this way before.

In mid-January, following an agreement between the government and the two funds, Griesa rescinded the freeze but only on the condition that the account’s balance never fell below $1.7 billion. The central bank can now use it for transactions but within tight parameters.


See also: Argentina: Redrado’s era comes to an end