Argentina’s Senate approved changes to the central bank’s charter that allow the government unlimited use of international reserves to pay debt and will boost loans to help cover a widening budget deficit.
The upper house passed the bill proposed March 1 by President Cristina Fernandez de Kirchner after midnight in a 42-19 vote. The lower house approved the proposal last week. The law will take effect after Fernandez officially enacts it with a statement in the government’s official gazette.
The changes eliminate a requirement that reserves must equal or exceed the monetary base, which had been part of the so-called Convertibility law that pegged the peso at a one-to-one rate to the dollar from 1991 to 2002. The bank will also be able to boost lending to the Treasury to help the government finance its biggest budget deficit in at least 12 years, opposition Senator Laura Montero said.
“There will be a clear mandate from the Treasury on the central bank to finance the country’s deficit,” Montero, a member of the Senate’s Economy Committee, said in a telephone interview before the vote. “The bank will respond by printing more money amid a strong inflationary process that the bank doesn’t even acknowledge.”
The extra yield investors own to Argentine dollar bonds over U.S. Treasuries rose 3 basis points, or 0.03 percentage point, to 801 at 11:03 a.m. Buenos Aires time. The peso rose 0.1 percent to 4.3633 per dollar.
Reserves held by Banco Central de la Republica Argentina rose to $47.3 billion yesterday from $46.4 billion at end of last year. Reserves reached a record $52.6 billion in January 2011. The government’s 2012 budget called for using $5.7 billion in central bank savings for debt payments this year.
The government has used $16.2 billion of reserves since 2010 to pay the country’s debt as Argentina has been blocked from international credit markets since its 2001 default on $95 billion in bonds. Fernandez plans to use $5.7 billion this year to pay debt, according to the 2012 budget.
Bank President Mercedes Marco del Pont said that the use of reserves to pay debt is “convenient” for the country.
“We seek to break a logic that no longer exists in Argentina, which is the convertibility logic,” Marco del Pont said March 7 in a presentation to lawmakers in Buenos Aires. “There’s no reason that the proper reserves level should be related to the monetary base. The level of reserves should be related to what happens in the external sector that guarantees the administration of the exchange rate.”
A change to the charter that allows increased lending means the government can take loans of about 55 billion pesos ($12.6 billion) in 2012, Montero said. Under the new law the bank will be permitted to lend the federal government as much as 20 percent of the cash resources it had in the previous 12 months, up from 10 percent previously.
South America’s second-biggest economy posted a 2.7 billion-peso budget deficit in January and February, the most since at least 2000, after spending jumped 34 percent last month from a year earlier while revenue increased 30 percent.
The budget gap will rise to about 3 percent of gross domestic product this year from an estimated 1.8 percent last year, according to Juan Pablo Fuentes, an economist at Moody’s Analytics in West Chester, Pennsylvania.
Montero said the changes could help fuel inflation. Consumer prices rose 23 percent in February from a year earlier, the fastest among Group of 20 economies, according to an average estimate of private economists released by opposition lawmakers. The country’s statistics agency reported that prices rose 9.7 percent in February from a year earlier.
The central bank changes also include a requirement that policy makers take into consideration financial stability and economic development in addition to maintaining the value of the currency.