Paying Debt With Reserves Puts Fernandez Ally at Argentina's Central Bank
Argentine central bank President Mercedes Marco del Pont, who backed the government’s use of $6.6 billion in international reserves to pay debt, was nominated to remain in her post after her term was set to expire at midnight.
Argentine President Cristina Fernandez de Kirchner designated the Yale-trained economist to keep running the bank until a Senate vote on her nomination, according to a statement on the presidential website. Marco del Pont, 51, took office in February to complete the mandate of Martin Redrado, whom Fernandez fired for opposing her plan to pay creditors with reserves, currently at a record $51.2 billion.
Marco del Pont’s first action as central banker was to transfer more than $6.6 billion to the Treasury to pay debt due this year, $4.7 billion of which has been spent, according to Economy Minister Amado Boudou. The former lawmaker with the ruling Victory Front coalition was named to the post after running state-owned Banco de la Nacion Argentina.
“Marco del Pont has shown sufficient submission to the executive branch to continue in her post,” said Aldo Abram, head of research company Exante SA, in a Sept. 21 telephone interview. “She doesn’t follow the bank’s charter but she acts in line with what she believes.”
A central bank official in Buenos Aires, who asked not to be identified by name in accordance with official policy, declined to comment. Fernandez spokesman Alfredo Scoccimarro was unavailable during travel to the U.S.
In a March 4 televised speech, Fernandez described Marco del Pont as “a respected economist with personal, academic, political and professional aptitudes.”
Most governments refrain from using international reserves to pay debt because it fuels inflation by freeing up budget money for other expenses, said Claudio Loser, a former International Monetary Fund official who now runs the Centennial Latin America research company based in Washington.
“It’s sound economic policy,” Marco del Pont said in defense of the utilization of bank funds at a March 10 Senate hearing on her appointment.
The use of central bank funds has reassured investors that Argentina is committed to honoring its debt, said Carola Sandy, an economist with Credit Suisse Group AG in New York.
Since Marco del Pont took office, the yield on the benchmark 7 percent bond due in 2015 fell 336 basis points to 10.05 percent, according to Bloomberg market average pricing. In the same period, the yield on Brazil’s 7.875 percent bond due in 2015 fell 187 basis points to 2.47 percent.
Argentine dollar bonds have returned 18.7 percent this year, compared with 12.6 percent by Brazilian bonds, according to JPMorgan Chase & Co.
Marco del Pont’s term has coincided with Fernandez’s decision to restructure $12.9 billion in defaulted debt tied to the country’s 2001 financial crisis.
The central bank chief has defended official inflation data from criticism by politicians and economists, including Vice President Julio Cobos, who say prices are rising at more than double the rate published by the government. Prices rose 11.1 percent in August from a year earlier, the government said. Former central bank president and opposition lawmaker Alfonso Prat-Gay said inflation is running at 25 percent per year, the fastest in the world after Venezuela.
“Marco del Pont has been a soldier of the government,” Prat-Gay said in a Sept. 16 interview in Buenos Aires. “That’s a violation of the law, which says that the bank should be a soldier of the people.”
As a lawmaker for the ruling coalition in 2007, Marco del Pont proposed changing the central bank’s charter to broaden its primary mission of “preserving the value of the currency” to include “sustaining a high level of activity” and maximizing the use of “human and available material resources.”
Fernandez plans to tap a further $7.5 billion of reserves to pay debt in 2011, Economy Minister Amado Boudou said when he presented next year’s budget to Congress on Sept. 16.
“This will give certainty to the economy,” Boudou said.
Standard & Poor’s raised Argentina’s debt rating Sept. 13 one notch to B, five levels below investment grade and the same level as Bolivia and Lebanon. S&P rates Brazil BBB-, the lowest investment grade category, and the U.S. at AAA, the highest.
The improvement hasn’t persuaded Silvia Marengo, fixed income portfolio manager at Falcon Private Bank in Zurich, to recommend investing in the country.
“There’s no policy to slow inflation, nor to sustain economic growth in the long term, and there isn’t an acceptable judiciary system,” Marengo said in a Sept. 17 telephone interview. All these variables “play a role and have a heavy weight that is not compensated by this plan to use reserves.”
The central bank forecasts the economy will expand 9.5 percent this year, the most since 1992, fueled by a record 55- million metric ton soybean harvest and rising auto sales to neighboring Brazil. Growth will slow to 4.3 percent in 2011, the least since 2009’s 0.9 percent, according to Fernandez’s budget proposal.
The bank has bought and sold pesos in the foreign exchange market to maintain a “competitive” exchange rate, Marco del Pont said Sept. 2 in Buenos Aires. The peso has fallen 3.9 percent against the dollar this year, the biggest decline among major Latin American currencies, to 3.9511 yesterday.
“The central bank kept focusing on the exchange rate and didn’t pay too much attention to inflation,” said Sandy in a telephone interview. “It’s surprising how the economy keeps working with inflation above 20 percent, but that’s not going to go on forever.”
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