Has the Argentine central bank lost any semblance of independence?

Monday, February 4, 2013

The charter of the Argentine central bank (BCRA) has been subject to many changes in recent times but section four still purports that "in carrying out its functions and powers, the Bank shall neither be subject to any order, indication, or instruction from the National Executive."

However, the Argentine government has struggled for credibility in its argument on the independence of the country's central bank after going through seven governors since 2001. The removal of the previous governor for refusing to transfer funds accumulated in international reserves over to the government to be used for debt payments, does not suggest much independence.

Over the past 13 years, the republic has enacted laws and issued decrees to expand its control over virtually all of BCRA's activities, according to lawyers for a group of bond holdouts led by Elliott Management in the latest filing to US courts.

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Lawyers representing the bond holdouts, exchange bondholders (EBG) and Argentina filed briefs at the end of last week at the second circuit court of appeals in New York in the lead up to the hearing scheduled for February 27. The hearing is set to decide the validity of the key pari passu clause that could compel Argentina to pay more than US$1.3bn to holders of its defaulted debt.

The increasing control exerted by the Argentine government over its central bank has been cited as evidence by the holdouts that international reserves held by the BCRA are readily available for repayment of defaulted debts.

The filing argues that the government continues to use BCRA funds to the present day as its central "piggy bank" with the 2013 budget earmarking nearly US$8bn of reserves to repay debt.

This refutes claims by Argentina that "no country on earth could, as plaintiffs suggest, expose itself to handing over its reserves, and no country should ever be commandeered by a U.S. district court to do so," before adding in its own filing that it is "impossible for the Republic to do so."

The Argentine brief also proposed the reopening of the exchange following the 2005 and 2010 exchanges on the same terms as in 2010, but both the republic and the EBG argued that should the appeals court uphold the injunction, a flood of follow on claims would be expected.

The EBG estimates that the addition of claims by the Paris Club and debts owed to the World Bank would mean that outstanding obligations to creditors would amount to US$26.5bn, compared to central bank reserves of US$19bn. Argentina in its filing estimated that potential claims could amount to US$43bn.

Gramercy, the lead member of the EBG also announced that it currently holds a claim against the republic relating to certain defaulted FAA Brady Bonds and that assuming legal technicalities relating to the underlying collateral can be overcome, it would participate in the new exchange. It also indicated that other institutions who, collectively with Gramercy, hold FAA bonds representing approximately US$500mn of judgments and claims against Argentina, would also be willing, subject to a review of the final terms, to participate in a re-opening of the 2005 exchange.