Argentina: Sacking of central bank governor damages country's reputation

The recent spectacle at Argentina's central bank, in which the country's president, Cristina Kirchner, attempted to dismiss central bank governor Martin Redrado, only to see to see Mr Redrado challenge the decision in the courts, has been likened to a 'soap opera' by some analysts.

The drama began when Ms Kirchner issued an emergency presidential decree on December 14, 2009, to set up the so-called Bicentennial Fund for Stability and Reduced Indebtedness. This was to involve the transfer of $6.56bn of the country's total $48bn reserves to the national treasury, which the government claimed would pay off sovereign debt that matures this year. Mr Redrado, at that point the central bank's governor, only learned about the decree a couple of hours before it was issued and was highly opposed to the move.

The situation turned ugly in January when Ms Kirchner (who is married to Néstor Kirchner, the former Argentine president who is widely believed to have a strong influence on his wife's policies) requested that Mr Redrado resign, due to his reluctance to back the transfer. Mr Redrado refused and on January 7, Ms Kirchner signed another decree in which she fired him and accused him of "misconduct and dereliction of duty by a public servant".

According to the bank's charter, Argentina's Congress is supposed to set up a special commission to advise the president on whether or not a central bank president should be dismissed. As Ms Kirchner had failed to consult Congress, Mr Redrado successfully appealed in court to obtain temporary injunctions against his removal and against the transfer of the bank's reserves. Finally, the government decided to take the constitutional route and asked for a three-member Congressional commission to be set up.

Power struggle

On January 24, Mr Redrado attempted to enter the central bank building in central Buenos Aires, but was blocked by a horde of policemen. Mr Redrado, aware that whatever the commission's counsel said, the president would be able to dismiss him after its report, resigned on January 29, following dramatic hearings before the commission in which he defended the bank's independence and accused the government of trying to raid the savings of all Argentines.

In a farcical situation, the government then refused to accept his resignation. On February 2, the Congressional commission backed the firing of Mr Redrado by two votes to one (Alfonso Prat Gay, a former central bank president, now an opposition Senator, voted against it). On February 3, Ms Kirchner named former Congresswoman Mercedes Marcó del Pont, president of Banco Nación, the country's main state-owned bank, as the new central bank governor, the first woman to hold the post.

A messy reminder

"It wasn't too surprising that the government attempted to raid the central bank's reserves," says Jerome Booth, head of research at Ashmore Investment, the emerging markets private equity investor. "The drama of Mr Redrado's dismissal was like a soap opera. It is another messy reminder of the country's political reality; however, it should not make a big difference to the country's credit spreads."

Peter Hakim, president of the Inter-American Dialogue, a Washington, DC-based think tank on Latin American affairs, says: "The whole thing was one more stupid mess. The government always seems to love a fight over principles, not over the sums involved. There may have been a middle ground in which the government may have persuaded Mr Redrado to make a transfer of, say, $3bn. The Kirchners seem to love to create battles and they hate to lose them. They do not seem to leave any room for compromise."

It is not clear that Mr Redrado would have agreed to even a $3bn transfer of the bank's reserves, as previously he had staked his reputation on not allowing the government to make such a move. One of the most bitter moments came at the end of January, when Mr Redrado told the media: "I have the specific list of the friends of power who have bought dollars," implying that some of the country's most influential people had sent money out of the country illicitly. Anibal Fernández, the government's chief of staff, then accused Mr Redrado of being "party to a cover-up" and said if he has such a list he should present it before the courts. He added that if he did not do so, the government would denounce him before the justice system for being "complicit to a crime".

Mr Redrado's ambition was to complete his six-year term in September this year - he would have been the longest-serving governor since the very first, Ernesto Bosch, who took the position in 1935. "In many ways, Mr Redrado was a successful central bank governor," says Miguel Kiguel, director of Buenos Aires-based consultant Econviews. "He brought stability, but in the end he had to go with high grace because the stand-off between him and the president could not continue. It is bad for the country."

New role

Analysts believe that Ms Marco del Pont will implement a more economically 'heterodox' monetary policy than Mr Redrado. During her period in Congress, she led an unsuccessful campaign to change the bank's charter and shift its objectives. She wanted it to not only defend the value of Argentina's currency - its current sole objective - but also try to maximise employment and economic growth.

"In our view, she tends to believe that the role of the central bank is to facilitate development, not just fight inflation," says Guillermo Mondino, Argentina analyst at Barclays Capital. "We believe the intention of the Kirchner administration is to push through Congress a reform of the charter of the central bank, presumably limiting its independence."

Mr Mondino believes the government is likely to back attempts by government-friendly legislators to reform banking institutions, forcing them to lend more aggressively, extending the territorial coverage of their branches, and lowering the cost of financing for small and medium-sized enterprises.

It is understood that the government's first choice to replace Mr Redrado, market-friendly Mario Blejer - who was the governor previously in 2002 and subsequently became director of the Bank of England's Centre for Central Banking Studies - rejected the offer.

Alberto Ramos, Argentina analyst at Goldman Sachs, says: "This, in our assessment, shows that someone with strong credentials and a solid reputation would be reluctant to risk all this in an environment in which the central bank's autonomy is not well established and in which prior central bank heads who dissented from the government had to leave the monetary authority."

Congress will vote this month on whether or not to allow the transfer of the central bank reserves (the government is not assured of a majority in either of the two chambers, Deputies or the Senate). One of the most controversial parts of the original decree was that there would be an initial transfer of $6.6bn but it enabled the government to draw on more than $11bn of reserves at later stages.

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

One of the main obstacles to the transfer is that it could provide grounds for creditors of the country's defaulted public debt to attempt to seize the central bank reserves on the basis that it is no longer an autonomous institution from the executive branch.

In fact, at the start of January, this argument led Thomas Griesa, a New York judge, to freeze the Argentine central bank's account held at the New York Federal Reserve (which had $1.7bn in reserves). In mid-January, following an agreement between the government and the creditors, Mr Griesa lifted the freeze, but only on the grounds that the account's balance never falls below $1.7bn. The central bank can now use it for transactions but within tight parameters.

Bad timing

The row with Mr Redrado did not come at the best of times. Although Argentina is expected to see strong economic growth this year (up to 4%, according to Goldman Sachs), it has $13bn of international debt that matures this year and a hole in its budget of between $2bn and $7bn. The government also wants to come to an agreement with the hold-outs to the 2005 debt restructuring of $100bn of public paper (the hold-outs are owed $20bn) within the next two months.

The drama at the central bank is another example of Argentina's weak institutions. This resources-rich country will see a significant economic recovery this year, as global demand picks up. But it must strengthen its institutions to improve its international image and to attract a higher level of foreign investment.