Thursday, February 4, 2010
New Appointment Will Likely Reduce Central Bank Autonomy in Argentina
Soon after being appointed as Argentina’s new Central Bank President, after the controversial ouster of the previous bank chief, Mercedes Marco del Pont told reporters that she plans work closely with the country’s government but still maintain the bank’s current exchange rate and monetary policies.
“I believe in operational autonomy of the central bank, but I don’t think it can be independent of a nation’s economic policies,” Marco del Pont, 50, told reporters in Buenos Aires on February 4, 2010.
A day earlier, on February 3, Argentina’s left-of-center president, Cristina Fernandez de Kirchner named Ms. Marco del Pont, president of state-owned Banco de la Nacion Argentina, as a last minute replacement for her predecessor, former central bank chief Martin Redrado. Mr. Redrago’s high profile resignation came after a congressional committee backed President Fernandez’s January 7 decree which dismissed Redrado for blocking her from tapping into the country’s US$6.6 billion reserve pool to help pay debt due this year.
Neil Shearing, a senior economist at Capital Economics Ltd., a London-based research firm, told reporters that the bank’s independence will likely be compromised further under Marco del Pont as the government looks to the US$48.2 billion in reserves as a source of emergency financing for government programs.
In 2008 the big story in Argentina was the government’s decision to nationalize the country’s pension system. Now, in 2010 it is becoming increasingly likely that the government will seek to use its control over the bank as a means to help finance its budget deficit, a move which very well may eventually lead to a rise in inflation and a deterioration in the value of the peso.
As a lawmaker in 2007, Marco del Pont sponsored a bill that called for changes to the central bank’s charter. The Yale-educated economist proposed a shift of the institution’s primary mission from narrow Monetarist goals such as “preserving the value of the currency” to include more broader, Keynesian goals like “sustaining a high level of activity” and maximizing the use of “human and available material resources. The bill didn’t pass in 2007. But now, at the head of the bank, Ms. Marco del Pont has the power to make her vision a reality.
Not surprisingly Marco del Pont’s appointment was met with an adverse reaction by the markets. The country’s benchmark 7 percent dollar bond due in 2015 fell 2.8% on Febuary 3 and dropped a further 0.58% on February 4 to 77.8 cents on the dollar at, according to data from JPMorgan Chase & Co.
In its latest drop, Argentina’s peso weakened 0.2% to 3.8415 per dollar. Overall, the currency has fallen 9.2% over the past 12 months, the worst performance in a region where most currencies are rebounding sharply relative to the dollar.
Many economists say that regardless of what the official figures say, inflation is fast becoming a problem in Argentina. Data from Moody’s Economy.com shows that annual inflation accelerated to as much as 30% in 2008 even though the official rate was only 7.2%.
Alberto Ramos, an economist at Goldman Sachs Group Inc, told reporters that with Marco del Pont running the bank, Argentina’s inflation “will remain among the region’s highest.”
Clearly, Argentina’s government is less concerned with short term inflation than it is with restructuring the country’s long term debt. President Fernandez has said the four-week dispute over the leadership of the central bank will not delay her plans to restructure the US$20 billion in defaulted debt, a by-product of the country’s 2001 financial crisis.
Alberto Bernal, an economist at Bulltick Capital in Miami said in a recent note that “the settling of the drama is positive in the sense that it reduces the decibels of political discourse and because the normalization of relations between the central bank and the executive should reduce delays on the swap offer.”
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