Central Bank saga continues

Author: | Published: 25 Mar 2010
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Marval O'Farrell & Mairal

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The intense debate revolving around the use of the Central Bank reserves to pay sovereign debt continues.

On December 2009 the Argentine Executive Branch issued a Need and Urgency Decree creating the Bicentennial Fund, to be funded with $6.6 billion of the Central Bank freely available reserves. As described in our article in IFLR March 2010, this Bicentennial Fund met resistance in Congress and in the Courts, including a judicial injunction that suspended the transfer of the reserves.

The executive branch replied with a slightly revised version of the same plan, and continued to challenge the limits the legislative and judicial powers attempt to impose on it. On March 1, President Cristina Fernandez de Kirchner announced three decrees. The first resolved to abrogate the Bicentennial Fund. The second resolved to pay international financial organizsations using freely available reserves for an amount of $2.2 billion. The third created a new fund denominated the Argentine Fund for the Indebtedness Reduction to pay debt with private bondholders, which was to be funded with $4.4 billion of the Central Bank's freely available reserves.

Two of these are decrees of need and urgency. These may be only issued by the executive branch under exceptional circumstances, such as Congress being unable to operate or the matter being so urgent that it cannot be postponed until the normal legislation procedure may be followed. The President announced them during her inaugural speech of the ordinary sessions in Congress, making the challenge extremely evident.

There is a technical improvement in splitting the payments that were provided previously by a single decree into two decrees. The use of freely available reserves of the Central Bank to pay international financial organisations is currently authorised by law. This is not the case for payments to be made to private creditors. By splitting the decrees, the executive branch isolates the payments to be made to international financial organisations from the discussion of this issue.

Following the executive branch instructions, the Central Bank transferred $4.4 billion to the new Indebtedness Reduction Fund. A new judicial temporary injunction was immediately issued, freezing those funds and prohibiting their use until the corresponding decree of need and urgency is considered by Congress.

As of March 15, the matter is unresolved. New chapters of this saga will probably be written during the upcoming weeks.