Re: Argentina
Argentina wants to tap more central bank reserves
Thu Mar 1, 2012 7:06pm EST
* Says "not necessary" to reform the financial entity law * Stocks soar, investors had worried about move against YPF * Economists warn proposed cenbank rule could fuel inflation (Adds analyst comment)
By Hugh Bronstein
BUENOS AIRES, March 1 (Reuters) - Argentina's president proposed using more central bank reserves to help repay foreign debt, but she spared local banks and the country's largest oil company YPF from state intervention, sending their shares soaring. Economists panned the move to loosen the rules by which the government can dip into the central bank's dollar vaults, saying it will fuel inflation and eventually weaken the peso currency. Share prices meanwhile shot higher as President Cristina Fernandez ended a three-and-a-half-hour-long address to Congress without announcing any new measures involving the financial and oil sectors, which had been feared by the markets. The local MerVal stock index ended up 3.8 percent. "The relief rally was due to an apparent lull in harsher economic policies toward the energy and financial sectors before the likely onset of another stormy period between the government and business," said Gary Kleiman, senior partner of Washington-based emerging markets consultancy Kleiman International. Argentina's economy has boomed in the years since its 2001-02 sovereign bond default and financial meltdown. But the recovery may face a headwind this year as the grain-exporting country dodges fallout from Europe's debt crisis.
DIPPING INTO RESERVES
Over the last two years, Fernandez's government has resorted to paying private creditors with central bank reserves left over after what the bank needs to back up cash in the economy. Those excess reserves have shrunk to near zero, prompting Fernandez to request a change in the "convertibility" law. "We have to know that the central bank is functioning for the good of the real economy," the charismatic 59-year-old leader said during the speech. The bank has about $46.9 billion in total foreign currency reserves. "This is a negative development," said Alberto Ramos, co-head of Latin America research at Goldman Sachs, who pointed out the risk that the new policy could stoke already high inflation. "Reserve transfers to the Treasury are debasing the balance sheet of the central bank and contributing to financing an admittedly expansionary and pro-cyclical fiscal stance, which jointly with an extraordinarily accommodative monetary stance, continues to stoke high inflationary pressures," he said. Fernandez, beloved by voters who benefit from her generous welfare spending, won a second term last year despite rankling Wall Street with policies such as raiding central bank reserves and publishing official economic data widely seen as unreliable. "Today's announcement shows Argentina has very weak resolve in terms of fighting inflation," said Boris Segura, who covers the country for Nomura Securities. "Over time this is going to make people less comfortable holding Argentine pesos." Fernandez says her policies are aimed at economic growth rather than inflation control. Consumer prices are meanwhile rising at more than 20 percent per year, according to private economists, one of the highest rates in the world. The president said she would not push for banking reforms that the private sector feared might obligate banks to make loans to small and medium-sized businesses. Bank shares soared when Fernandez said it was "not necessary" to reform the financial entity law. Grupo Financiero Galicia shares jumped 5.7 percent and the stock price of Banco Santander Rio rose 4.3 percent. Shares in YPF, controlled by Spain's Repsol , were up more than 13 percent in afternoon trade after Fernandez announced no new measures affecting the company. The company has faced intense government pressure in recent weeks to boost its production of oil and natural gas. "This was positive news in the wake of the recent rumblings about YPF, which had done a lot to scare the market," said Walter Molano, who analyzes emerging markets for BCP Securities.
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