Argentina tries to fire central banker in debt row

BUENOS AIRES, (Reuters) – Argentine President  Cristina Fernandez tried to force out the country’s central  bank chief yesterday in a dispute over using billions of  dollars in foreign currency reserves to pay rising debt  obligations.

Martin Redrado, who refused to step down and said only  Congress can remove him, has balked at handing over $6.6  billion in reserves despite a presidential order to use them to  service debt at a time of a rising fiscal deficit.

Argentina’s bonds, currency and stocks fell and the news  cast uncertainty over the country’s drive to regain investor  confidence and return to global bond markets with a new issue  for the first time since a massive 2001/02 default.

“Redrado has led the Central Bank and today that role is  over,” Economy Minister Amado Boudou told a news conference. He  added that the president had merely accepted Redrado’s previous  offers to resign whenever she wanted.

Boudou said economist and former Central Bank chief Mario  Blejer would take the post as soon as Redrado steps aside, but  Blejer told El Cronista newspaper he could not take the job  under the circumstances.

The peso currency weakened 0.33 percent to close  at 3.875 per U.S. dollar while the benchmark MerVal stock index  slid 1.63 percent. Argentine risk as measured by the  spread between benchmark bonds and comparable U.S. Treasuries  widened by 13 basis points, underperforming the J.P. Morgan  Emerging Markets Bond Index, which narrowed by 10 basis  points.

Argentine credit default swaps, or the cost of insuring the  country’s bonds, rose by 100 basis points according to Markit  Intraday.

Traders said markets read the president’s attempt to push  out Redrado as a sign of desperation as the government seeks  funds for debt payments.

Argentine bonds and stocks had risen in recent months in  anticipation of a $20 billion bond swap, which aims to mop up  leftover defaulted bonds and clear the way for the country to  issue a major bond. A crisis over foreign reserves — which total about $48  billion — could raise Argentina’s borrowing costs just as it  is tries to return to markets.

“Today’s events serve as a reminder of the acute political  risks that still face investors in Argentina and … the  government’s planned return to international debt markets is  unlikely to be smooth,” Neil Shearing, senior emerging markets  economist at Capital Economics, wrote in a report.

Opposition lawmakers had criticized the plan to tap foreign  currency reserves to pay debt, and the Supreme Court had asked  for an explanation of the plan. Under the central bank’s charter, the executive branch can  dismiss a member of its board for dereliction of duties but  must have a recommendation from a special congressional  committee.

Congress is in recess. Fernandez allies lost their control  of both houses of the legislature in 2009 but remain the  largest bloc.

“It is very serious that the government is trying to manage  the Central Bank,” said opposition Senator Ernesto Sanz of the  Radical Civic Union party. The executive wants to handle  Redrado “like a remote-control toy.”

Redrado, a Harvard-trained economist and former trade  minister who has led the bank since 2004 and whose mandate was  to end in September 2010, has traditionally been less  autonomous than other Central Bank presidents.

He has quietly blocked some more radical economic proposals  from the Fernandez administration, such as a plan to force  local banks to buy bonds. But his role is largely limited to  administering the exchange rate to prevent sharp movements and  to regulating liquidity in the private banking system.

Argentina’s debt obligations rise this year to $13 billion,  and economists see a funding gap of $2 billion to $7 billion.

At the same time, the rate of growth in government income  has shrunk due to the economic slowdown.

The centre-left government rattled markets in the past by  nationalizing the country’s main airline, soccer game  broadcasts and the private pension system. Investors have also  criticized policies such as price controls to try to tame  inflation and intervention in grains and currency markets.