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Wednesday, March 7, 2012 - 13:07

Argentina Cen. Bank Reform Designed to Spur Grwth,Fight Infln

--Retransmitting;Correcting Spelling of Last Name In 17th,19th Paragraph

BUENOS AIRES (MNI) - Argentina Central Bank Chief Mercedes Marco del Pont Wednesday said a government-backed bill to reform the monetary authority will make it possible to use international reserves to spur economic growth and fight inflation.

Central banks were created "not only to maintain the stability of the currency but to finance the state, to help financial system in times of crisis and to act as lender of last resort," she said in a televised presentation of the bill before three congressional committees.

President Cristina Fernandez de Kirchner sent the bill to Congress March 1, saying the central bank, while independent, should work to sustain economic and job growth, in addition to its current mandate to preserve fiscal and monetary stability.

Marco del Pont stressed that the reform will give the central bank more resources to battle inflation, which according to the government was 9.7% year-on-year in January, far below private estimates of 20% to 25%.

"The reform of the central bank will make it possible to attack the problem of inflation" by making more credit available to companies to boost output," she said.

According to a draft of the bill, the bank's board of directors will be able to decide the optimum level of reserves for sustaining the currency, meaning that the rest can be used at its discretion to promote economic expansion.

This could be done by making funds available to commercial banks at low interest rates for long-term lending to companies, with the central bank stipulating terms like commissions, fees, interest rates and maturities.

That means the central bank can print pesos foe lending to banks, who in turn will lend them out for investments, a move that economists said could accelerate inflation even more.

Monetary expansion has been part of the reason for high inflation since 2007, but also a faster increase in demand compared with the supply of goods.

This has led to a rise in imports as companies struggle to keep pace even as they run their factories at close to 100% capacity.

Many companies have withheld investment because of the shaky economic policies and legal stability, such as with price controls, tax hikes and export restrictions. Energy imports, for example, surged by 110% last year, led by diesel and fuel oil because refiners couldn't meet all the demand even as capacity ran at 76% to 89%, according to government data.

"We believe that the problems with prices have to do with supply and demand, for which reason it is necessary to spur credit to be able to generate more supply and a deconcentration of production," Marco del Pont said.

She told legislators that the bill was written after studying the central bank's historical role in Argentina and in other countries.

"Central banks have played a fundamental role in the promotion of credit for growth and development," she said.

"It was with the emergence of the neo-liberal model and restoration of conservatism at the end of the 80s when this concept started to change," she said. This led to the materialization of a "focus on a single issue, which is the issue of currency stability, but this focus on currency stability was isolated from what happened with the real economy and employment."

Marco del Pont blamed this as the root of the international financial crisis.

"The world hasn't done well with this orientation," she said.

Even so, the central bank chief said the bank "is concerned and will continue to be concerned with currency stability."

The reform is designed to give the central bank a bigger direct role in the economy, making it easier for the central bank to take steps to promote economic growth and bringing more people out of poverty and into the mainstream, Marco del Pont said.

She said its actions are now limited by the current charter.

The reform is expected to gain rapid approval this month since the president has control of both houses.

Economists said the reform is designed to secure more funds for the government to cover debt payments as a slowing economy reduces tax revenue and threatens to erode the president's power. CFK has the backing of most governors, in part because the national government is a chief financier of their spending and public works.

The reform plans have raised concerns that the country's finances are eroding faster than expected, leaving the only alternative to dip deeper into central bank reserves.

Argentina has been cut off from international credit markets since defaulting on $100 billion in 2001, an account not fully settled. It still owes about $9 billion to the Paris Club of creditor nations and a lesser amount to bondholders who declined to accept terms of two debt restructures.

That leaves the central bank as one of the last few sources for financing.

The government took over the private pension fund system in 2008 to gain about $30 billion in assets and $5 billion in annual contributions. Two years later it started tapping international reserves, using them to cover $6.6 billion in debt payments in 2010 and then $7.5 billion in 2011 -- a move that prompted a battle with then-central bank president Martin Redrado, who CFK dismissed in January 2010.

The central bank will use an estimated $5.7 billion this year, according to the 2012 budget.

"The government is going to push the reform bill through very quickly," said Jaime Abut, a business consultant in Rosario, Santa Fe. "The government needs to take more reserves to pay the foreign debt and the local debt" as a government spending continues to rise at 30-35% and a slowing economy stunts tax collections.

The economy is expected to grow less than 4% this year after averaging 8% a year between 2003 and 2011.

The other option would be to reenter the global market to sell bonds. But to do so the government would have to rebuild investor confidence and revamp its economic statistics, which are widely thought to be manipulated -- its inflation rate is believed to be more than 10 percentage points below private estimates.

The move would also require a turnaround in the president's much hyped debt-reduction policy, which could come with a political cost.

** Market News International - Buenos Aires **

[TOPICS: MGT$$$,MFT$$$,M$T$$$,MN$FX$]

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