And you thought Central Banks were independent?
In my last post, I had argued that central banks are generally much more independent from administration hence making monetary policies more effective.
Yesterday, Argentine President Cristina Kirchner, along with her entire cabinet, signed a “decree of necessity and urgency” to oust the Central Bank Chairman Martin Redrado from his post. The reason? In short he wanted more autonomy for the central bank. In December 2008, the government had announced that it would transfer USD6.6 billion of central bank’s international reserves (from about little more than USD40bn it currently holds) to a new “The Bicentennial Fund”, that would be created to service public sector debt. And Mr. Redrado refused to agree to this.
While the new fund was expected to be earmarked for primarily servicing government debt, some argued that the real objective would be to free up resources for the government’s populist programs and prepare for next year’s elections. The dire need for this debt servicing was a little surprising given that the total debt burden for the government is just about 40% of GDP and the fiscal deficit was even less than 2% of GDP (even projections).
As for the modalities in this arrangement, in exchange for the central bank reserves, the Ministry would issue a dollar denominated 10-year note with an interest rate no higher than the LIBOR minus 100 bps. And with the current LIBOR the initial rate would thus be zero. There would be no net change in the central bank’s balance sheet but probably one if the central bank wishes to invest its reserves otherwise.
The Chairman opposed this and refused the transfer of the funds, and the use of forex reserves are always the central bank’s prerogative. Use of central bank’s reserves for debt servicing or for infrastructure purpose is not new but in this case the urgent need for this was probably not justified. Redrado, now faces the axe for not obeying official orders being a public servant. This decision however, needs an approval from a panel chaired by the Vice President including 2 members each from the lower house and the senate. But if this goes through, it would be detrimental to the functioning of the central bank, as it would lose its independence.
