LandingPad Buenos Aires

Yesterday, President Cristina Kirchner fired Argentina Central Bank president, Martin Redrado for “misconduct” after he refused to transfer reserve funds to pay off government debt. Redrado responded by saying he will not step down, citing the fact that only Congress can remove him. At the moment, it is unclear whether Redrado will challenge the decision in court. Ironically, the Harvard-educated Redrado has been a Kirchner ally over the past 5 years.

Opposition leaders in Congress came to Redrado’s defense, also claiming the Central Bank president cannot be fired without the approval of Congress. In addition, this morning Federal Judge Maria Jose Sarmiento ruled that the reserves could not be used until Congress had the opportunity to review the measure.

The Kirchner administration wants to create an account funded by Central Bank reserves to pay off debt. They claim it is an efficient use of Central Bank funds, because it would be cheaper than borrowing more money to pay the current debt.

In addition, the government also wants to use the reserves to fund a new offer to holders of defaulted bonds. Settling with the holdouts would give the government access to the capital markets (the ability to issue sovereign debt.) The initial intention of using reserves to pay down government debt was to reassure investors that Argentina will honor their obligations. However, the ensuing soap opera has only led to the perception of instability, driving down current bond prices.

Cynics and opposition leaders claim that the Kirchner administration is, and has been, on an asset-grabbing spree to fund wild spending until 2011 (the next election year). The nationalization of private pension funds and the current effort to tap central bank reserves are cited as evidence.

Whatever the fate of Martin Redrado, it is probable that the Kirchner administration will need to convince Congress of the validity of using central bank reserves to pay off the debt before the issue is resolved.