MercoPress. South Atlantic News Agency

Argentine Central Bank props the Peso with Euro operations

Fearing more seizures of US dollar funds in New York

Argentina has been forced to buy Euros in the local market to control the exchange rate of the US dollar relative to the Peso in a complicated move but necessary to avoid the risk of having additional Central Bank funds seized in New York.

The move highlights the strategy of some of the holders of defaulted bonds to make life so difficult for Argentina that the government ends up paying them off rather than continui9ng to have the to deal with the headaches.

Last Wednesday a US court ruled for the first time that Argentina’s Central Bank is indistinguishable from the government and its assets can be seized by creditors to pay down debts.

The two investment firms (also called in bonds jargon ‘vulture funds’) which brought the case EM Ltd. and NML Capital Ltd hold defaulted Argentine government bonds and have won judgements allowing them to seize Argentina assets to settle those debts.

So far Argentina has been able to shield its assets but the New York federal court ruling allowed the investment firm to attach 105 million US dollars in central bank funds held at the Federal Reserve Bank of New York.

While Argentina announced it would appeal the ruling, the Central Bank was prevented from buying dollars in the local market as they are traditionally deposited in a foreign account which could make them vulnerable to attachment, according to Goldman Sachs.

The Argentine government opted to intervene in the local market to keep the Peso stable by buying Euros to be deposited in a local account.

This forced local banks to buy US dollars locally to buy Euros from abroad and thus it was the banks rather than the Central bank that had to settle the transactions offshore, according to Goldman Sachs.

On Friday the government bought the Euro equivalent of 250 million US dollars according to local foreign exchange operators. That was “without doubt the main support for the wholesale exchange rate despite the embargo on the accounts in New York”.

The Argentine Peso remained stable through out the week due to the government intervention, closing last Friday unchanged at 3.88 Argentine pesos to the US dollar.