MercoPress. South Atlantic News Agency

How far can Argentina’s Central bank’s 48 billion USD reserves be stretched?

The Central bank, a numbers’ puzzle difficult to complete

The dispute between Argentine president Cristina Fernandez de Kirchner and the governor of the Central Bank over who is entitled to use the international reserves triggered a legal and political battle that is ongoing.

It all started when Mrs. Kirchner called for 6.9 billion US dollars of Central bank reserves for a Bicentennial Fund with which the government was planning to pay sovereign debts. Court injunctions prevented the Executive from sacking the president of the bank and making use of the reserves arguing congressional participation in these decisions was unequivocal.

However, all the arguments (and temptations) are based on the 48 billion US dollars in foreign currency reserves held by the Argentine Central bank.

But a Sunday technical report in the Buenos Aires press gives another view, not so optimistic regarding the volume of such reserves.

To start with the monetary base in Argentine pesos (money circulating in the economy) at the exchange rate of 3.80 pesos to the US dollar, adds up to 32 billion USD.

Therefore the 48 are really 16 billion.

Furthermore the banking system had deposited as technical reserves in the Central Bank 7.3 billion US dollars, which leaves us with 9 billion.

The 9 billion, according to the bank’s own data include 3 billion from the Bank for International Settlements (BIS) in Basel, an institution that with certain discretion helps central banks overcome unexpected moments such as happened with Argentina at the outbreak of the 2008 global financial downturn when there was an outflow of capital from the country. The BIS money is in stand by for emergencies.

The approximately 6 billion must also contemplate 2.5 billion in Special Drawing Rights awarded by the IMF to help countries honour debts. In other words no where close the 6.9 billion demanded by the government for the Bicentennial Fund.

The report belongs to Ecolatina, one of Argentina’s main economic and financial consultants closely linked to former Economy minister Roberto Lavagna.

Ecolatina also points out that, as repeated experience has shown, central bank’s reserves can’t be limited to covering the monetary base (in pesos) since in a “bank-run” or “dollar-run” scenario, the multiplying effect of deposits would put at stake “financial and exchange rate stability”.

And to make this scenario even more delicate during the years and months the Argentine Central bank was purchasing US dollars in the local market to build reserves, taking advantage of the inflow of capital, and to avoid inflation the bank also issued short term notes to “sterilize” those funds.

They are estimated to be equivalent to 10 billion US dollars.

And do not forget that the Central Bank has already extended loans to the central government to help pay IMF pending debts and other transitory advances, which easily add up to another 23 billion USD.

Let’s call it a day.