Argentina Seeks To Calm Nerves About Foreign Reserves

The head of Argentina's central bank said Wednesday that he expects the country's foreign currency reserves to increase by the end of the year, but analysts warn that this may be optimistic.



"We're not worried at all about the level of the reserves," Alejandro Vanoli said on Radio Del Plata.



He said the reserves now stand at $27.4 billion and will increase by year's end but declined to sayby how much.



The hard currency reserves have become a barometer of confidence in Latin America's third-largest economy, acting as a main source of funds for paying the national debt as well as covering imports to sustain economic growth and to finance a fiscal deficit.



Unlike most countries, Argentina cannot borrow on international capital markets to ease its need to dip into reserves because it hasn't fully settled a $100 billion debt default from 2001 that cut the country off from financial markets abroad.



The government restructured about 93 percent of the defaulted debt at 30 cents on the dollar in 2005 and 2010 but the remainder of the bondholders held out to pursue legal channels to the full amount, and a few have won a lawsuit in U.S. courts to be repaid in full. This issue, in addition to other lawsuits, make it risky for Argentina to sell bonds abroad because creditors can get court orders to seize the proceeds as repayment.



This has left the government heavily reliant on the reserves, which have dropped from a record high of nearly $53 billion in 2011 to a seven-year low.



The drop has raised concerns of currency depreciation, stoking a surge in capital flight as Argentians seek to protect their savings in dollars. This demand for dollars drove the peso to a low of 16 per dollar on the black market in September, prompting President Cristina Fernandez de Kirchner to replace her central bank president.



Vanoli has clamped down on illegal trading houses to try to reduce dollar buying on the black market, and called on farmers to step up crop exports to bring more dollars into the country.



The moves have cut the black market rate to 14.61 per dollar –  a 72 percent gap with the official rate of 8.50.



Vanoli, however, said there will not be any new restrictions on buying dollars, leaving them at the current limits on buying off foreign websites and how many greenbacks can be bought each month. Other restrictions include limits on how much residents can spend on local credit and debit cards when traveling abroad, while a 35 percent withholding tax acts as a deterrent to this shopping as well as buying trips abroad and shopping on foreign websites.



Vanoli said that by not imposing new restrictions, the central bank wants to "bring tranquility to Argentines," adding that there won't be another devaluation like the 20 percent plunge in the peso against the dollar in January.



To bring more dollars into the country, the central bank has reached an agreement for farmers to export $4.2 billion in soybeans and other crops through January 2015. Another $1 billion is expected to come in from tender for fourth-generation mobile telephone networks to be held Friday, but the funds may not enter before the end of the year.



Even so, the reserves could drop as low as $25-26 billion by the end of the year, said Eric Ritondale, a senior economist at Econviews, an economic consulting firm in Buenos Aires.



The leading reason for the expected decline stems from a 2 percent  to 2.5 percent economic contraction estimated for this year, led in part by a 10 percent decline in imports that is limiting equipment and supplies to maintain industrial output and investment.



Importers owe an estimated $5 billion on products they have brought into Argentina, but they cannot pay until the central bank sells them the dollars to complete the transactions. The bank has been refusing to sell the dollars to protect reserves.



"There's margin for the reserves to not fall more," Ritondale said. "But we will have to see how long the government will be willing to allow the declines in imports and economic activity, which will have impacts on employment, investment and social moods."



He expects that keeping the reserves stable is a strategy to reach January without a financial crisis.



Then the government can sit down with the 7 percent of creditors from the 2001 default to settle their claims for a government-estimated $15 billion, making it possible for the country to borrow abroad again.



The government has said it can't settle these claims before January because of a clause with the rest of the bondholders from the default who accepted 30 cents on the dollar in 2005 and 2010 restructuring offers. The clause allows these creditors to demand the same terms if the country pays to any of the 7 percent, a bill that the government estimates could surpass $120 billion.



www.aa.com.tr/en - Buenos Aires