A Crisis at the Central Bank Is a Crisis for Argentina’s Democracy

Since the year began, Argentina’s president Cristina Fernández de Kirchner and the country’s central bank have been in a serious row over the use of the bank’s strategic reserves. The conflict began when Fernández asked the bank for more than $6 billion of reserves to create a Bicentennial Fund meant to pay down the national debt and restore Argentina’s credibility in international financial markets. But political opponents of all ideologies have cried foul. Central bank reserves, they have argued, are not meant for paying down sovereign debt.

Colin Miller

Since the year began, Argentina’s president Cristina Fernández de Kirchner and the country’s central bank have been in a serious row over the use of the bank’s strategic reserves. The conflict began when Fernández asked the bank’s president, Martín Redrado, for more than $6 billion of reserves to create a Bicentennial Fund meant to pay down the national debt and restore Argentina’s credibility in international financial markets. But political opponents of all ideologies have cried foul. Central bank reserves, they have argued, are not meant for paying down sovereign debt.

When asked to deliver the $6 billion in question, the Central Bank of the Republic of Argentina—a constitutionally independent body—refused to do so. Fernández swiftly issued two emergency decrees, one calling for Redrado to resign and another allowing the executive branch of government to tap into the bank’s reserves. Redrado initially refused to step down and took the case to the courts. A judge overruled both decrees and upheld congressional authority over Redrado’s job and the use of reserves. However, Redrado later resigned with little explanation, before a congressional committee formed to evaluate his job performance could come to a decision.

Fernández immediately appointed Mercedes Marco del Pont as the new central bank president. Marco has close ties to the Fernández administration, and she is likely to align the central bank with the administration’s policy goals. On March 2, Fernández revoked her previous emergency decrees and issued a new decree to transfer more than $6 billion of bank reserves into government accounts. Marco immediately complied and handed over the funds. This debacle continues to play out in the courts and in Congress, where opposition members have vowed to fight the Bicentennial Fund. Fernández appears increasingly close to gaining full control of the bank’s reserves.

Using central bank reserves to pay down the national debt is, without question, a political gray area. While critics argue that the bank’s reserves are meant to support monetary policy, not to service debt, many also acknowledge that excessive reserves are unnecessary and repaying the national debt would help restore the country’s international creditworthiness.

Critics argue, however, that Fernández’s actions are unconstitutional for two reasons. First, the president challenged the central bank’s institutional independence when she refused to accept bank president Redrado’s decision not to hand over the reserves. Second, she ignored the constitutionally mandated separation of powers when she attempted to remove the bank president and access bank reserves through an emergency decree. According to the Argentine Constitution, these matters are delegated to Congress. Further, critics worry that Fernández has on many occasions attacked or manipulated public institutions, whose independence is critical for a healthy democracy.

In one such case, Fernández challenged civil service independence by manipulating the inflation figures reported by the national statistics bureau, known as the INDEC. Under extreme pressure from the Fernández government, the INDEC changed its statistical methodology for calculating inflation. In 2009, it reported an annual inflation rate of 7.2%, but Ecolatina, an independent economic consultancy in Buenos Aires, estimated actual inflation at 18%. The government was motivated to manipulate the INDEC’s numbers because an artificially low inflation rate allowed it to make smaller interest payments on outstanding debt.

In late 2008, Fernández re-nationalized the country’s private pension system, placing private savings in general government accounts, mostly to shore up a hefty budgetary shortfall. The issue for many critics of this move was not whether Argentina should have private or public pensions, but whether the president should take money meant for Argentine retirees and use it as general government funds. The president, say her critics, blatantly disregarded the purpose for which Congress intended this money when it passed the re-nationalization bill.

High levels of corruption and ineffective governance—two serious problems facing Argentina—are not helped by the demise of independent public institutions. Moreover, the weakening of these institutions is an even greater problem in a country that is still recovering from a military dictatorship and still making a full transition to functional democracy. It can thus be argued that the erosion of the independence of the Central Bank, the INDEC, and social security has imperiled Argentina’s democracy.

Voters have responded resoundingly: At 28%, Fernández’s approval rating in February was the lowest of any president in Latin America. And in the midterm elections in June, her ruling Justicialist Party lost its majority in the lower house of parliament. Voters may well be telling her she should learn to play by the rules. Fernández’s recent aggressive posture over the sovereignty of the Falkland/Malvinas Islands calls to mind a similar attempt by the military dictatorship to win back the public’s dwindling support. If history is any indication, she will not succeed.


Colin Miller is a NACLA Research Associate.

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