Fun with Sovereign Debt Default and Central Banking in South America

Sunday, January 17, 2010 , , , 0 Comments

Wall Street, October 1929

Let me see if I get this straight: The Argentinian government defaulted on a bunch of bonds and investors, pissed that they'd been miffed by the government, demanded access to the Argentine central bank's funds at the NY Fed to pay off their debts? Do I have that right?

Is this the kind of crap we have to look forward to here in the good ole US of A?

Here was the story as of Thursday January 14:


Confusion on Thursday surrounded the status of the Argentine central bank's operating account at the Federal Reserve Bank of New York amid conflicting reports from the Argentine government.

Central Bank Governor Martin Redrado denied that U.S. District Judge Thomas Griesa had backtracked on an embargo of the bank's account.

The judge heard the central bank's arguments and said he will consider lifting the freeze, Redrado said, in comments which were broadcast on local television channel TN.

The official said he is "very optimistic" that the judge will unfreeze the account.

Earlier, Finance Secretary Hernan Lorenzino told reporters that the judge had already lifted the freeze on the account Wednesday.

Griesa "decided to return to the status quo with respect to the accounts of the central bank," Lorenzino said.

The judge froze the accounts Monday at the request of two investors with claims totaling nearly $2.4 billion against the government, related to defaulted bonds. The investors argued that two decrees at the center of the central-bank dispute proved that the monetary authority is directly controlled by the government.

The Argentine government has denied this is the case, arguing that the central bank is independent, an argument which the bank's lawyers pressed home Wednesday.
And then come Friday the 15th:


Argentina's Central Bank chief Martin Redrado said on Friday he expected an embargo on the bank's funds in the U.S. Federal Reserve to be lifted in the coming hours.

U.S. Judge Thomas Griesa froze the account earlier this week in response to a lawsuit filed by holders of defaulted Argentine bonds, deepening a dispute in Argentina over government plans to use foreign reserves to repay the public debt.

"The account is going to be operative in the coming hours and this proves the strength of the Central Bank's arguments," said Redrado, whom President Cristina Fernandez sacked last week for blocking her reserves fund plan.

A judge reinstated Redrado a day after he was fired and also blocked the transfer of Central Bank reserves to the treasury.

Now, weren't we just talking about the importance of Fed independence in the face of reckless government behavior? Case in point, Argentina. Picture it: The Treasury defaults on T-bills, pissed off foreign investors come banging down the door for blood, Timmy rats on Bernanke, Obama fires the Beard and Timmy swoops in to take what the Fed's got. Is it crazy? Sure. No crazier than anything else that's happened in the last, oh, two or so years.

The disadvantage to the independence argument, of course, is also demonstrated above. If you think the confusion surrounding actual ownership of the Federal Reserve System is confusing by design, keep in mind as Yves Smith says it is a feature, not a bug.

Jr Deputy Accountant

Some say he’s half man half fish, others say he’s more of a seventy/thirty split. Either way he’s a fishy bastard.