Argentina creates $6.6bn creditor fund

Argentina seems determined not to repeat the default of 2001. Economy minister Amado Boudou has said $6.6bn of the central bank’s international reserves will be placed into a fund this month, to help the government pay bondholders and international lenders for debts. The fund will cover about half of $13bn interest and principal payments due in 2010. The government said today it will give the central bank 10-year dollar-denominated notes, known as Letes, in exchange for the funds.

The plan is to use the fund to make payments of $4.4bn to bondholders and $2.2bn to lenders. The government will also offer creditors early 2010 payments at a discount.

“The goal is to give a maximum level of certainty,” said Boudou. But he added that the reserves won’t be used to pay the ‘Paris Club’ – an informal association of creditors including the US, Germany and Japan – about $6.7bn in defaulted debt.

Goldman Sachs economist Alberto Ramos said the use of central bank reserves to pay government obligations “was not a positive development.” He explained: “This weakens the balance sheet of the central bank and provides the wrong incentive structure to the government as it weakens the incentive to control the rapid expansion of spending.”

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