Adios Redrado

It’s hard to resist presidential decree. Yesterday, after calling for his resignation, President Cristina Fernández de Kirchner issued a decree to remove the governor of Argentina’s Central Bank, Martín Redrado, from his post. The impasse has been brewing for some time, coming to a head this week.

Kirchner wanted Redrado to devote $6.6 billion in foreign currency reserves to paying off national debt. Meeting a $13 billion debt that comes due this year is critical to Argentina regaining access to global credit markets, which left the nation isolated after its 2001 default, the largest external default in history. Since then, the weight of default has been eased by strong economic growth, particularly from 2003-2007, and large loans offered to Argentina by Hugo Chavez. Now growth is flagging, and the interest rate on Mr. Chavez’s loans exceeds 10%.

Tax hikes or entitlement cuts are the more orthodox tools under such circumstances. These appear a bit too sour to the political palette of the president, who told reporters “It was not Redrado who gathered the reserves, it was the government.” True enough, but sacking Redrado and raiding foreign reserves is bound to spark a short-term backlash. A sell-off of the peso seems inevitable. Mark Mobius, executive chairman of Templeton Asset Management, said investors should “generally” avoid Argentina.

More troubling are the medium-to-long-term implications. The independence of central banks throughout the region is critical to economic stability. Should the banks (once again) become the handmaiden of populist politicians the beast of inflation may return—already Argentina has Latin America’s second-highest rate of inflation, eclipsed by Venezuela.