Cabinet switch buttresses Argentina's left-leaning economic model

BUENOS AIRES Tue Nov 19, 2013 10:12am EST

BUENOS AIRES Nov 19 (Reuters) - President Cristina Fernandez's new cabinet picks confirmed a deepening of Argentina's left-leaning economic model rather than a policy switch needed to confront escalating inflation and dwindling foreign currency reserves.

Following her first public appearance since an Oct. 8 operation to remove blood that pooled on her brain, Fernandez's spokesman announced late on Monday the promotion of leftist economist Axel Kicillof to economy minister and the replacement of the central bank director and agriculture minister. Kicillof has served as deputy economy minister.

Argentine debt prices were little moved by the news on Tuesday, though the Global 2017 bond was down 1 percent.

Analysts said Kicillof already had more influence on Fernandez than the man he replaced, Hernan Lorenzino, who was given the job of ambassador to the European Union.

"I wouldn't say that any of this represents a policy change, per se. But a deepening of the model? Perhaps," said Michael Henderson, a Latin American economist at Capital Economics in London.

Latin America's No. 3 economy faces inflation that private economists estimate at 25 percent and a currency, the peso, that is 65 percent weaker on the informal market than at the government's official rate.

The government is also in the midst of a decade-long legal battle with holdout creditors and is blowing through foreign currency reserves to import energy and fund popular subsidies.

Kicillof, 42, steered the Argentine government's expropriation of a controlling stake in energy company YPF from its former parent company, Spain's Repsol . Argentina, once a net energy exporter, needs foreign capital to develop its vast Vaca Muerta shale reserves.

Amid concerns over the economy's health, Fernandez's supporters suffered heavy losses in congressional elections on Oct. 27 that ended her chances of securing a change to the constitution that would have enabled her to run for a third term in 2015.

"Since there's no chance of Fernandez holding on to power, she might just throw caution to the wind and really double down on some of these ideological reforms pre-2015," Henderson said.

Fernandez's spokesman also announced the appointment of Carlos Fabrega as central bank chief on Monday, replacing Mercedes Marcó del Pont, and said Carlos Casamiquela would take over as agriculture minister, replacing Norberto Yauhar in the world's No. 3 soybean and corn supplier.

Most observers expect Fernandez's government to maintain or intensify measures to keep the economy growing even as foreign investment abandons Argentina. She increased public spending to keep voters happy ahead of the mid-term vote, causing prices to rise and reserves to melt away.

"The bottom line is that if the government fails to tackle the underlying inflation problem - which the new economy minister doesn't even recognize - there will be a strong risk of some sort of currency crisis in the rest of Ms. Fernandez's term," said Fiona Mackie, an Argentina analyst for the Economist Intelligence Unit.

Mackie said bondholders who refused to participate in two debt restructurings dating to the country's 2002 default had more confidence in Lorenzino as a dealmaker than in the abilities of Kicillof, who previously focused on domestic policy.

"This could dash hopes that were only recently raised that some sort of negotiated settlement to the holdout problem could finally, and against the odds really, be found," Mackie said.

A U.S. appeals court in New York on Monday declined to reconsider an order requiring Argentina to pay $1.33 billion, ruling in favor of bondholders who refused to participate in two debt restructurings spinning out of the country's 2002 default.

The court's decision set the stage for Argentina to go to the U.S. Supreme Court in a case that has created concerns about a potential new debt crisis following Argentina's $100 billion default more than a decade ago.

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