March 15, 2012 / 3:15 AM / 8 years ago

Argentina set to free up cenbank reserves, with lower house passage

* Passed with 142 votes in favor, 84 against

* Aims to free up more reserves for debt payments

* Criticized as inflationary, a slush fund with no oversight

* Senate likely to pass bill in coming weeks

By Luis Andres Henao

BUENOS AIRES, March 14 (Reuters) - Argentina’s lower house approved a bill on Wednesday to free up more central bank reserves for debt payments, a move that paves the way for the government to keep spending high but which has been criticized as inflationary.

With Argentina’s trade and budget surpluses eroding on big public spending that has helped foster a booming economy for most of the past nine years, President Cristina Fernandez’s administration is seeking to plug fiscal holes.

Argentina has earmarked up to $5.7 billion in excess foreign reserves to pay debt in 2012 but under current rules, Latin America’s third-biggest economy has none left.

The country has been virtually shut out of global credit markets since defaulting on some $100 billion in debt in 2002 and tapping central bank reserves for a third straight year will help allow it to avert brutal fiscal cuts and costly debt issues, central bank chief Mercedes Marco del Pont has said.

But critics call this a desperate move and say it will only worsen inflation already clocked by private economists at over 20 percent per year. Some have argued that it institutionalizes a slush fund within the public sector that has no oversight.

With Fernandez’s allies in control of Congress, Senate approval of the bill is expected in the coming weeks. It passed the lower house by a 142-84 vote, with 10 abstentions, after a nine-hour debate.

The central bank’s current charter defines excess reserves as those surpassing what is needed to back up cash in the economy. The new definition scraps any correlation to the money supply and puts the criteria in the hands of the central bank’s board.

It also allows the central bank to regulate credit conditions in the local market, including loan maturities, interest rates and commissions, while also “orienting” loans toward projects that boost domestic production.

Marco del Pont last week argued that Argentina can gradually replenish the foreign reserves it uses to pay government debt, signaling the bank will keep buying billions of dollars on the local market to help keep state finances afloat.

The central bank has bought roughly $2.1 billion on the local market since the start of 2012 to bulk up foreign reserves that have fallen by nearly $6 billion since hitting a record high $52.7 billion in January 2011.

In the past two years the administration tapped about $16 billion of central bank reserves to pay debt.

The bill is only one of several unorthodox policies pursued by Fernandez that have increased the state’s role in the economy and earned her the ire of Wall Street. Other measures include the nationalization of Argentina’s private pension system.

But the 59-year-old leader was easily re-elected last year and is loved by many for her generous social spending and the emphasis that her administration places on human rights.

Additional reporting by Hilary Burke and Hugh Bronstein; Editing by Edwina Gibbs

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