In today’s podcast at 11AM Eastern,
Behind Impasse Over Argentine Central Bank Is Battle For Cash

Behind the dispute between the Argentine government and the governor of the central bank is a battle over the administration’s efforts to secure new sources of cash to maintain high public spending.

The government says it must continue to spend generously to reboot the economy and prop up employment after a slump in 2009. Political opponents, invigorated by gains in recent midterm elections, contend that the government is forcing through extra spending without consulting Congress as it seeks to boost its waning popularity ahead of presidential elections in late 2011.

Public outlays have risen constantly, and government revenues haven’t kept up. While income was up about 12.5% in 2009, spending was up 29%, according to the ACM consulting firm.

The latest move to borrow $6.6 billion from the central bank to pay down debts coming due this year would have freed up cash from the budget. At the same time, it would improve the country’s profile among investors, helping it regain access to international debt markets to be able to borrow at reasonable rates.

President Cristina Fernandez on Thursday signed a decree removing Martin Redrado from the helm of the central bank for dragging his feet in setting up the fund as he sought assurances that all the right procedural steps were taken.

A federal judge has suspended the decree that would allow the government to use foreign reserves to pay debt. The government says it will appeal the judge’s decision.

Redrado has stepped down: The BBC reports,

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Argentina’s central bank boss has stepped down after the president signed a decree firing him for refusing to use currency reserves to pay foreign debt.

Cristina Fernandez de Kirchner cited misconduct and dereliction of duties in a decree dismissing Martin Redrado.

A spokesman for Mr Redrado said he had agreed to step aside but not to resign, and was launching a legal challenge.

As a result,

he county’s bonds were the worst performers on JPMorgan’s Emerging Market Bond Index Global. The country’s risk premium was raised by 18 basis points, to 674 basis points over Treasurys, for a loss of 1.74%.

And despite some analysts’ calls that a sell-off presented a good buying opportunity, not too many buyers stepped up, a trader in New York said.

Pressure was put on the bonds when central bank governor Martin Redrado vowed to stay in his job despite President Cristina Fernandez’s call for him to step down. Late Thursday, Fernandez signed a decree that sacked Redrado, citing poor conduct. The government said it is proceeding with the $6.6 billion fund using central bank reserves.

The dispute has heightened market concerns over the formation of a debt-payment fund that is seen as a major step for the country as it looks to settle its defaulted debt and regain access to international capital markets.

“The main risk to Argentine asset prices is an unwarranted delay or an eventual cancellation of the reopening of the 2005 debt exchange,” said Boris Segura, an economist at RBS.

Prior post and podcast here.