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By Walter Brandimarte
BUENOS AIRES, Feb 24 (Reuters) - Argentine PresidentCristina Fernandez is trying to use billions of dollars inforeign reserves to help pay debt this year, but a courtdecision on Wednesday dealt another blow to her plan.
An appeals court upheld a freeze on Fernandez"s bid totransfer some $6.6 billion from the country"s foreign reservesinto a fund managed by the Treasury, a ruling that may forceher to find new ways to cover a widening fiscal deficit.
Fernandez"s critics say she is seeking the funds toincrease public spending and boost the popularity of governmentahead of next year"s presidential election.
The following are possible scenarios on the outcome of thereserves fund, including the impact on government finances andArgentine securities prices:
GOV"T GETS SENATE VOTES TO APPROVE DECREE
Fernandez used a presidential decree to create the reservesfund and needs the approval of one chamber of Congress to moveforward with it.
Her government lost its majority in the lower house in amid-term election last year so she has focused efforts onscraping together enough votes in the Senate.
However, Senate leaders allied with the government havesaid they have not been able to secure the votes to approve thefund and local media say Fernandez now looks set to losecontrol of the Senate when Congress reconvenes in March afterthe summer recess.
SUPREME COURT RULES ON RESERVES PLAN
Wednesday"s ruling referred the case to the Supreme Court,which will consider the government"s appeal against theinjunction blocking the reserves plan.
Supreme Court judges could theoretically decide the case,but they are more likely to pass the matter to Congress,constitutional lawyers say. Supreme Court Judge Carlos Fayt hassaid it is a political matter and as such should be decided byCongress.
GOV"T PRESENTS BILL, NEGOTIATES CONGRESS SUPPORT
If unable to push the decree through by winning Senatesupport, Fernandez could instead try to tap central bankreserves by reviving the plan in the form of a bill. That mightinvolve including the reserves as a financing source byrevising the annual budget law.
Even without a congressional majority, she could negotiatesupport for the use of reserves with the opposition,particularly if she made concessions on allocating funds to theprovinces. Some opposition lawmakers have already signaledbacking for using reserves under certain circumstances.
FERNANDEZ MAY TAP OTHER CENTRAL BANK FUNDS
Should her current plan fail, Fernandez might considertapping other central bank funds that are not necessarily partof the monetary authority"s reserves.
The government could still get hold of $2.2 billion of thecountry"s reserves which are earmarked for payment of debt withmultilateral institutions such as the World Bank and the InterAmerican Development Bank.
She could also tap into central bank profits, which BuenosAires daily La Nacion estimated could have reached 24.7 billionpesos, or $6.3 billion, in 2009 -- an amount similar to thatsought by the reserves fund.
The central bank will release its 2009 financial results inMarch, a government source told Reuters, adding the numbersreported by La Nacion seem to be too optimistic.
It is more likely that the bank"s profits for 2009 hoveraround 20 billion pesos, the source said.
The Central Bank has transferred about 4.5 billion pesos tothe Treasury each year during the past two years. Those arebasically accounting profits resulting from mark-to-marketgains on the bank"s portfolio and the revaluation ofArgentina"s foreign reserves at a weaker exchange rate.
POSSIBLE MARKET AND POLITICAL IMPACT
Government bond prices would likely rise if the fund isapproved since it would improve Argentina"s ability to servicedebt in the short term.
It would be seen as a negative factor in the longer run,however, as it would deplete the country"s foreign reserves,which stand slightly below $48 billion.
The fund approval could further fuel inflation, which isalready expected to reach 20 percent this year, as it wouldincrease the amount of pesos in circulation.
The collapse of the fund, on the other hand, would increasethe government urge to move forward with a planned swap ofdefaulted debt -- a necessary step for Argentina to return tointernational capital markets.
It would also strain government finances and increasepolitical confrontation with provincial governors who did notback the plan. (Additional reporting by Guido Nejamkis; Editing by AndrewHay)
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