A conflict over Argentine President Cristina Fernandez de Kirchner's plan to use $6.6 billion of central bank reserves to pay debt this year may weaken the peso and cause investors to pull out of the country, Goldman Sachs Group Inc. economist Alberto Ramos said.

Fernandez said yesterday that her plan to use the reserves, which was blocked by a federal judge Jan. 8, would help the country's efforts to restructure $20 billion in defaulted debt and return to international credit markets for the first time since 2001. The judge also blocked another decree firing central bank President Martin Redrado for not backing the plan.

"This has been handled very poorly and there is a risk that it could cause a renewal of capital flight and pressure on the currency," Ramos said in interview from New York yesterday.

Economy Minister Amado Boudou told reporters yesterday that the dispute is harming the country's planned exchange of defaulted bonds. Boudou spoke after U.S. District Judge Thomas Griesa froze $1.7 million in central bank funds held at a U.S. Federal Reserve bank and said the embargo, sought by holders of defaulted debt, could reach $15 million.

"What is happening damages the debt swap," Boudou said. "It seems to be a conspiracy so that Argentina pays the highest possible interest rates."

The Merval stock index fell 2 percent, the most since Nov.26, to 2,270.49. The peso was little changed at 3.792 per dollar. The currency has weakened 9.1 percent against the dollar over the past 12 months, the worst performance among 26 emerging market currencies tracked by Bloomberg.

Eoin Treacy's view The Argentine economy has prospered over the last decade but has stubborn economic and governance issues which need to be tackled if the country is to achieve its long-term potential. As with a large number of other emerging markets, Argentina's US Dollar reserves have grown considerably in the last decade and are currently near $48 billion. President Fernandez-Kirchner's plan of spending part of this reserve in order to regain access to the international credit markets and lower borrowing costs appears to be a common sense solution on first inspection. However, since the country's external debt has risen from $100 to $128billion since 2005 any reduction in the country's reserves is going to encounter inevitable resistance.

Argentina's CDS spread has contracted from 4000 basis points at the end of 2008 to the current 1000. While this is an improvement, the spread remains higher than it was before the Lehman bankruptcy and considerably higher than most other countries. A sustained move below 1000 would suggest a more sanguine appraisal of the default risk on Argentine sovereign bonds. It is noteworthy that the cost of default protection has not risen over the last few months, while the current political impasse has unfolded.

Argentine US Dollar discounted bonds found support above 20 in October 2008 and broke upwards from their six-month base in March. They encountered resistance below 80 in September and have been ranging since. Last week's key reversal marked a failed upside break and this week's follow through suggests that some further retracement of last year's impressive advance is now more likely. An upward dynamic is now required to indicate demand is returning.

The Argentine stock market has been among the best performers in the world since its October 2008 bottom and is one of only a handful to have posted new all time highs since the credit crisis unfolded. However, the Index remains overextended relative to the 200-day moving average and the prospect of additional reversion to the mean remains high. A sustained move below 2100 would indicate this process is gathering pace.

The Argentine Peso was one of the worst performing currencies last year but hit a medium-term low against the US Dollar in August and continues to show gradual signs of improvement. A sustained move above ARS3.8 would break the Dollar's progression of lower rally highs and indicate a return to Peso supply dominance. (Also see Comment of the Day on October 16th.)

In conclusion, Argentina's financial markets are at a delicate point. The often chronically weak currency has firmed recently, CDS spreads have tightened and the country may soon be able to re-access credit from the international markets. However, the stock and bond markets have had a very good run and are looking somewhat overextended; having already priced in at least some of this good news. However, the chart action is supportive of the bull market hypothesis and suggests that any downside is likely to be limited to a medium-term correction in the absence of further economic problems.