Argentina central bank faces crucial peso test ahead of fraught election

By Walter Bianchi and Jorge Otaola

BUENOS AIRES (Reuters) - Argentina's central bank will play a crucial role in propping up the peso ahead of October's presidential election, analysts said on Friday, toeing a politically fraught line between providing support without blasting through its reserves.

Argentina's peso was in free fall for most of this week after a shock primary election result on Sunday, when center-left presidential candidate Alberto Fernandez trounced center-right President Mauricio Macri by a margin of 15 percentage points. The scale of Fernandez' victory suggested he could win the upcoming ballot in the first round.

After losing about a quarter of its value in the first three days of the week, the peso has since stabilized. On Friday morning it was more or less flat at 57.15 pesos per U.S. dollar, giving policymakers a bit of breathing room.

The peso's collapse, which comes amid growing fears of a global recession, forced the central bank to sell dollars and oblige private banks to trim their dollar holdings and provide liquidity to the market. Despite those measures, analysts said the central bank will be in a politically sensitive position ahead of October's election.

"One strategic element for the government and the opposition is how the current reserves of the central bank are used," consultancy Fundacion Mediterranea said in a note.

"The opposition does not want the current administration to leave the central bank with very few reserves, and it is convenient for the government that the proposals announced by the opposition are reasonable for the markets."

The central bank has about $66 billion in reserves, of which about $20 billion are free resources that can used to pay debt and stabilize the peso, according to an Argentine government official. Since Sunday's vote, the central bank has auctioned a total of $503 million.

Macri announced on Thursday that sales taxes of around 21 percent on basic foodstuffs would be axed until the end of the year to soften the impact of an International Monetary Fund-backed austerity program on the poor. The government estimated the sales tax freeze will cost about 10 billion pesos ($174.2 million).

The shelving of the taxes was the boldest in a series of measures totaling hundreds of millions of dollars that Macri has unveiled since the primary vote as he seeks to salvage his re-election bid and revive Latin America's third-largest economy.

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