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Argentine opposition lawmakers are stepping up efforts to derail a government proposal to make debt payments with central bank reserves, jeopardizing the country’s plan to restructure $20 billion of defaulted bonds.

Opposition leaders are drumming up votes among their majority ranks before the March 1 opening of congressional sessions to defeat President Cristina Fernandez de Kirchner’s reserves-for-debt fund plan, said Senator Alfredo Martinez.

“We are going to meet at the Senate to try to get as much support as possible to reject the decree,” Martinez, 58, said in a Feb. 18 telephone interview from his constituency in Santa Cruz, the southern Patagonian province where Fernandez began her political career.

A rout in Argentine dollar bonds that has made them the worst performers in emerging markets this year may deepen if the government fails to obtain the $6.6 billion in central bank money, said Paul Biszko, an analyst with RBC Capital Markets. The country’s average dollar bond yield surged last week to a five-month high of 12.12 percent, more than two percentage points above the government’s target yield on new bonds in the debt restructuring, according to JPMorgan Chase & Co. indexes.

“If this fund fails to pass, it makes it more difficult for Argentine spreads to compress,” Biszko said in a phone interview from Toronto. “It would be negative and would be more negative if it derailed or delayed further the opening of the debt swap.”

Holdout Investors

Fernandez is seeking to renegotiate $20 billion of defaulted debt that creditors kept out of a 2005 restructuring that paid 30 cents on the dollar. A settlement with the holdout investors would give Argentina access to international capital markets for the first time since the 2001 default on $95 billion of bonds.

The government, in need of money to fund a widening budget deficit, plans to require creditors put up cash for new bonds in addition to tendering their defaulted securities. RBS Securities Inc. projects the deficit will double to 1.2 percent of gross domestic product this year from 0.6 percent in 2009.

Economy Minister Amado Boudou said as recently as Feb. 18 that the country is looking to sell the bonds abroad at rates below 10 percent. The country’s average dollar bond yields closed last week at 11.98 percent after reaching 12.12 percent, according to JPMorgan.

Bonds Tumble

Argentina, which is waiting for authorization from the U.S. Securities and Exchange Commission, will move forward with the restructuring even if the reserves-for-debt fund is defeated in congress, Boudou said at a press conference in Buenos Aires on Feb. 18. He told Buenos Aires-based Radio 10 on Feb. 15 that the government wants to complete the debt exchange by March.

“We’ll continue ahead with the exchange process,” Boudou said at the news conference. “We’re convinced that the rate will fall below 10 percent.”

An Economy Ministry spokesman didn’t answer his mobile phone when contacted by Bloomberg News for further comment.

The country’s dollar bonds have lost 9.4 percent this year, more than all other 38 emerging-market nations in JPMorgan’s EMBI Global Index, in part on concern the reserves plan would fail. That’s a reversal of the 5.9 percent return the bonds posted in December, capping a record 133 percent rally on the year, after Fernandez’s announcement of the plan buoyed confidence in the government’s ability to service its debts.

‘Blank Check’

Fernandez fired central bank President Martin Redrado on Jan. 7 after he sought to block implementation of the fund. A day later, a federal judge ruled the government needed approval from the opposition-controlled congress to proceed with the plan.

Opposition lawmakers in the Senate will look to cobble together votes against the proposal this week as they gather to negotiate the makeup of congressional committees after a three- month recess, Martinez said.

“We can’t give a blank check to this government,” he said.

Miguel Pichetto, a senator from Fernandez’s ruling coalition, said the government isn’t ready to concede defeat.

“We have to keep talking,” Pichetto, 59, said in a Feb. 14 interview transmitted by Radio 10. “I’m still optimistic. The numbers aren’t decided.”

Markets Last Week

The yield on Argentina’s benchmark 8.28 percent dollar bonds due in 2033 declined 14 basis points to 12.94 percent, according to JPMorgan. The peso was little changed at 3.8542. The Merval stock index rose 2.7 percent to 2,334.99.

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