ECONOMY-ARGENTINA: Bonds for Deposits, to Overcome Banking Crisis

By Marcela Valente Reprint | | Print |

Marcela Valente

BUENOS AIRES, Apr 18 2002 (IPS) - The Argentine government is studying a bill that would force some account-holders to swap their deposits, which have been frozen in the banks since early December, into goverment bonds with a ten year maturity, in an attempt to overcome the crisis that has crippled the banking system.

On Thursday, delegates of the Central Bank and the ministries of justice and the economy discussed a draft law to be sent to Congress, which if approved would give people access to their fixed-term deposits while keeping the banks from falling into insolvency.

However, the proposed solution is far from winning the support of depositors, many of whom gather to hold daily protests outside banks in this country of 37 million, Latin America’s third-largest economy.

“This is a new violation of the property rights of savers,” complained one protester. Another demonstrator said he could not wait that long to recover his savings, because he lives overseas.

The banks, on the other hand, have expressed a keen interest in a solution of this sort, since they are facing a constant drain of deposits due to the increase in legal rulings allowing savers to withdraw their money, while few banks are drawing any new deposits.

The banks are also finding it difficult to collect on their loans, because of a new bankruptcy law that has curbed foreclosures.

The restrictions on bank withdrawals were decreed on Dec 3 by then-president Fernando de la Rúa and his economy minister Domingo Cavallo to stave off a run on banks. The partial freeze on accounts was originally to last 90 days, and virtual transactions were excluded.

However, Argentina’s political crisis and the collapse of the government of de la Rúa in late December, followed by the devaluation of the local currency, led to a stiffening of the bank restrictions and to the design of a timetable for the mid- to long- term return of deposits, which triggered outrage among savers.

The banks argue that they cannot return people’s savings because they have not yet been able to recover the loans granted to companies and individuals.

The caretaker government of Eduardo Duhalde has accepted the excuses offered by the banks, although it warns that the situation is explosive and exceedingly difficult to resolve, and that it is standing in the way of a resurgence of the crisis-stricken economy.

According to the new bill, the holders of fixed-term deposits – which total around 30 billion dollars and 10 billion pesos (at par with the dollar at the time they were deposited) – would receive government bonds in the currency in which their money was originally deposited, payable within 10 years.

The initiative is similar to the Plan Bonex, implemented in 1990, although that programme involved only 10 percent of the amount of money that would be swapped into bonds today.

The holders of the bonds issued under the Plan Bonex, which was put into effect at the start of the government of Carlos Menem (1989-99), lost 80 percent of their deposits if they tried to immediately cash them in at the going exchange rate, while the best returns were earned by those who waited 10 years to do so.

The Duhalde administration is urgently seeking a solution to the freeze on bank accounts, known popularly as the “corralito.”

If the restrictions continue to remain in place, the economy could totally dry up due to the credit crunch, since the collapse has given rise to a continued drain of savings from the banks, which in the meantime are unable to attract new deposits.

According to rumours insistently circulating this week, several banks might have to close their doors within just a few days, overwhelmed by court rulings ordering them to hand over the savings of account-holders.

The courts have ruled that the freeze on bank accounts is unconstitutional, because it violates the right to private property.

Around 150,000 people have brought lawsuits demanding access to their savings, leading to constant withdrawals from the banks. Some 130 million dollars were pulled out of Argentina’s banks on Wednesday alone thanks to legal rulings that came down on the side of depositors.

Economy Minister Jorge Remes Lenicov revealed Monday that Duhalde was about to sign a decree that would put a halt to the lawsuits, but the president himself decided the measure was unconstitutional.

Instead of that decree, the government came up with the idea of swapping fixed-term deposits for bonds, subject to parliamentary approval.

The bill also foresees a partial lifting of the restrictions on withdrawals from savings and current accounts. But in these cases, depositers would only be able to take out a fixed amount of cash every month, while being forced to convert part of their deposits into the new bonds.

The government hopes that would not only resolve one of its most pressing problems, but would also help the country live up to International Monetary Fund (IMF) recommendations that it eliminate the “corralito”, even at the cost of the collapse of several banks and huge losses for savers.

Duhalde said Thursday that “far from being sustainable,” the IMF conditions for granting further economic aid “could lead us into bigger trouble.”

He noted that Remes Lenicov would travel to Washington this week to suggest “modifications” of the multilateral lending institution’s proposed plan.

The IMF has conditioned any further financial aid to Argentina on major cuts in public spending, the elimination of bonds issued by the provinces to finance expenditure, the repeal of laws that affect banks, and dismissals of public employees.

Duhalde, however, warned that “we cannot say yes to everything.”