FINANCE-ARGENTINA: A Banking System in Coma

By Marcela Valente Reprint | | Print |

Marcela Valente

BUENOS AIRES, May 21 2002 (IPS) - Argentina’s banking crisis, which erupted in December, has pushed the financial system to the verge of total collapse, and there are some experts who believe the worst is yet to come.

Total bank deposits have plummeted from 80 billion to 10 billion dollars in the last 12 months.

In 1985, there were 200 banking institutions in the country, but the so-called “tequila effect” of the 1994 Mexican economic crisis cut the number in half. Many become local affiliates of major foreign banks, backed by the solvency of the head offices.

“The effect of the foreign mergers is that it immunises the system in terms of liquidity when faced with a run on the banks,” said Martín Redrado five years ago when he was president of the think-tank Fundación Capital. REdrado is currently head of international economic relations for Argentina’s Foreign Ministry.

But most of the foreign banks set up as corporations, or public limited companies, with the publicly recognised name but without the responsibility of financial backing if difficulties should arise.

Most of Argentina’s 36 million people were unaware of this fact until the current crisis began.

With the Dec 1 withdrawal restrictions still in place – known as the “corralito”, or little fence – the Central Bank has taken over operations of Scotiabank Quilmes, which belongs to the Canada- based Scotiabank. All others were forced to take state financial aid.

And the Central Bank announced Monday that it was temporarily taking over operations of the Suquía, Bisel and Entre Ríos banks, three provincial banks owned by France’s Crédit Agricole, whose shareholders had announced that they would not provide even one more dollar.

Anxiety is growing at Sudameris, a bank based on Italian capital, and at the France-based Societe Generale, though their situation is not as grave as Crédit Agricole’s.

Meanwhile, millions of Argentine savers say they feel cheated and many regularly engage in protests outside of banks, demanding access to the money they deposited in their accounts.

“We are faced with a process of destruction,” a former bank executive and current financial consultant who requested anonymity told IPS.

“When a country declares a debt default, breaks its contracts and devaluates in a dollarised economy, 90 percent of the companies go bankrupt, including banks and the state itself,” added the expert.

“Since the mid-1990s there was a false impression that the affiliates of foreign banks had lenders of last recourse at their headquarters, but that wasn’t true.

“The savers want their money, and there is great risk that the banks will begin to fall, one by one, due to lack of cash,” stated the source.

Following the “destruction phase”, the situation may normalise in the middle term, if investor and saver confidence is restored, but it is also possible that the local financial market will become “limited, inoperable, without credit and based purely on transactions,” said the former bank executive.

“With today’s crisis, in Argentina half the businesses and half the banks are superfluous, unnecessary.”

The withdrawal of bank deposits began to increase gradually throughout 2001, hand in hand with waning confidence in the system, generated by nearly four years of recession. This ultimately prompted a halt in foreign debt payments, despite the large influx of funds from multilateral credit organisations, like the International Monetary Fund.

Last week, parliamentarian Mario Cafiero, of the opposition party Argentines for a Republic of Equals, made a legal denunciation that the monthly account balances presented to the Central Bank show that the foreign owners of local banks moved some 25 billion dollars out of Argentina “in a silent and orderly manner.”

The “corralito”, imposed in December by Domingo Cavallo, economy minister at the time, initially limited withdrawals for what was to be a 90-day period. The maximum savers could take out of their accounts was 250 pesos per week, a limit set when the Argentine peso was still pegged at one-to-one parity to the dollar.

Thus the recession, illiquidity and lack of credit grew worse. Purchase and sales operations dropped dramatically and all types of projects ground to a halt due to lack of funds. And the limit on withdrawals was extended.

The banking restrictions caused great social unrest – with thousands of people taking to the streets in protest, and widespread looting of businesses, particularly supermarkets – leading to the resignation of president Fernando de la Rúa on Dec 20.

In January, Congress designated current president Eduardo Duhalde to the post and almost immediately he devalued the peso. The national currency had been pegged – by law – to the dollar for more than a decade.

The Duhalde administration also reprogrammed the timeframe for returning funds to savers and allowed them to convert pesos to credits or dollar deposits.

Some 200,000 savers, out of a total estimated at nine million, presented the Argentine courts with petitions to protect access to their money, arguing that the “corralito” is unconstitutional.

So far, nearly 20,000 of the plaintiffs have won favourable rulings that have allowed them to recover their deposits. The banks, meanwhile, say that if the process continues they will be forced into bankruptcy.

The peso-dollar exchange rate reached 3.45 on Friday, and that only served to deepen the liquidity crisis of the banks’ dollar holdings.

The Association of Argentine Banks, which encompasses private local and foreign institutions, stated before the Supreme Court that there are “risks that the financial system will collapse” as a result of the continued outflow of deposits without new funds coming in to replace them.

If the dynamic persists, 75 percent of the depositors will not be able to recover their money, loans will be discontinued and 100,000 jobs will be lost in Argentina’s banking industry alone, warned the Association.

Duhalde has proposed to programmes for exchanging deposits for long-term bonds, but both initiatives failed because they were not approved by Congress, which is under pressure from savers, and because the banks refused to guarantee the emission of the bonds.

The Duhalde administration’s first Economy minister, Jorge Remes Lenicov, resigned in April due to the failure of the first plan, and his successor, Roberto Lavagna, has not yet been able to achieve consensus for solving the problem.

Discrepancies between the Economy Ministry and the Central Bank have been made public in recent days, with the ministry wanting to offer savers a range of options, while the Central Bank insists on largely maintaining the “corralito” to prevent massive withdrawals and a deepening of the crisis.

In an interview published Saturday by Clarín newspaper, Central Bank president Mario Blejer denied rumours that he was planning to resign from his post but admitted that there are many points on which he disagrees with Lavagna when it comes to the restrictions imposed on bank customers.

“We will step down if we reach the conclusion that we cannot manage these issues,” stated Blejer.