ECONOMY-ARGENTINA: Measures to Lift Bank Freeze Go into Effect

By Marcela Valente Reprint | | Print |

Marcela Valente

BUENOS AIRES, Jun 3 2002 (IPS) - Savers in crisis-ridden Argentina had already taken to the streets early Monday to protest the new measures to do away with the freeze on bank deposits, and analysts expressed concern about the fiscal cost of the plan.

According to the new measures, which were published in the official newspaper at noon, account-holders have 30 days as of Monday to choose between several options involving a deposit-for- bond swap. Otherwise, they will have to wait for the return of their savings in cash sometime between 2003 and 2005.

Announcing the new plan on Saturday, Economy Minister Roberto Lavagna explained the various options by which savers can attain bonds in exchange for their deposits, which have been trapped in the banks since December.

Lavagna underlined that the new plan aimed at restoring confidence in Argentina’s teetering banking sector is “voluntary, provides various options, and includes norms to rebuild the financial system.”

He thus highlighted the difference between the current programme and the obligatory deposit-for-bond swap that cost his predecessor, Jorge Remes Lenicov, his post in April.

On late Friday, President Eduardo Duhalde signed the decree that went into effect Monday to replace the “corralito” (little fence), the local name for the restrictions on bank withdrawals adopted on Dec 2 to curb the massive capital flight resulting from the loss of confidence in the banking sector.

The freeze on deposits was put into effect by the government of Fernando de la Rúa, 18 days before he was forced out of office by widespread protests, looting and rioting. The restrictions were stiffened after parliament appointed Duhalde caretaker president on Jan 1, and all of the initiatives presented since then to phase out the banking freeze have failed.

In the meantime, account-holders who could afford lawyers got around the limits by obtaining court injunctions enabling them to withdraw their money, thus provoking a new stampede that led to the fall of several private sector banks and threatened the entire system with collapse.

The Canadian Scotiabank Quilmes was taken over, and the French Credit Agricole, which owns the Banco Suquía, the Bisel and the Banco de Entre Ríos, pulled out of Argentina, forcing the public Banco Nación to temporarily assume the administration of those institutions.

The new plan, which gives savers 30 working days as of Monday to decide which option they will choose, was grudgingly accepted by the foreign banks, which preferred an obligatory swap of deposits for long-term bonds.

The new measures allow the holders of fixed-term accounts to recuperate their money in the currency in which it was deposited, whether in pesos or dollars, through public bonds maturing in 10 years. They will also be able to withraw interest every six months.

Another option is for account-holders to swap their deposits for treasury bonds in pesos or dollars, payable in five or ten years, with interest payments that can be withdrawn every six months.

Bonds maturing in three years are also available in the case of current and savings accounts, as well as for people over 75, those who have severe health problems, and workers who deposited their severance pay in bank accounts.

Savers who do not want treasury bonds will have to wait for their money to be returned in cash according to a system announced earlier this year, by which people are to get their money back sometime between 2003 and 2005, depending on the amount involved and the currency in which the deposit was made.

If bond-holders do not want to keep their bonds until they mature, they can sell them on the secondary market as an investment in futures or to pay off loans. The bonds are expected to be worth 20 to 40 percent of their nominal value at their launch.

The bonds will be issued by the treasury and guaranteed by the banks, which will be compensated for the conversion to pesos of loans granted in dollars and payable at a one peso-one dollar exchange rate. Deposits in dollars were converted to pesos at a rate of 1.40 to the dollar.

Protesters taking part in the traditional Monday demonstrations outside the banks (the protests are held every Monday, Wednesday and Friday) were furious over the new plan, especially because the state promised the banks that it would compensate part of their losses.

One angry anonymous caller told radio Mitre Monday that “Lavagna is holding all Argentines accountable for the theft by the banks. It is the bank that owes me, and which must give me back my money, not the state.”

Lavagna said that some banks had expressed their support for the new measures after they were assured that the state would compensate part of their losses.

“This is not a happy option for anyone, but I observe that people are very realistic, they know that there is no way to pull out of this crisis overnight, and what they want are several options for a solution,” said the minister.

He also admitted that the plan has not been accepted by all of the members of the International Monetary Fund board of directors, some of whom were pushing for an obligatory deposits-for-bonds swap. But he stressed that only a voluntary plan would be accepted by the courts.

Analysts expressed concern Monday at the fiscal cost of easing the “corralito”, estimated by Finance Secretary Guillermo Nielsen at around 9.5 billion dollars. The more people who opt for long-term, 10-year bonds, the bigger the burden on the state coffers.

In the case of those who elect to get their savings back in cash between 2003 and 2005, the burden will fall on the financial system, as they will be paid by the banks in cash and within a shorter timeframe.

Nevertheless, Nielsen encouraged people Monday to opt for the 10-year bonds, saying they would provide the best returns, and that they were the surest way to recover trapped savings.

The government’s new plan entails a restructuring of the financial system, aimed at drawing back people who were able to withdraw their savings and are holding them in safe-deposit boxes, outside the country, or “under the mattress.”

Lavagna said it was “a parallel, totally free, scheme” designed to recreate the banking system with new deposits and loans. The government is trying to prevent more people from withdrawing their money from the banks, which would lead to a further devaluation of the peso and would only drive up prices even more.

There are presently some 63 billion pesos (equivalent to 18 billion dollars at the current exchange rate) trapped in fixed- term deposits and demand accounts in Latin America’s third-largest economy.

After the convertibility law or currency board system, which fixed the peso at par with the dollar for nearly 12 years, was scrapped in January, the value of the local currency began to plunge. By late May, the peso was trading at 3.55 to the dollar.

Lavagna said the economic collapse facing this country of 36 million is the result of nearly five years of recession, during which the financial system’s weaknesses and flaws were concealed and glossed over.

The crisis, the roots of which date back to 1994, is a consequence of the “inconsistencies” of the economic model followed for nearly 12 years, and now we are trying to “spread out the losses,” said Lavagna.

According to Duhalde, “this is the best we can do to guarantee savers’ money.”

Half of Argentina’s population has fallen into poverty, and unemployment has climbed above 20 percent.