2002-2003/ARGENTINA: Banking System on its Way to Recovery?

By Marcela Valente Reprint | | Print |

Marcela Valente

BUENOS AIRES, Dec 17 2002 (IPS) - Argentina’s banking system, which was on the verge of collapse a year ago, seems to be on its way to recovery, with the return of some account-holders’ money, a slight rallying of deposits, and a reduction in the amount of outstanding loans.

But some say that although banks are no longer closing in this crisis-stricken Southern Cone nation, the ”recovery” is only a mirage.

”A year after the debacle broke out, we can say that a totally new phenomenon is occurring in the country: banks and businesses are bankrupt but nevertheless enjoy abundant liquidity,” a former banker who is now a consultant to financial institutions and who asked not to be identified commented to IPS.

This month, the restrictions on cash withdrawals – known as the ”corralito” (”playpen” or ”little fence”) – were lifted on savings and checking accounts and small fixed-term deposits, a year after they were first imposed by the government to stem a run on the banks.

The Capital Foundation, a think-tank in Buenos Aires, estimated that ”only” 32 percent of fixed-term deposits remain frozen in the banks.

But depositors who are still unable to withdraw their savings take a less upbeat view than those who say the situation is almost back to normal.

Savers whose money is still unavailable to them launched a hunger strike this month, in which two depositors at a time are fasting in 24-hour shifts to demand swifter progress on their lawsuits challenging the constitutionality of the bank restrictions.

”The banks have money and reserves, and continue doing business with our money. If they don’t, how can you explain that almost no bank has collapsed in this crisis?” Nito Artaza, a prominent actor and the president of the Movement of Swindled Bank Depositors, remarked to IPS.

In December 2001, after months of an ongoing stampede on deposits, then-president Fernando de la Rúa (1999-2001) announced the ”corralito” to avert a chain of bankruptcies in the financial sector, which would have brought even more serious consequences for Latin America’s third-largest economy.

The restrictions caused profound discontent, within the broader context of a social decline brought on by a four-year recession and rising unemployment and poverty, as well as a crushing foreign debt.

Just three weeks later, looting of supermarkets, rioting and huge street protests forced de la Rúa to resign.

After taking office in early January, caretaker President Eduardo Duhalde set the peso to float free after 10 years of a currency board that fixed the peso to the dollar, and stiffened the ”corralito”, which was originally to have been in place for just 90 days.

The Duhalde administration ordered that all deposits in dollars be converted into pesos (”pesification”), which meant tens of thousands of account-holders saw the value of their savings slashed overnight.

Meanwhile, the new government left the freeze on withdrawals in place. In compensation, it offered to swap deposits for long-term bonds that some savers accepted, while other depositors filed lawsuits and waited for the courts to rule in their favour and order that their savings be released.

Artaza said foreign banks contributed to generating the crisis in 2001 by transferring billions of dollars abroad in the months prior to the creation of the ”corralito” – an allegation supported by the findings of an investigation carried out by a group of lawmakers headed by Deputy Mario Cafiero of the Alternative for a Republic of Equals opposition party.

In mid-2002, when the peso stabilised at around 3.5 to the dollar, small savers were allowed to begin withdrawing their deposits, after which the restrictions on withdrawals of cash from current and savings accounts were completely eliminated.

Several foreign banks, including Canada’s Scotiabank and France’s Crédit Agricole, decided to pull out of the country. Around 100 foreign banks remained, with a reduced number of branches and smaller staffs, and economic analysts say they do not know if the presence of foreign banks will continue to shrink in 2003.

According to the former banker interviewed by IPS, a cursory glance shows that the stabilisation of the exchange rate led to a rise in interest rates, which helped the banks to begin attracting deposits once again.

The deposits trapped in the ”corralito” were reduced from 29 billion pesos in May to 17.6 billion in October, and the amount of new deposits not subject to the restrictions grew from 27 to 34 billion pesos in the same period, the Deloitte & Touche consultancy stated in its November report.

More than 60 percent of small savings account-holders affected by the ”corralito” chose to leave their deposits in the banks once they were authorised to remove them, which helped the banks to maintain their liquidity, the former banker added.

For his part, Artaza said he hoped savers would once again begin to have confidence in the banks, and continue to entrust their money to the financial system.

But for that to happen, he said, the banks must stop clamouring for support from the state, and negotiate with each client, without intermediaries or limits and timetables for paying back deposits.

The report by Deloitte & Touche indicated that the outstanding loans owed to the banks were reduced from 40 billion pesos in May to 32.7 billion in October, which revealed that loans were paid off and new lines of credit have been restricted.

”All of that increased the liquidity of the banks, which needed to accumulate reserves once again,” said the anonymous source. ”But it must be clarified that no bank is currently lending money, because they are afraid that a new crisis would make it impossible to recover the loans, or that Congress will put in place obstacles to foreclosing on collateral.”

The banks suffered losses that led to a shrinking of their net worth due to the ”uneven pesification” ordered by authorities, by which savers got their money back at an exchange rate of 1.4 pesos to the dollar, while those who had taken out bank loans successfully pressed for their debts to be computed at one peso to the dollar, he explained.

The banks also suffered losses because deposit-holders who benefited from legal rulings in their favour were able to avoid the ”pesification” of their dollar-denominated deposits, and got their savings back in dollars or in pesos estimated at the going rate for the dollar, he added.

In December 2001, the government’s decision to default on payments to private creditors also hurt the banks. According to Deloitte & Touche, at that time, the banks operating in this Southern Cone country held 30 percent of their investments in public bonds.

”The banks are broke, but have much greater liquidity,” said the former banker.

”The big danger is to believe that the problems have been resolved,” he added. ”If a family does not invest in maintaining its home and if it is not paying off its debts, you can’t say it is prosperous, even though it has liquidity.”

The Supreme Court is studying the possibility of handing down a verdict that would revert the obligatory pesification of dollar- denominated deposits, and would set a precedent for all of those whose savings in dollars are still frozen in the banks to demand that their money be returned to them in that currency.

The government argues that such a ruling would bring to a halt the feeble economic recovery that has begun to be seen in the past few months, in a once-rich country where over half of the population has fallen into poverty.

It is thus not clear whether Argentina’s banking system will get back on its feet next year with a reduced number of banks, or whether a new crisis is on the horizon.