SOS
04-22-2002, 03:11 PM
This means that Argentina has collapsed into like a 1930s recession.
Argentina's Woes Worsen
As Nation Closes Its Banks
By MICHELLE WALLIN and PAMELA DRUCKERMAN
Staff Reporters of THE WALL STREET JOURNAL
BUENOS AIRES -- Argentina closed its banks and foreign-exchange markets indefinitely Monday as the government prepared to take politically treacherous measures to rescue the banking system by further encroaching on Argentines' savings. "We run the risk of the system exploding," said President Eduardo Duhalde, Argentina's fifth leader since December.
The announcement Friday night capped a chaotic week in which renewed outflows from Argentina's battered banks, many owned by European and U.S. parent companies, heightened fears that Latin America's third-largest economy would be unable to avoid a wholesale collapse of its financial system. Since December, Argentina has defaulted on much of its $141 billion of public-sector debt and devalued the peso, which had been pegged 1-to-1 to the dollar for the prior decade.
Argentina, a country of 37 million people, was hailed by Washington as a model of free-market reform during the 1990s. Multinationals poured in money, and Wall Street lent Argentina's government and companies billions of dollars. But now, in the wake of its economic collapse, the nation has emerged as a test of the Bush administration's efforts to steer the International Monetary Fund toward taking a tougher line with developing countries seeking an economic bailout.
During the IMF's spring meetings in Washington this weekend, Horst Koehler, the fund's managing director, said an IMF mission would travel to Argentina next month to negotiate a letter of intent on a new economic program, a key step toward releasing aid. But Mr. Koehler also made clear that the IMF will hold fast to its insistence that Argentina make stiff budget cuts and forcefully rein in spending and money-printing by profligate provincial governments. Over the weekend, the Group of Seven industrialized nations noted their "serious concern" about Argentina and called on Buenos Aires to implement reforms essentially identical to those being sought by the IMF.
By contrast, a group of six South American countries, led by Chile's finance minister, called on the international community to offer Argentina immediate help to stanch a crisis that has shown signs of roiling other countries in the region.
Despite the general impression that the gradual, grinding nature of the Argentine meltdown had given investors time to differentiate between Argentina and other emerging markets, Chilean Finance Minister Nicolas Eyzaguirre said Argentina's troubles were in fact casting a dark shadow over the region. Both the Brazilian real and the Chilean peso have come under pressure, and foreign investors have been deterred from entering South America, he said.
The announcement of the bank and foreign-exchange shutdown differed from earlier banking closures in that the government didn't set a date for reopening. Before announcing the systemwide closure, the central bank as of Friday suspended most transactions at Bank of Nova Scotia's Argentine unit, Scotiabank Quilmes SA, after the parent company refused to inject more cash into it. Friday afternoon at the headquarters of Scotiabank Quilmes, Argentina's 12th-largest bank, dozens of desperate depositors -- stepping around leaflets dropped by a bank employees' union saying, "Canada, Fork Over the Money" -- formed long lines in hopes of retrieving funds. (See related article.)
The stepped-up withdrawals followed thousands of individual legal rulings against draconian government restrictions on bank-account withdrawals put into place in December. A trickle of initial judicial rulings in depositors' favor turned into a flood this month. A group of depositors and their lawyers, brandishing the judicial rulings, holed up in state-owned Banco de la Nacion Argentina until around midnight Friday after bank employees failed to return their money.
Despite apparent misgivings by Mr. Duhalde, government officials over the weekend indicated that a bill would be sent to Congress to convert certificates of deposit into five- and 10-year bonds denominated in pesos and dollars. Passage of the bill would allow the central bank to reopen banks, officials said.
But the bond plan -- dubbed Bonex II, after a similar, wildly unpopular savings-for-bonds swap in the early 1990s -- is likely to be challenged in the same courts now ruling on the side of the depositors. Economist Aldo Abram of the consulting firm Exante termed the plan unconstitutional. He added, "I think the likelihood that this government won't complete its term is growing." Mr. Duhalde, who is viewed by many Argentines as emblematic of the country's discredited political apparatus, was chosen by Congress at the height of this year's political turmoil to serve as president until December 2003.
The government's failure to meet agreed-upon fiscal targets led the IMF to suspend all loans to Argentina in December. "The IMF has no faith in the Duhalde regime -- zero," said Walter Molano, head of research at BCP Securities in Greenwich, Conn. "What the IMF is doing is saying, 'We'll just wait you out.' "
In an effort to police spending by provincial governments, an Argentine official said last week that the IMF will insist that every province ink a separate spending accord with the federal government, rather than signing a joint accord as in the past. "The provinces have to be a part of the solution from the outset -- this is a clear signal from the ministers … to Argentina," the IMF's Mr. Koehler said.
Treasury Secretary Paul O'Neill said in a Saturday statement that "we urge the Argentine authorities to work closely with the IMF to put a comprehensive reform plan into place." In separate remarks, he added: "It seems very clear there are some things suggested by the IMF that are not just what the IMF wants or what the G-7 wants, but what Argentina needs to do for its own people."
On Wednesday, Argentine Economy Ministry officials indicated the government would convert the bulk of savings into bonds. Mr. Duhalde on Thursday said he wasn't entirely convinced the bond plan was the best solution. But the government seems likely to go ahead with it.
The Scotiabank Quilmes closure fueled rumors that other mediumsize banks would be shuttered and provided a bleak preview of what the future might hold for many depositors. The central bank gave the Canadian-owned bank 30 days to present a reorganization plan. Scotiabank blamed its problems on the impact of the currency devaluation and also cited the central bank's refusal to provide emergency funds. A spokeswoman indicated the bank had no interest in pumping money into its Argentine unit until the government dealt with the larger crisis.
"We are not able to entertain any capital injection until there are clear rules for the system," said spokeswoman Diane Flanagan. "The liquidity problems are systemic."
The IMF remains mindful that Argentina has billions in principal and interest payments coming due to the IMF this year and next. To roll over the loans, the fund must issue new loans to replace the ones coming due. And it can't make new loans unless Argentina has an IMF agreement in place.
Even though it declared a moratorium on foreign-debt payments in December and subsequently defaulted on its foreign bonds, Argentina has stayed current with its so-called "multilateral" creditors, such as the IMF, the World Bank and the Inter-American Development Bank. Argentine officials haven't said how they would use new IMF money. But observers say the government is likely to use at least part of it to make sure they remain current with the IMF.
A default could also be viewed as a defeat for the IMF, which championed the privatizations and open-market policies that Argentina undertook throughout the 1990s. Thanks to its extensive loan programs, the IMF is currently one of Argentina's biggest creditors.
Argentina's Woes Worsen
As Nation Closes Its Banks
By MICHELLE WALLIN and PAMELA DRUCKERMAN
Staff Reporters of THE WALL STREET JOURNAL
BUENOS AIRES -- Argentina closed its banks and foreign-exchange markets indefinitely Monday as the government prepared to take politically treacherous measures to rescue the banking system by further encroaching on Argentines' savings. "We run the risk of the system exploding," said President Eduardo Duhalde, Argentina's fifth leader since December.
The announcement Friday night capped a chaotic week in which renewed outflows from Argentina's battered banks, many owned by European and U.S. parent companies, heightened fears that Latin America's third-largest economy would be unable to avoid a wholesale collapse of its financial system. Since December, Argentina has defaulted on much of its $141 billion of public-sector debt and devalued the peso, which had been pegged 1-to-1 to the dollar for the prior decade.
Argentina, a country of 37 million people, was hailed by Washington as a model of free-market reform during the 1990s. Multinationals poured in money, and Wall Street lent Argentina's government and companies billions of dollars. But now, in the wake of its economic collapse, the nation has emerged as a test of the Bush administration's efforts to steer the International Monetary Fund toward taking a tougher line with developing countries seeking an economic bailout.
During the IMF's spring meetings in Washington this weekend, Horst Koehler, the fund's managing director, said an IMF mission would travel to Argentina next month to negotiate a letter of intent on a new economic program, a key step toward releasing aid. But Mr. Koehler also made clear that the IMF will hold fast to its insistence that Argentina make stiff budget cuts and forcefully rein in spending and money-printing by profligate provincial governments. Over the weekend, the Group of Seven industrialized nations noted their "serious concern" about Argentina and called on Buenos Aires to implement reforms essentially identical to those being sought by the IMF.
By contrast, a group of six South American countries, led by Chile's finance minister, called on the international community to offer Argentina immediate help to stanch a crisis that has shown signs of roiling other countries in the region.
Despite the general impression that the gradual, grinding nature of the Argentine meltdown had given investors time to differentiate between Argentina and other emerging markets, Chilean Finance Minister Nicolas Eyzaguirre said Argentina's troubles were in fact casting a dark shadow over the region. Both the Brazilian real and the Chilean peso have come under pressure, and foreign investors have been deterred from entering South America, he said.
The announcement of the bank and foreign-exchange shutdown differed from earlier banking closures in that the government didn't set a date for reopening. Before announcing the systemwide closure, the central bank as of Friday suspended most transactions at Bank of Nova Scotia's Argentine unit, Scotiabank Quilmes SA, after the parent company refused to inject more cash into it. Friday afternoon at the headquarters of Scotiabank Quilmes, Argentina's 12th-largest bank, dozens of desperate depositors -- stepping around leaflets dropped by a bank employees' union saying, "Canada, Fork Over the Money" -- formed long lines in hopes of retrieving funds. (See related article.)
The stepped-up withdrawals followed thousands of individual legal rulings against draconian government restrictions on bank-account withdrawals put into place in December. A trickle of initial judicial rulings in depositors' favor turned into a flood this month. A group of depositors and their lawyers, brandishing the judicial rulings, holed up in state-owned Banco de la Nacion Argentina until around midnight Friday after bank employees failed to return their money.
Despite apparent misgivings by Mr. Duhalde, government officials over the weekend indicated that a bill would be sent to Congress to convert certificates of deposit into five- and 10-year bonds denominated in pesos and dollars. Passage of the bill would allow the central bank to reopen banks, officials said.
But the bond plan -- dubbed Bonex II, after a similar, wildly unpopular savings-for-bonds swap in the early 1990s -- is likely to be challenged in the same courts now ruling on the side of the depositors. Economist Aldo Abram of the consulting firm Exante termed the plan unconstitutional. He added, "I think the likelihood that this government won't complete its term is growing." Mr. Duhalde, who is viewed by many Argentines as emblematic of the country's discredited political apparatus, was chosen by Congress at the height of this year's political turmoil to serve as president until December 2003.
The government's failure to meet agreed-upon fiscal targets led the IMF to suspend all loans to Argentina in December. "The IMF has no faith in the Duhalde regime -- zero," said Walter Molano, head of research at BCP Securities in Greenwich, Conn. "What the IMF is doing is saying, 'We'll just wait you out.' "
In an effort to police spending by provincial governments, an Argentine official said last week that the IMF will insist that every province ink a separate spending accord with the federal government, rather than signing a joint accord as in the past. "The provinces have to be a part of the solution from the outset -- this is a clear signal from the ministers … to Argentina," the IMF's Mr. Koehler said.
Treasury Secretary Paul O'Neill said in a Saturday statement that "we urge the Argentine authorities to work closely with the IMF to put a comprehensive reform plan into place." In separate remarks, he added: "It seems very clear there are some things suggested by the IMF that are not just what the IMF wants or what the G-7 wants, but what Argentina needs to do for its own people."
On Wednesday, Argentine Economy Ministry officials indicated the government would convert the bulk of savings into bonds. Mr. Duhalde on Thursday said he wasn't entirely convinced the bond plan was the best solution. But the government seems likely to go ahead with it.
The Scotiabank Quilmes closure fueled rumors that other mediumsize banks would be shuttered and provided a bleak preview of what the future might hold for many depositors. The central bank gave the Canadian-owned bank 30 days to present a reorganization plan. Scotiabank blamed its problems on the impact of the currency devaluation and also cited the central bank's refusal to provide emergency funds. A spokeswoman indicated the bank had no interest in pumping money into its Argentine unit until the government dealt with the larger crisis.
"We are not able to entertain any capital injection until there are clear rules for the system," said spokeswoman Diane Flanagan. "The liquidity problems are systemic."
The IMF remains mindful that Argentina has billions in principal and interest payments coming due to the IMF this year and next. To roll over the loans, the fund must issue new loans to replace the ones coming due. And it can't make new loans unless Argentina has an IMF agreement in place.
Even though it declared a moratorium on foreign-debt payments in December and subsequently defaulted on its foreign bonds, Argentina has stayed current with its so-called "multilateral" creditors, such as the IMF, the World Bank and the Inter-American Development Bank. Argentine officials haven't said how they would use new IMF money. But observers say the government is likely to use at least part of it to make sure they remain current with the IMF.
A default could also be viewed as a defeat for the IMF, which championed the privatizations and open-market policies that Argentina undertook throughout the 1990s. Thanks to its extensive loan programs, the IMF is currently one of Argentina's biggest creditors.