- The Washington Times - Monday, January 14, 2002

American banks, investors and corporations stand to lose billions of dollars as a result of Argentina’s debt default and currency devaluation.
Argentine leaders are forcing foreigners, particularly lenders such as America’s FleetBoston Financial Corp., Citibank and J.P. Morgan Chase & Co, to shoulder a disproportionate share of losses from the peso’s devaluation to 1.4 pesos to the dollar, from one-to-one last week.
U.S. banks have extended $21 billion in loans to Argentine citizens and corporations, and under the government’s new policies, the income from many of those loans automatically drops by 30 percent.
U.S. investors are among the many holders of $142 billion of Argentine bonds now in default and worth as little as 25 cents on the dollar. And U.S. corporations that sold about $4.3 billion of products in Argentina last year will suffer big losses as they are forced to accept payment at the government’s reduced exchange rate.
Many observers say the peso will fall much further than the official government rate and could tumble to as low as 3 pesos to the dollar. On the first day of free trading Friday, the currency immediately dropped to 1.8 to the dollar.
The export revenues of U.S. corporations already have been hit by Argentina’s four-year recession. The devaluation will make American products more expensive and harder to sell, while making Argentine products cheaper and more competitive abroad.
Companies expecting reduced earnings from the devaluation include General Motors, Coca-Cola, Dial Corp., AES Corp., Avon Products, Monsanto and Eastman Chemical Co.
GM told stockholders that the devaluation cut the automaker’s earnings per share in the last quarter by 10 cents to 60 cents. Clorox, by contrast, said it fully anticipated the devaluation in its earlier earnings estimates and does not expect any further losses.
Major retailers such as Wal-Mart and Home Depot, which were attracted to the rapidly growing Argentine market during the 1990s, are closing stores there because of the bleak prospects and threats by the government to crack down on stores that try to cover their dollar losses by raising prices.
Power companies such as AES, an Arlington company with seven power plants in Argentina, also are being asked to bear the brunt of the devaluation. The government is prohibiting utilities from linking their rates to the dollar as they have in the past.
“These are hard days for Argentina,” said Dennis Bakker, chief executive officer of AES, in a conference call with investors, adding that profits from the company’s Argentine operations are “at risk.”
Despite the unexpectedly harsh treatment of foreign companies, news of Argentina’s devaluation and default created nary a ripple on U.S. stock and credit markets. Most of the damage had been anticipated by investors and banks, many of which have been unloading their Argentine assets for months in anticipation of an economic collapse.
Legislation approved by Argentina’s Congress requires banks to convert all the loans and mortgages less than $100,000 that they made in dollars to pesos at the old one-for-one rate. That means an automatic 30 percent loss of income on those loans.
Also, in an effort to protect Argentine citizens with bank savings, the government is requiring banks to return all deposits made in dollars at the previous one-to-one rate, once again not taking into account this week’s deep devaluation.
In response to criticism that such tough measures could cause a run on bank deposits and lead to the collapse of many Argentine institutions, the government last week froze more than a third of the nation’s $67 billion of bank deposits through March. It also said citizens would not be able to tap some savings deposits until next year.
The legislature also is promising to compensate domestic lenders for some losses using the revenues from a new tax on oil exports.
The stark terms for foreign lenders have a strong populist appeal in Argentina, while the restrictions on withdrawals aimed at protecting banks have led to street riots.
President Eduardo Duhalde said upon entering office that he would turn his back on the close ties the previous administration cultivated with foreign lenders and focus his efforts on bolstering Argentine workers, businesses and consumers.
One saving grace for the American banks is that many of their loans were made to the government and Argentine corporations in amounts exceeding $100,000, and thus are not subject to the toughest treatment. The loans still are subject to renegotiation, have high default risks and have lost considerable value because of the devaluation, analysts say.
None of the U.S. banks has as yet reported the extent of its losses. Disclosure is expected this month with the release of fourth-quarter financial reports.
“It’s not likely to bring down any of the big banks, but it could make a significant dent in their quarterly earnings,” said Raphael Soifer, chairman of Soifer Consulting LLC.
U.S. investors in Argentine bonds also have suffered significant losses since the country officially suspended payments on Christmas Eve in one of history’s biggest and most widely anticipated defaults.
Bond investors may end up doing better than bank lenders in the end, however, because Argentina is promising to renegotiate the terms of the bonds. Hanging on the outcome of those negotiations will be the nation’s hopes of regaining access to the international credit markets, which effectively slammed the door on Argentina last month. That may enable bondholders to wrest more favorable terms from the government than the banks.
Spanish Prime Minister Jose Maria Aznar, concerned about the effect of Argentina’s crisis on Spain’s economy, has taken the lead in calling for a “credible and workable” plan to repay Argentina’s debts.
“It’s in Argentina’s interest to continue to be a country capable of receiving foreign investment,” he said.

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