The “pesofication” of Argentine banking deposits appears to be under way. Though it will lead to even greater economic stress and a painful loss of wealth, this may be the only way to avoid a collapse of the banking system.
Argentina’s government announced on Thursday that it is slightly loosening the country’s unpopular banking restrictions. Argentines will be allowed to transfer larger amounts of dollar-denominated deposits into peso accounts, from which they can make payments electronically or by check.
The move is an attempt to defuse intense public anger about the restrictions without tipping the banking system into bankruptcy. To walk that fine line, the government will have little choice but to “pesofy” bank deposits flipping dollar-denominated deposits into pesos while slowly allowing people greater access to their funds.
This step has several negative financial implications.
It will mean large-scale printing of pesos so that banks can meet the demand for withdrawals. That will inevitably lead to a further erosion of the peso, a spike in inflation and more public discontent as citizens’ “wealth” erodes even more. Meanwhile, the banking system will remain on very thin ice.
The government, recognizing that its survival depends upon giving people greater access to their money, announced that it was loosening the “corralitos” or little corrals around bank deposits imposed by former President Fernando de la Rua in early December. The rules raise the ceiling from $3,000 to $5,000 for voluntary conversions of dollar deposits into pesos, at a conversion rate of 1.4 pesos to the dollar. The peso has traded far below that rate for most of the week, hovering around 2 pesos to the dollar. Argentines may use those converted funds to make payments by credit card, debit card or check. Restrictions on cash withdrawals will remain, and banks will not give out dollars.
President Eduardo Duhalde says these rules will benefit 78 percent of account holders, and he is surely hoping they will satisfy at least temporarily an increasingly enraged populace. Argentines attacked banks and ATMs last week in frustration about the banking restrictions, and some reportedly have resorted to barter because of a lack of cash.
The loosening will help to some extent, but will do nothing to address citizens’ fears that their money has been stolen fears stoked by recent investigations that implicate foreign companies in capital flight. To quell such fears, the government would have to eliminate the restrictions while ensuring that banks can meet the demand for withdrawals.
However, it is impossible to eradicate the corralitos because the banking system is most likely insolvent a reality that cuts to the heart of Argentina’s financial conundrum.
The banks’ problems are myriad.
Anticipating a devaluation, Argentines pulled 20 percent of deposits out of the banking system in 2001, severely undercutting reserves. At the same time, bank loan portfolios soured as companies and individuals went bankrupt.
Then came devaluation and the one-to-one conversion of dollar loans of less than $100,000 to pesos, which cost the banks an estimated $9 billion, according to the Financial Times. The government recently extended the conversion to most loans worth more than $100,000, at a ratio of 1.4 pesos to the dollar. This will cost banks an estimated $20 billion, according to JP Morgan.
The government’s debt default also has hit the banks hard as billions of dollars in government bonds they hold are now worth about 10 cents to 20 cents on the dollar.
With such staggering losses and total deposits of $67 billion two-thirds of which are denominated in dollars the banking system is little more than a house of cards. Moody’s Investor Services downgraded six Argentine financial institutions to their lowest possible rating, the Wall Street Journal reported Jan 17.
The federal government financially cannot come to the banks’ rescue. Foreign currency reserves dropped by a third in the last quarter of 2001 as capital fled the country. The central bank has a little less than $15 billion in reserves, which it has vowed to use to uphold the peso, Bloomberg reported Jan. 16.
Michael Oakes is an analyst at STRATFOR in Austin, Texas, a provider of global intelligence to private companies and subscribers. Its Web site is Stratfor.com.