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12/06 10:55
Argentina Seizes Pension Fund Deposits to Pay Bills (Update1)
By John Lyons
Buenos Aires, Dec. 6 (Bloomberg) -- Argentina confiscated about $3.2 billion of retirement savings and signaled it may not pay international bondholders on time after the International Monetary Fund withheld a loan payment expected this month.
The government, with more than $2 billion in debt payments due by the end of the month, ordered pension funds to transfer deposits to state-owned Banco de la Nacion. Economy Minister Domingo Cavallo said Argentina's priority is to cover state wages, social services and payments to domestic bondholders who exchanged debt last week for loans that offer lower interest.
``When push comes to shove, they can probably finance themselves through Banco Nacion,'' said Boris Segura, chief emerging markets economist at Atlantic Asset Management in Stamford, Connecticut. ``But that will last only for a few weeks. Then it's the `full monty.'''
Argentina's finances deteriorated last week after depositors pulled $1.3 billion from banks on concern the government was preparing to devalue the peso or freeze accounts. Over the weekend, the government limited cash withdrawals and banned most overseas money transfers to avert a collapse of the banking system and try to protect the peso's fixed exchange rate.
Bonds Tumble
The government's floating-rate bond due 2008 tumbled 6 percent. Argentina's bonds yield more than any other emerging market debt in the world, at an average yield spread of more than 40 percentage points over U.S. Treasuries, according to a J.P. Morgan Chase & Co. index.
Argentina, which ran short of cash after a recession cut tax revenue, has pledged not to miss any payments as it restructures at least $95 billion of bonds through debt swaps.
An initial exchange of debt with domestic banks and funds last week -- in which investors received loans guaranteed by government tax revenue -- is supposed to be followed by a similar transaction with international bondholders to help the government cut interest payments.
``We have as our fundamental concern paying salaries and all of the social services, and also all of the guaranteed debt that Argentina has,'' Cavallo said outside a conference on Argentine trade. ``This guaranteed debt has become the assets of many Argentines and foreigners who've had confidence in Argentina in the first phase of the debt swap.''
Cavallo said last night that international bondholders would be asked to forgive principal or interest payments on their debt, in an exchange that Argentina hopes to complete early next year.
IMF Loan
The IMF said it wouldn't make a $1.24 billion payment it had planned for December after the government limited withdrawals. To meet its obligations this month, the government ordered pension funds to transfer deposits to the state-owned bank in exchange for Treasury bills, Cavallo said.
``The term deposits that the pension funds have in different banks are going to be concentrated in the Banco de la Nacion,'' Cavallo said. ``In this way we will be able to avoid any form of inconvenience in financing, above all to the pensioners.''
As of October, pension funds held $3.18 billion of their $21.1 billion of assets as deposits in banks.
The government depended on Banco de la Nacion to help service its debt last month, borrowing $1.2 billion of central bank reserves that were channeled through the state-owned bank. A central bank board member said then the bank had overridden its own rules that require it to deposit reserves only at the highest- rated international banks.
Printing Money
The nation's 10-year-old currency system prohibits the central bank from printing money or lending to the government.
The central bank has circumvented that law by flooding Banco de la Nacion with cash under a bond repurchase system normally used to ensure bank liquidity, analysts said. The state bank has lent the cash to the government to pay bills.
The central bank's cash and gold reserves have fallen by 28 percent since early October to $14.7 billion and now represent only 95 percent of the pesos monetary supply. Argentina has kept the peso fixed to the dollar by ensuring that it has reserves greater than the amount of pesos in circulation.
Moody's Investors Service said yesterday the decade-old currency system has essentially collapsed because of the banking restrictions circulation of new provincial currencies by local governments short of cash to pay their bills.
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