Argentina Seizes Private Pensions; Aftermath
October 30th, 2008Via: AP:
The Argentine Central Bank spent nearly $1 billion Wednesday to support its precipitously falling currency as fears of a pension funds takeover drove the peso to its lowest level in nearly six years.
The peso closed Wednesday at 3.39 to the dollar after plummeting to 3.44 in the early afternoon amid concern that nationalizing at least $23 billion in private pension funds could drain capital from Argentina’s stock markets.
Analysts see the value of the peso against the dollar — now at its lowest point since December 2002 — as an appropriate thermometer for confidence in the local economy, since spooked Argentines and investors often trade pesos for more stable dollars in times of crisis.
“The government has no idea of the level of uncertainty their decision has provoked in the market,” said economist Fausto Spotorno, an analyst with Orlando Ferreres y Asociados consultancy in Buenos Aires.
The private pension funds maintain liquidity by injecting nearly $324 million monthly into local stocks. Should Congress approve the takeover, this important source of capital may shift to bonds and other investments.
Since the plan was announced by President Cristina Fernandez, the peso has fallen from 3.24 to the dollar.
“If people keep getting scared because the dollar is rising, deposits are going to be affected, because people are going to take them out of the bank and change them for dollars” at an even more accelerated rate, said Buenos Aires economic analyst Aldo Abram.
Currently the CDS cost of Argentine debt is 3900 basis points over LIBOR, meaning you need to put up $420,000 to insure that $1,000,000 of Argentine bonds hold value. Seems like a bad idea.
On the other hand, when my boss gets paid a fifty thousand dollar milestone from some US company we get $170,000 pesos out of that instead of $153,000.
The Argentine government is plagued by cultural stupidity, but I prefer it to the institutional stupidity of the US government, or perhaps the NZ government (you tell me).