Latin Finance - December 2008 - 46

argentina local markets Last Nail in Coffin by Jason Mitchell rgentine president Cristina Fernandez roiled financial markets in October by announcing plans to nationalize pension funds. This involves bringing into the state-run pension system annual contributions of 15 billion pesos and funds under management of almost 100 billion pesos at the Administradoras de Fondos de Jubilaciones y Pensiones (AFJPs). The government says it did this because private pension funds had underperformed since they were set up in 1994, and because it wanted to ensure that senior citizens receive a decent pension. However, market watchers say the true motive is to shore-up fragile government finances, which will be tested by next year’s $11.7 billion in capital amortizations on debt and $6.9 billion interest payments. Some $2 billion of the amortizations involve debt held by the AFJPs and a further $1 billion of the interest payments would also be destined for private pension funds. Analysts say that the country’s capital markets – which suffered hugely at the time of Argentina’s default on its sovereign debt in 2002 – have taken another body blow. Since the government’s decision, the risk premium on Argentine sovereign debt has gone through the roof, rising to 362.4 basis points on November 1 from 140.9 on October 1, according to the bond index of Ecolatina, an Argentine economic consultancy. This extraordinarily elevated figure indicates that markets believe the risk of Argentina defaulting on its sovereign debt is extremely high and rising. Experts say that one of the factors A Nationalization of the country’s private pension funds is the final nail in the coffin of Argentine capital markets. And efforts to normalize external creditor relations are stalled. Insult to injury: a pensioner bangs pot lids outside congress in Buenos Aires behind this view is that the raid of the pension funds can be seen as an attack on the overall private sector and is yet another example of Argentina running roughshod over the rule of law. “It is a disastrous move,” says Geoffrey Dennis, chief LatAm equity strategist at Citi. “In some ways it is one of the final nails in the coffin for investing in Argentine equities.” He adds that the last time Argentina seized private assets was in 2001, prompting unfortunate comparisons with what happened at the end of that year, when the sovereign defaulted on $100 billion in debt. The fear is that private pension funds were one of the few remaining institutional sources for financing private companies through capital markets, and that the government’s step Disastrous Move Wall Street roundly condemned the move, which came just a few weeks after the sovereign showed signs that it was ready to re-engage with the international financial markets. The stock market plunged to a low of 839.77 points on October 27 from a peak of 2,248.63 points on May 22. It closed at 1,096.6 points November 7. 46 LATINFINANCE December 2008
Latin Finance - December 2008

Table of Contents for the Digital Edition of Latin Finance - December 2008
