The Americas: Argentina appropriates pension funds to pay bills risk of default:

By:  Thomas Catan and Richard Lapper
 Financial Times, December 7, 2001

Argentina's government yesterday took control of Dollars 3.5bn (Pounds 2.5bn) in private pension assets to pay bills and keep up payments on its debt.

The drastic move came a day after the International Monetary Fund said it would not make a payment of Dollars 1.26bn due in the middle of the month because of Argentina's deteriorating accounts. Domingo Cavallo, economy minister, was yesterday due to fly to Washington with his entire economic team for an emergency meeting with the IMF.

For more than a year Argentina has depended on local banks and pension funds - as well as some Dollars 27.5bn in aid from multilateral lenders - to finance government spending and meet payments on its debt.

It has already dipped into its foreign exchange reserves - which back the country's dollar-pegged currency - to meet its debt payments.

Domingo Cavallo, economy minister, told reporters yesterday: "The money held by the private pension funds at banks will be turned into treasury bonds." He said the funds would be used to pay wages and state pensions.

The IMF decision to withhold a payment will also hold up payments from other multilateral lenders, increasing the chances that the country will default on its entire Dollars 155bn stock of public debt. It has also aggravated political pressures faced by President Fernando de la Rua. Yesterday he called an emergency meeting of the cabinet to discuss the country's options.

"The crisis is evolving so rapidly that it is difficult to take actions that last for more than a day," said a government adviser, who noted that banking and capital controls introduced on Monday to stop a bank run had already been modified. He said sentiment in the government was still against devaluing the peso, which he said was tantamount to "collective suicide".

In some respects, yesterday's move to appropriate pension fund assets is a continuation of the practices of the last year, in which pension funds have been pressured into lending to the government when no one else would.

Following the IMF's decision to suspend lending to Argentina, the government will have to rely further on local financial institutions and its own reserves to keep up payments on its debt.

Mr Cavallo is betting everything on the completion of a massive debt restructuring, which got under way last month.

So far, around half of the country's Dollars 95bn in bonds - mainly owned by local banks and pension funds - have been exchanged for lower-interest bonds, saving the government some Dollars 3.5bn in interest payments a year.

Mr Cavallo hopes to complete a second leg of the debt exchange aimed at international bondholders within 90 days. Yesterday he hinted that there could be an even broader renegotiation of the country's debt. The next 90 days would be "very complicated" as the government battled with foreign investors to restructure its debt, but the country would "come out ahead", he said. Mr Cavallo noted that "the important thing is that the (IMF) is going to keep working together with us".

In Washington yesterday an IMF spokesman said emergency currency controls taken at the weekend by Argentina were "regrettable", but that few alternatives were available.

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