By James Attwood and Bill Faries
Oct. 22 (Bloomberg) -- Argentina's planned seizure of $29 billion of private pension funds stoked concern the nation is headed for its second default in a decade.
Investors say President Cristina Fernandez de Kirchner's decision may further hurt markets already reeling from slumping commodity prices and slower growth. The retirement system, set up in 1994 to help bolster capital markets, owns about 5 percent of companies listed on the Buenos Aires stock exchange and 27 percent of shares available for public trading, data compiled by pension funds show.
Argentine bond yields soared above 24 percent before the announcement late yesterday, and the Merval tumbled 11 percent. The last time the government sought to tap workers' savings to help finance debt payments was in 2001, just before it stopped servicing $95 billion of obligations.
``It's the final of many nails in the coffin from an institutional investor perspective,'' Bill Rudman, who helps manage $3 billion of emerging-market equity at WestLB Mellon Asset Management in London. Argentina is ``disappearing into irrelevance.''
The government's proposal to take control of 10 funds, including units of London-based HSBC Holdings Plc and Bilbao, Spain-based Banco Bilbao Vizcaya Argentaria SA, still needs congressional approval. Fernandez said yesterday her decision is ``in a context where the biggest countries'' are taking steps to protect their banks because of the global financial crisis.
``Instead, we're taking them for our retirees and workers,'' she said during a rally in Buenos Aires.
Borrowing Needs
Argentina's borrowing needs will swell to as much as $14 billion next year from $7 billion in 2008, RBC Capital Markets, a Toronto-based unit of Canada's largest bank, said yesterday.
South America's second-largest economy hasn't had access to international capital markets since its 2001 default. Holders of about $20 billion of defaulted bonds rejected the government's 2005 payout of 30 cents on the dollar, and Fernandez has said she's considering proposals to offer a new deal.
The cost of protecting Argentina's bonds against default soared yesterday, as five-year credit-default swaps based on Argentina's debt jumped 2.38 percentage points to 32 percentage points, according to Bloomberg data. The contracts to protect against or speculate on default pay the buyer face value should a borrower fail to adhere to its debt agreements.
The proposed takeover ``makes the chance of default in the short-term less likely by inflicting immense damage to the long- term credibility of the government and the financial system with its own people,'' said Paul McNamara, who helps manage $1.2 billion of emerging-market assets at Augustus Asset Managers Ltd. in London.
Investment Mix
Amado Boudou, the head of Argentina's social security administration, said yesterday the government will keep the same investment mix for the funds, with 60 percent in bonds and 10 percent in stocks. He called the privately run system an ``enormous error.''
Currently, about 55 percent of the 94.4 billion pesos ($29.3 billion) held by the private pension funds is invested in government debt, according to the pension regulator's Web site. A takeover would allow the Fernandez administration to write off the sovereign bonds held by the funds, said Javier Salvucci, an analyst with Buenos Aires-based Silver Cloud Advisors.
``It's a short-term fix that may cause more fiscal and macro pain in the long haul, which has been typical of the last two administrations,'' said Will Landers, who manages $5 billion in Latin American equities at BlackRock Inc.
Volume Quadrupled
Since the pension system began in 1994, trading volume on the Buenos Aires stock exchange has quadrupled. The funds were net buyers of domestic equities for a third straight month in September, investing about $144 million, according to Deutsche Bank AG. They have about $4.1 billion in domestic stocks, strategist Guilherme Paiva wrote in an Oct. 15 note.
The government's plan is ``one additional factor to count against Argentine assets,'' said Vinicius Silva, an emerging market strategist at New York-based Morgan Stanley, which recommends that emerging-market equity investors have a ``zero' weighting in the country.
Nestor Kirchner, Fernandez's husband and predecessor as president, began tightening restrictions on private pension funds last year, requiring them to keep more investments in the country to sustain economic growth. The rules forced the funds to ``repatriate'' about $3 billion in mostly Brazilian assets, Sebastian Palla, chairman of the country's pension fund association, said in February.
Fund Sales
Foreign emerging-market funds sold about $250 million in Argentine stocks through August this year in the biggest outflow since 2000, according to fund flow tracker EPFR Global in Cambridge, Massachusetts. The Merval is down 51 percent this year compared with 39 percent for the Bovespa in neighboring Brazil.
Bond markets also have tumbled. Yields on the government's 8.28 percent bonds due in 2033 have almost tripled to 24.69 percent from 8.83 percent a year ago.
Seven years ago, as the government tried in vain to stave off a debt default, it pressured the pension funds to participate in bond swaps that pushed forward repayment dates. That December, strapped for cash to pay salaries, it ordered the funds to transfer $3.2 billion in bank deposits to state-owned Banco de la Nacion.
The latest move is ``much, much worse,'' said McNamara at Augustus Asset Managers Ltd.
``It's not just shoving a little bit of debt in at the edge, it's taking over the whole system,'' he said. ``It does even more damage to the concept of encouraging people to invest in the domestic financial industry.''
To contact the reporters on this story: James Attwood in Santiago at jattwood3@bloomberg.netBill Faries in Buenos Aires wfaries@bloomberg.net
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