Argentina: Foreign Banks May Head for the Exits

With an IMF rescue stalled, they're thinking about fleeing

It wasn't long after Argentina pegged its peso to the dollar, in 1991, that foreign banks looking for easy profits invaded the country. Deposits poured in. For the first time in decades, Argentines felt they could trust their money to something other than their mattresses. And with President Carlos Saúl Menem rapidly liberalizing the economy, the banks--including marquee names such as Citibank, Santander, and HSBC--felt they could operate their businesses without fear of government meddling. Deposits surged, from 4% of gross domestic product in 1989 to 37% a decade later.

The banks and their customers were wrong. Today, three months after Argentina's financial crisis came to a head, devaluation has reduced the value of the peso by 70%. The forced conversion of dollar loans and dollar deposits into pesos has cost the banks an estimated $20 billion. In addition, they are losing more than $100 million a day in deposits, despite strict limits on withdrawals. Several of the foreign banks, which together control 75% of the country's deposits, have written off their entire investments in Argentina.

Now, foreign banks in Argentina face a hard decision: whether to stay or call it quits. Executives from BankBoston to Scotiabank Quilmes are mulling their options. For the moment, they are hanging on, trying to negotiate a deal with the government that would cover some of their losses. "It's no secret that every bank is reconsidering its position in Argentina right now," says Robert Lacoursiere, director of Latin American equity research for Lehman Brothers Inc. "And who can blame them, given the bleak outlook?"

The government is paralyzed with indecision over the next step in dealing with the financial crisis. But there is a consensus that the country can't function without a banking system, and right now, it doesn't have one. No deposits are being taken, and no loans are being made. President Eduardo Duhalde is trying his best to persuade the banks to stay. In negotiations held in Buenos Aires in January and February, bankers and government officials agreed on the framework for a bailout plan. Under the scheme, the banks would receive bonds as compensation for being forced to convert dollar loans and dollar deposits at different exchange rates.

There's a big hitch, however: The government, having defaulted on $143 billion in debt, has no standing to issue new paper. And its bid for a $20 billion rescue package from the International Monetary Fund, which could be used to back a bond issue, is stalled. The IMF wants to see the government implement a bare-bones budget and get a grip on the money supply before it puts up more cash. Duhalde & Co. say working out a deal will take another month, but some analysts fear it could take much longer. What, then, is Plan B for rescuing the banks? "There is no Plan B," says Vice-Economy Minister Jorge Todesca. "I'm confident [that] we'll reach an accord by the end of April. The differences with the IMF are over the pace at which we're advancing, not the reforms themselves."

For now at least, the banks are refusing to comment on their plans. Analysts say the most likely to pull up stakes are second-tier institutions with mostly retail operations, including Italy's Banca Nazionale del Lavoro, Canada's Bank of Nova Scotia, France's Societe Generale, and Britain's HSBC. More likely to stay are the Spanish banks BBVA and Santander, since fleeing Argentina could taint their reputation in other Latin American countries. U.S. giants Citibank and BankBoston also may hang on. Each has almost a 100-year presence in Argentina.

For any banks thinking of sticking around, it will take years, if not decades, to rebuild their franchise. In Mexico, for example, lending levels still trail what they were before its banking crisis seven years ago. And with Argentina's dollar deposits confiscated at a stroke, a generation of Argentines may never trust its savings to a bank again. Mattresses proved to be a better bet after all.

By Joshua Goodman in Buenos Aires

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