On October 21, 2008, Argentina’s president, Cristina Fernandez de Kirchner, announced a plan to nationalize the country’s 30 billion dollars in private pension funds, ostensibly in a effort to protect retirees' savings during the current global economic turmoil. The announcement, however, rather than stabilizing Argentina's economy, has thus far resulted in greater uncertainty and tremendous economic and social turmoil.
Argentina’s stock market has lost more than half of its value since May, the bond market has plummeted and the value of the peso has dropped dramatically. The Argentinean government has publicly blamed the markets’ performance on the ten companies in charge of the pension funds. The Buenos Aires police recently raided the pension system’s offices and a judge recently prohibited the companies from trading on the Buenos Aires exchange for a week.
Proponents of the plan maintain that nationalization will protect the pension funds' assets from risky investments and pump enough cash into the state treasury to finance infrastructure projects and pay off considerable amounts of national debt, although the government has publicly denied that the funds would be used to pay off or refinance debt. Opponents of the plan, however, both within Argentina and in the national community, have little faith in the Argentinean government's intentions or in its ability to maintain appropriate fiscal oversight of the funds. When given the choice last year between private and public pensions, only twenty percent of Argentineans selected government-controlled funds. Abroad, institutions like the IMF have so little faith in Argentina’s bookkeeping due to the 2002 debt default that they are unwilling to do business with the Argentine treasury, while a United States court has frozen American assets owned by Argentinian pension funds, a major roadblock to the effectiveness of any possible fund nationalization.
Commentators have also cautioned that a pension fund nationalization will have broader ramifications for the Argentinean economy. Standard & Poors lowered Argentina's debt ratings last month on the basis of the announcement and Fitch recently released a report calling the outlook for Argentinean companies "dismal" for 2009, due in part to the threat of pension fund nationalization: "Local liquidity is scarce, the banks are working to preserve capital and the international capital markets are closed to Argentine corporates. This situation has led blue chip companies to seek financing in the local bond market, which has become increasingly dormant during 2008. The recent proposal . . . threatens to eliminate the local bond market as a source of liquidity. While the asset allocation of corporate debt in the Argentine pension system is small, the pension funds' participation in the local debt market is essential. Without them, there are not enough investors to absorb the huge financing needs."
For a copy of the Fitch release, please click here.
The private pension funds have recently proposed a series of reforms as an alternative to nationalization. Nonetheless, the pension fund nationalization bill was passed by Argentina's lower house of Congress on November 7th and is widely expected to pass in the Peronist party-controlled Senate when it is taken up on November 20th.
A number of the private accounts are managed by affiliates of international banks and insurance companies, including BBVA, HSBC, MetLife and ING.