Argentina Default Haunts Pensioners, by David DeRosa
Bloomberg.com: Bloomberg Columnists
(Corrects $93.4 billion to $94.3 billion in fifth paragraph, and deletes ``his'' in penultimate paragraph. Commentary. David DeRosa, president of DeRosa Research & Trading, is also an adjunct finance professor at Yale School of Management and the author of ``In Defense of Free Capital Markets.'' The opinions expressed are his own.)
Oct. 3 (Bloomberg) -- Argentine President Nestor Kirchner's administration is pressuring the country's private pension funds to write off 75 percent of their government debt holdings.
The funds are stuck with $14 billion of defaulted bonds that the government is offering to take back at a piddling 25 cents on the dollar.
Understandably, the private funds, known as the ``AFJPs,'' are balking at the suggestion that they should swallow a write- down of $10.5 billion in the value of their bonds.
It's not just the pension funds that are outraged. The rest of the investors in Argentina's bad debts are refusing to go along with the government's offer.
Argentina defaulted on $93.4 billion of its sovereign debt in January 2002.
Not surprisingly, Economy Minister Roberto Lavagna kept a low profile when he visited New York this week. He found it convenient to duck meeting Argentina's much-abused creditors.
Large foreign banks own Argentina's private pension funds. The bulk of their assets, as much as 70 percent, are concentrated in Argentine government bonds.
In one sense, the private pension funds aren't different from ordinary creditors. The crucial distinction, unfortunately for the clients of the private funds, is that the government can force them into accepting just such a lousy settlement offer.
Pay-As-You-Go For example, the government is trying to entice pensioners to abandon the private retirement system. This amounts to trying to wear down the fund by depleting it of its clients.
Noem Rial, the government's employment secretary, was quoted Tuesday in the Financial Times as saying: ``We have to give the worker who opted for the fully funded system the chance to return to the pay-as-you-go system.''
What a generous offer. The state is trying to steal more than half of the private pension assets outright and substitute a no-recourse promise to pay future benefits.
Why would anyone abandon a funded private sector pension fund for an unfunded pay-as-you-go system operated by the Argentine government? A plausible answer is that it's better to have pay-as-you-go from the government than starve-as-you-wait from the private funds.
The Great Charade
It gets better. The government also accuses the private funds of having mismanaged their clients' assets by investing in Argentine government debt.
Lavagna last week accused the private funds of ``inept'' management. He suggested the pensioners pursue legal remedies against the fund companies.
If there is a prize in Argentina for being a revisionist historian, it should go to Lavagna. Did the private funds have any choice except to buy the government's bonds?
Prior to the default, the Argentine government stuffed its debt down every institution's throat. To not buy these garbage bonds in 2000 and 2001 was to court the full fury of the government.
In this way, the government that preceded Kirchner robbed the workers and the elderly of a good portion of their retirement assets.
Even before Eduardo Duhalde, Kirchner's predecessor, took office, pressure was put on the funds to buy the government bonds, and now he is completing the circle by making the funds give the bonds back to the government for one quarter of their original value.
Nasty Campaign
And this campaign has turned very nasty. The AFJPs are being threatened with what could amount to being regulated out of business. Cabinet chief Alberto Fernandez this week declared that the private funds constituted a system with ``weaknesses'' that needed correcting.
To this end, the government wants private fund managers to record all internal conversations and preserve documents that deal with their investment decision making, according to the FT.
This is a war against private savings, to the extent that there is any such thing left in Argentina. When Argentina elected Kirchner last spring, there was hope that the dirty financial tactics of Duhalde, and before him of the hated economy minister, Domingo Cavallo, would be history.
No such luck for Argentina.
(Corrects $93.4 billion to $94.3 billion in fifth paragraph, and deletes ``his'' in penultimate paragraph. Commentary. David DeRosa, president of DeRosa Research & Trading, is also an adjunct finance professor at Yale School of Management and the author of ``In Defense of Free Capital Markets.'' The opinions expressed are his own.)
Oct. 3 (Bloomberg) -- Argentine President Nestor Kirchner's administration is pressuring the country's private pension funds to write off 75 percent of their government debt holdings.
The funds are stuck with $14 billion of defaulted bonds that the government is offering to take back at a piddling 25 cents on the dollar.
Understandably, the private funds, known as the ``AFJPs,'' are balking at the suggestion that they should swallow a write- down of $10.5 billion in the value of their bonds.
It's not just the pension funds that are outraged. The rest of the investors in Argentina's bad debts are refusing to go along with the government's offer.
Argentina defaulted on $93.4 billion of its sovereign debt in January 2002.
Not surprisingly, Economy Minister Roberto Lavagna kept a low profile when he visited New York this week. He found it convenient to duck meeting Argentina's much-abused creditors.
Large foreign banks own Argentina's private pension funds. The bulk of their assets, as much as 70 percent, are concentrated in Argentine government bonds.
In one sense, the private pension funds aren't different from ordinary creditors. The crucial distinction, unfortunately for the clients of the private funds, is that the government can force them into accepting just such a lousy settlement offer.
Pay-As-You-Go For example, the government is trying to entice pensioners to abandon the private retirement system. This amounts to trying to wear down the fund by depleting it of its clients.
Noem Rial, the government's employment secretary, was quoted Tuesday in the Financial Times as saying: ``We have to give the worker who opted for the fully funded system the chance to return to the pay-as-you-go system.''
What a generous offer. The state is trying to steal more than half of the private pension assets outright and substitute a no-recourse promise to pay future benefits.
Why would anyone abandon a funded private sector pension fund for an unfunded pay-as-you-go system operated by the Argentine government? A plausible answer is that it's better to have pay-as-you-go from the government than starve-as-you-wait from the private funds.
The Great Charade
It gets better. The government also accuses the private funds of having mismanaged their clients' assets by investing in Argentine government debt.
Lavagna last week accused the private funds of ``inept'' management. He suggested the pensioners pursue legal remedies against the fund companies.
If there is a prize in Argentina for being a revisionist historian, it should go to Lavagna. Did the private funds have any choice except to buy the government's bonds?
Prior to the default, the Argentine government stuffed its debt down every institution's throat. To not buy these garbage bonds in 2000 and 2001 was to court the full fury of the government.
In this way, the government that preceded Kirchner robbed the workers and the elderly of a good portion of their retirement assets.
Even before Eduardo Duhalde, Kirchner's predecessor, took office, pressure was put on the funds to buy the government bonds, and now he is completing the circle by making the funds give the bonds back to the government for one quarter of their original value.
Nasty Campaign
And this campaign has turned very nasty. The AFJPs are being threatened with what could amount to being regulated out of business. Cabinet chief Alberto Fernandez this week declared that the private funds constituted a system with ``weaknesses'' that needed correcting.
To this end, the government wants private fund managers to record all internal conversations and preserve documents that deal with their investment decision making, according to the FT.
This is a war against private savings, to the extent that there is any such thing left in Argentina. When Argentina elected Kirchner last spring, there was hope that the dirty financial tactics of Duhalde, and before him of the hated economy minister, Domingo Cavallo, would be history.
No such luck for Argentina.
posted by Pablo Presas at 6:52 p.m.
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