Fearful Argentines Flee Bank Deposits

Chris Kraul Los Angeles Times Service Thursday, July 19, 2001

BUENOS AIRES Argentines, fearful that the government might abandon their currency's peg to the dollar, pulled $2.6 billion out of the banking system last week.

Official data on the withdrawals, issued Tuesday, raised concerns over a possible exodus of capital if the cash outflow from banks is not halted.

The statistics cover withdrawals during the five banking days through Thursday.

The finance secretary, Daniel Marx, said Wednesday that Argentina might use as much as $600 million of its loans from the International Monetary Fund and other lenders to pay off Treasury bills in a bid to remain solvent through the end of the year, Bloomberg News reported.

Mr. Marx said the loans from the IMF, World Bank and other lenders will be used to pay T-bills so that Argentina can reduce or eliminate the number of debt auctions this year.

Financial markets reacted favorably Tuesday to an agreement by 14 opposition governors to accept President Fernando de la Rua's emergency spending cuts, which total $1.6 billion.

Although the agreement was viewed as positive news, there were still concerns about how it would be implemented. The governors can pick their own spending cuts and can choose which salary and pension reductions to impose, to a maximum of 13 percent. The provinces are also expected to argue that they need to go slowly because the federal government owes the states tens of millions of dollars.

"There are still some questions up in the air," said Jorge Mariscal of Goldman Sachs Co.

The Merval stock index in Buenos Aires on Wednesday fell 1.69 percent at midday, and bond prices gained modestly.

The peso is pegged to the dollar on a 1-to-1 basis. If the government abandons the peg, the peso is expected to decline in value, perhaps by as much as half.

Friday and Monday were also thought to have been "tough days" for the banking system in terms of high levels of withdrawals, Mr. Mariscal said, citing anecdotal information. "Argentina continues to lose deposits in very large amounts," he said.

But Michael Gavin, an economist at UBS Warburg in Stamford, Connecticut, said deposit outflows were less than had been feared.

"The impression we have is that they are likely to slow in the coming days," Mr. Gavin said. "So I at least do not view the withdrawals with any particular surprise or alarm for now."

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-- Martin Thompson (mthom1927@aol.com), July 23, 2001