Saturday, November 08, 2008

Argentina Advances Plans to Nationalize Pension Plans

Argentina's Lower House Approves Pension Takeover (Update2),
Argentine Pension Fund Investments in U.S. Are Frozen (Update3)
Pension Law Advances to Argentina Senate, Wall Street Journal
Argentina Impoverishes Itself Again: What happens when government meddles with private wealth, Wall Street Journal
Argentina Pension Plan Spurs Peso Returns, Market Tension, Wall Street Journal
Avanza en el Congreso la estatizaciĆ³n de jubilaciones La NaciĆ³n

The lower house of the Argentine Congress, which is dominated by the leftist Peronist party, has approved a proposal to nationalize private pension funds by a vote to 162 to 75. The proposal now goes to the Senate for a full vote on November 20, where it is expected to pass, albeit by a slimmer majority. These pension funds have nearly $30 billion in assets and forthcoming pension contributions of up to $5 billion annually. Nationalizing the funds will give the government a surge of continuing revenue at a time of slowing economic growth. As an analogy, if a similar proposal passed in the U.S., it would allow the U.S. government to remove the assets of all 401(k)s from the owners' accounts and placing them in a single government-managed account.

Peronist President Cristina Kirchner defends the plan by asserting that the market is too risky for retirement savings, and that the returns earned by private-sector fund managers are inadequate. Opponents argue that President Kirchner’s claims are baseless, because the average annual return of Argentina's private-sector pension managers over the past 14 years is 13.9%. The global market turmoil, however, has bolstered Kirchner’s claims that nationalizing these private funds will protect Argentina's savers in the midst of the global market turmoil.

Many economists claim this takeover is intended to get the Kirchner government out of a cash squeeze in the coming year, during which it will face heavy debt payments as well as political pressure to increase spending as midterm elections approach. Since the government announced the nationalization on Oct. 21, 2008, the key Argentine stock index has dropped 27% and bonds have also drastically declined. Additionally, the central bank has had to spend about $1 billion in reserves to defend a peso devaluation, which has been caused in part by Argentineans converting their pesos to U.S. dollars in a search for stability. While much of this turmoil can be traced to the global market crisis, economists and analysts state that the pension fund nationalization also played a major role in Argentine market downturns.

Last week, Argentina’s government attempted to force pension funds to repatriate cash from investments in the U.S. However, these attempts were temporarily frustrated by holders of outstanding debt tied to the country's 2001 default on $95 billion of bonds. The U.S. District Judge Thomas Griesa granted a request by bondholders including Aurelius Capital Partners LP and Blue Angel Capital to freeze Argentine pension fund assets in the U.S. The bondholders argued that the nationalization will cause the funds to become the “immutable”' property of the republic. A hearing is scheduled in Manhattan federal court Nov. 14 on whether to extend the order.

1. Do the ongoing market downturns justify President Kirchner’s claims for the need to protect Argentinean’s pensions from market risk? Why or why not?
2. Is there anything the Argentine government could have done or could do to counter concerns that the pension fund nationalization is simply a cash grab?

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