Think tank recommends orderly change in Argentina

ARGENTINA - Argentine authorities must take care to avoid a chaotic and unpredictable restructuring of the country's fragile financial system, local economic think-tank Fundacion Capital (FC) said in a report on the financial system.
ARGENTINA - Argentine authorities must take care to avoid a chaotic and unpredictable restructuring of the country's fragile financial system, local economic think-tank Fundacion Capital (FC) said in a report on the financial system.

The administration of former President Fernando de la Rua imposed a partial deposit freeze in December last year to halt a massive run on banks. The banks are now struggling to stay afloat with what little liquidity they have left, and most owners have said they will not inject more capital into their banks until the economic situation in Argentina improves.

Argentina's central bank chairman Aldo Pignanelli said last week that only 40 out of the 110 banks were likely to survive the crisis.

The fact that a number of banks have already fallen since the Argentine crisis began, makes it "urgent" for a solution to the risk that more banks will go under and spark an uncontrolled restructuring with bank failures on a massive scale, FC said.

Scotiabank Quilmes and Banco Velox have seen their operations suspended and Banco Galicia has received a government-sponsored bail out. France-based Credit Agricole decided last month to exit Argentina to leave Banco Bisel and Banco Suquia in the hands of the government.

According to FC, macro-economic stability must be introduced and the reigning insecurity in Argentina eliminated in order to convince the banks' shareholders to inject fresh capital.

The Argentine government needs to implement an austere fiscal policy and a neutral monetary policy to achieve some stability in the currency market to pave the way for greater macro-economic stability, FC said, adding that such policies would increase the chances of a much needed aid package from the IMF.

The government should also take a more active role in restructuring the financial system so the cost of the process is shared between the banks' shareholders and the government, FC said. Those banks that are viable should be issued government bonds to aid their recapitalisation.

FC also recommended the creation of an independent government body, a kind of bank hospital, to audit the banks in the financial system to determine which are viable and which are not. This organization would intervene weaker banks and sell them to the remaining viable banks or capitalize them with the aim of selling them at a later stage.

A "complete political consensus" is key to a successful restructuring of the financial system and an end to the central bank's liquidity loans to weaker banks, because it conceals their true financial condition, FC noted.

FC said there is empiric evidence that an orderly and efficient restructuring of financial systems have permitted economies to emerge from deep economic crisis, citing the case of Indonesia after the Asian financial crisis in 1997.

Only users who have a paid subscription or are part of a corporate subscription are able to print or copy content.

To access these options, along with all other subscription benefits, please contact info@centralbanking.com or view our subscription options here: http://subscriptions.centralbanking.com/subscribe

You are currently unable to copy this content. Please contact info@centralbanking.com to find out more.

You need to sign in to use this feature. If you don’t have a Central Banking account, please register for a trial.

Sign in
You are currently on corporate access.

To use this feature you will need an individual account. If you have one already please sign in.

Sign in.

Alternatively you can request an individual account

.