Argentinas Kirchner seizes private pension funds

Its official: Twenty three billion dollars in private pension funds have been seized by the leftist government of Cristina Kirchner in Argentina. Immediately one would argue that this is completely illegal, but the government just made it legal. The law legalizing the seizure went into effect on December 9, 2008 after Congress approved it in November. The bill was published in Argentina’s official gazette as follows: “the state guarantees pensioners benefits that are ‘equal or greater’ to what they received under the private system.” About a fourth of Argentina’s 40 million citizens invested in the private pension system. The National Security System Administration (ANSES) will absorb the personal accounts which will be managed by a board of 13 members who will be responsible for investing it ‘profitably and safely.’

After the first announcement in October and in preparation for implementing the state takeover, squads of federal police raided the offices of the country’s 10 main AFJP’s, confiscating documents and files to supposedly ‘uncover evidence that the managements of the funds had engaged in illegal financial maneuvers, selling off stocks and bonds in anticipation of Fernandez’s announcement.’[1]

Argentines have had lots of experience with the government meddling with their money. Prior to the 2001 economic collapse, when the government was trying to maintain the peso at parity to the dollar, the government placed limits on bank withdrawals. Later, it issued a decree converting dollar-denominated deposits to pesos. Argentina has been largely shut out of international capital markets since 2001, when it declared the largest sovereign-debt default ever.[2]

On December 5, the government of Cristina Fernandez de Kirchner announced a $3.8 billion stimulus package that will grant low-cost loans to farmers, automakers and other exporters. This money will come from the billions of nationalized assets from the pension funds. In total, the government will spend the equivalent of 16.6 billion USD on infrastructure projects next year in an attempt to create 380,000 construction-related jobs.

The funds seized are known as AFJP’s (Administradoras de Fondos de Jubilaciones y Pensiones) or retirement accounts. Mrs. Kirchner says that this measure was ‘necessary to protect Argentinian workers and retirees from losses resulting from global market turmoil.’ In reality the private pension system, although it had suffered normal investment losses, was otherwise sound. Few people trust the ability of the government and believe their funds will literally disappear. Many are outraged and question the real motivation behind the measure while doubting the truthfulness of what the government is telling them.

For some time now the Kirchners have been eyeing this money and some say the move last year to implement new rules forcing the AFJP’s to invest more money inside the country was a warning signal.

The AFJP system was introduced during the Carlos Menem Administration in 1994 as an efficient way to replace the country’s state-run pension system where funds were mismanaged, lost value due to inflation, or simply used or stolen for other purposes leaving retirees with little if no money in the end. The plan initiated by Menem allowed workers to choose between staying with the old system or switching to the private AFJP’s in which case they would pay contributions into individual retirement accounts.  This plan was in keeping with the eleven countries in the region that also implemented privately administered pension funds.  Some like Chile and Mexico completely replaced the public system.

The AFJP system in Latin American has helped create a vast stock of domestic savings that can fund local capital markets and lend money for projects like toll roads. In Argentina, Mexico and Chile, pension funds are among the biggest players in local stock markets, helping young companies get access to capital.[3]

There are two main reasons why Cristina Fernandez de Kirchner decided to seize these private accounts. First, she wants to stay in power. Remember that it was not long ago when people were speculating that her mandate might end sooner due to an ongoing violent farmers’ strike. The farmers strike was set off by her proposal to raise taxes on key agricultural products which was extremely unpopular. Even her Vice President voted against the proposal. (See ‘The Americas Report’ June 12, 2008).  In order to remain in power, she believes that she needs to boost her popularity by continuing to fund social programs. Before last year’s presidential elections, Nestor Kirchner decided to step up spending on social programs and raise public sector wages to attain more votes for his wife. These measures worked and she was elected. Now she believes she needs to continue these policies and needs the cash. The private pension funds could certainly serve that purpose.

Secondly, over the next two years, $23 billion of public debt falls due and Fernandez needs to comply to avoid a second default. The payments are from debt restructured after a 2001 default and new debt issued locally. Since the state required the AFJP’s to hold a lot of government bonds (approximately 55% of their portfolios) and now that these funds are government owned, the state won’t have to pay this debt which has not been reduced because investors lack trust in the government and demand extremely high interest rates. An important buyer of Argentinian debt in recent times has been Hugo Chavez who demanded a very high yield in return. Venezuela is currently having financial problems due to the low price of oil and it seems unlikely that it will be able to buy more Argentinian bonds.

It is clear that Mrs. Kirchner’s move has been poorly though since private funds are the major institutional investors in the Argentinian economy and without the funds, the financing of many companies and projects will be severely affected. In addition it is illegal because this is private money that contributors earned through their work and which they deposited in individual accounts to be able to have a decent retirement. The AFJP’s were legally instituted and Mrs. Kirchner has unfairly changed the rules.

The measure has already had an adverse effect on Argentina’s already deteriorating capital market and has been perceived by foreign and local investors as a new attack on private investments. The Buenos Aires stock-exchange index fell 24% in two days, and investors dumped Argentine bonds, sending their yield soaring to 28%.[4] Foreign investors lack confidence in the stability of the Argentinian market and some already are announcing that they are rethinking their plans and will likely get out.  Some foreign companies had invested heavily in the AFJP’s. These include Banco Bilbao Vizcaya Argentaria (BBVA), HSBC, ING and MetLife. The day after the measure was announced, BBVA slid 6.5 percent in Madrid and Repsol YPF SA, Spain’s biggest oil producer, fell 13 percent.[5]

Argentinians are already pulling their money out of the local banking system. In October, $4 billion left the banking system, and analysts predict the total for 2008 will exceed $25 billion. Now many people are beginning to wonder: what will the government nationalize next?

There have been major protests but labor unions which usually can affect a governmental decision are siding with Kirchner since most of its members have remained with the state pension system and will counter any popular mobilization.

Even though protection under either the public or private system is not 100% certain, at least beneficiaries in the private system received periodic reports on their funds and had the ability to seek the best return. To test whether people were happy with the AFJP’s, last year when then president Nestor Kirchner gave contributors the option of staying in the private or moving to the state system, 90% chose to stay.  That pretty much revealed that people were satisfied with the private system and that Mrs. Kirchner’s decision did not take into account their choice.

The sad reality is that Argentinians are scared and worried about what will happen to their retirement accounts. The amount being seized can probably solve the short term debt problem, but it will surely hurt the economy badly and the effects will last for a very long time. Also, nobody knows how ANSES (the public system) will manage the funds. The move could potentially create discontent and unrest if the returns are not what were promised. The social impact of such a desperate measure combined with Argentina’s financial and political instability makes this is a perfect recipe for disaster.

Nicole M. Ferrand is a research analyst and editor of “The Americas Report” of the Menges Hemispheric Security Project at the Center for Security Policy in WashingtonDC. (www.centerforsecuritypolicy.org). She is a graduate of Columbia University in Economics and Political Science with a background in Law from Peruvian University, UNIFE and in Corporate Finance from Georgetown University.

NOTES

1 Fearing default, Argentina moves to nationalize private pension funds. 24 October 2008. wsws.

2 Argentina Makes Grab for Pensions Amid Crisis. October 22, 2008. The Wall Street Journal.

3  Wall Street Journal – Ibid.

4  Ibid.