Argentines Withdraw $2.6 Billion From Banks

Argentines, fearful that the government might abandon their currency’s peg to the dollar, have pulled $2.6 billion out of the banking system, figures released Tuesday showed. The data raise concerns over a possible exodus of capital if the withdrawals are not halted.

The statistics cover withdrawals during the five banking days ended Thursday. Because of delays in reporting, figures for Friday, which was considered another difficult day during the current crisis, were due to be released today.

Markets reacted favorably Tuesday to the agreement by 14 opposition governors to accept President Fernando de la Rua’s emergency government spending cuts, which total about $1.5 billion. The pact, concluded Monday night, was described by the president as Argentina’s last hope of avoiding financial collapse.

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%.

The provinces also are 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, Latin American equity strategist at Goldman Sachs in New York.

Argentina’s Merval index of stocks closed up 4.9% on Tuesday, and its bonds also gained. Markets elsewhere in Latin America responded favorably, with Brazil’s Bovespa index up 2.6% and Mexico’s bolsa finishing 0.3% higher. Chilean and Colombian stocks also strengthened.

The government data released Tuesday showed that bank withdrawals reached a high point Thursday when depositors took out $820 million. Most of that money is being converted to dollars and often placed in foreign bank accounts.

The Argentine currency, the peso, is currently pegged to the dollar on a one-to-one basis. If the government were to abandon the peg--which De la Rua has said repeatedly in recent days that he will never do--the peso would plummet in value by as much as half.

Anecdotal information suggested that Friday and Monday were also “tough days” for the banking system in terms of high levels of withdrawals, said Goldman Sachs’ Mariscal in New York.

“Argentina continues to lose deposits in very large amounts,” Mariscal said Tuesday.

But Michael Gavin, an economist at UBS Warburg in Stamford, Conn., said deposit outflows were less than were feared and that “the impression we have is that they are likely to slow in the coming days. So I, at least, do not view the withdrawals with any particular surprise or alarm for now.”

Merrill Lynch equity strategist Ed Cabrera speculated that a decisive factor in the governors’ decision to sign off on the De la Rua plan was the alarming levels of deposit withdrawals. If unimpeded, the withdrawals could move Argentina “over the cliff,” Cabrera said.

“It’s the Achilles’ heel of the Argentinian crisis. If it gets to the point where Argentinians feel all their neighbors are pulling their money out, they will follow suit,” Cabrera said. “Deposit flight could lead to economic collapse.”

Several of the opposition governors told reporters here that they were supporting De la Rua not because they had great faith in his economic blueprint but because the situation was so dire that extreme measures were called for.

Last week’s bank withdrawals brought the nation’s total deposit base down to $75.991 billion, according to Fiel, an independent economics research firm in Buenos Aires.

Bank deposits and how they rise and fall are important barometers of the public’s confidence in an economic system and a critical stimulus for growth in that they provide cash or liquidity to fuel economic expansion.

Argentina’s banks are better positioned than most to withstand a short-term run on deposits because, thanks to a 1995 overhaul, they are among the strongest in any emerging market nation. Banks here are highly capitalized and must adhere to extremely conservative supervisory standards.

The 1995 reforms, brought about after the “tequila effect” from Mexico’s financial crisis reverberated here, whittled the number of banks in the country to about 100 from the previous 200, Fiel economist Abel Viglione said.

But even the strongest banks can be routed by a loss in public confidence, which last week’s withdrawals seemed to reflect, Cabrera of Merrill Lynch said.

Gavin said investor optimism also received a boost from reports that the government was close to finalizing an agreement with banks to turn as much as $3 billion in short-term treasury notes held by financial institutions into longer-term bonds and thereby avoid bimonthly auctions of the notes.

The last auction of notes July 10 involved the sale of $828 million at 14% interest rates, the rate the government was forced to offer to make the sale. Lengthening the maturity of the debt held by the banks would lessen the government’s exposure to high rates and market volatility, Gavin said.

Meanwhile political leaders braced for a massive labor march by government workers today to protest the pension and salary cuts. Unions have called a 24-hour general strike for Thursday.