Argentina Responds to Banking Outcry

Argentina’s new government rushed Monday to soothe public rage over its decision to drastically cut the dollar value of bank deposits, but a beleaguered financial system breathed a sigh of relief.

The government, which this month ended a decade-old peg of one Argentine peso to the U.S. dollar, plans to turn dollar deposits to pesos to spread more evenly costs of a devaluation that has put banks near collapse and moved the country to the verge of revolt.

Officials said they might ease the pain for angry depositors--many with life savings under threat after a recession in its fourth year--by offering Argentines as many pesos for the buck as possible.

Millions of Argentines have bank savings in dollars, a currency safe-haven in Latin America, but the government froze these deposits--some $45 billion--to stop a run on banks, a restriction that sparked huge street protests and contributed to the downfall of two governments.

The decision to switch these dollars to pesos at parity, the official 1.40 peso rate, or another inflation-indexed rate could determine the survival of both a financial system dominated by foreign banks and even Peronist President Eduardo Duhalde, the fifth leader in little more than a month.

Argentines fear they could lose up to half the dollar value of their deposits, depending on how the conversion is done.

“Most of my life savings were just taken away from me,” said Jose, a 38-year-old psychologist. “I was going to move away to Italy but now I can’t because my money is trapped here. Argentina is like a prison.”

The deposit move is a sudden about-face for the government, which this month angered foreign investors by switching most dollar debts owed to banks into devalued pesos, costing the banks billions of dollars.

Moody’s ratings service said last week that banks were insolvent. Some large foreign-owned banks had hinted in recent weeks that they might leave Argentina as the recent devaluation blew a huge hole in their balance sheets.

But the new policy, meaning the banks would have all their debts as well as assets turned into pesos and therefore evening out the financial burden of the devaluation, could save them billions of dollars, depending on the rate.

The deposit switch was a nightmare come true for many Argentines and could spark numerous lawsuits. A few took to the streets banging pots and pans in miniature versions of the protests that toppled two presidents last month.

After three weeks in power, Duhalde has broken his first and biggest promise--to return intact the roughly 65% of deposits in Argentina made in dollars--and has been unable to lift an unpopular account freeze.

Duhalde told local media over the weekend that “the money is just not there.”