International pension fund association FIAP has come out and said it is against the nationalization of the Argentine private pension fund manager (AFJP) system and wants it reconsidered.
On Tuesday (Oct 21), President Cristina Fernández de Kirchner said the government would take over the 10 AFJPs and transfer the 94.4bn pesos (US$29.3bn) they hold in assets under management as of end-September to social security agency ANSES.
"The G8 countries are protecting their banks and we're protecting our workers and retirees," she said in a televised speech from ANSES headquarters on Tuesday.
In a statement, FIAP said the proposal is contrary to the interests of Argentine workers, will put the financing of future pensions at risk, negatively affect the country's economic growth and infringe the rights of current members.
Last year, all AFJP affiliates were given the option to choose to stay in the system or switch back to the pay-as-you-go scheme. Over 9.5mn workers out of 11mn stayed in an AFJP.
President Fernández said the creation of the new system called SIPA (Sistema Integrado Previsional Argentino) was a "strategic decision" taken to "rescue" Argentine retirees' savings from falling asset prices prompted by the global financial crisis.
While admitting the value of pension savings has been affected by the financial crisis, FIAP said workers' pensions depend on the profitability accumulated throughout their working lives and not on the results of any given period.
"The profitability results of the past few months are not representative of the long-term potential of the system," the statement reads.
As of August this year, when some of the effects of the current crisis were already being felt, the AFJP system's real accumulated profitability since it started operations in 1994 amounted to an annual average of 8%, a value FIAP says is considerably higher than initial expectations.
FIAP also criticized past governments' measures to force AFJPs to transfer savings to government bonds until they represented 55% of the portfolios, which have not yielded adequately over time.
"It is therefore unacceptable that the low profitability of the funds is now advocated as the reason for the bill," FIAP said.
AFJPs saw assets under management shrink 3.48bn pesos in September compared to the previous month while recording a negative average return on assets of 2.25% in nominal terms in the year-ended September 30.
In real terms, the AFJPs' funds yielded a negative return of 10.3% in the year ended September, Juan Pablo Vera, chief economic analyst at local brokerage firm Tavelli, told BNamericas.
As for the future of Argentine capital markets after the demise of AFJPs - the largest investors in the local capital markets -Vera said it remained to be seen.
"Nothing has been said about what ANSES will do with the large amount of AFJP funds. The market fears an unfriendly response, hence the recent fall in stock prices," he said.
Following the nationalization announcement, the Argentine stock market plunged 21% this week, rebounded only slightly on Thursday and was down again 8% on Friday.
In a brief statement, the stock exchange said the AFJPs will be able to go back to the market on Monday, ending a Buenos Aires court ruling that prevented them from trading and liquidating their positions until next Wednesday.
FIAP also called on members of congress to think about the importance of Argentine workers' savings as denying them right of ownership or using the funds for another purpose infringes the principles of the rule of law.
Fernández sent the bill to congress immediately after her speech on Tuesday so changes to the market would begin in January 2009. The lower house intends to begin discussions next week.
"In our view, the most likely scenario is the bill will be passed after some headline-grabbing changes to restrict the use of funds," Barclays Capital said in a report.
Fernández' majority in congress is uncertain as earlier this year lawmakers from her own Peronist party helped to veto the government's plan to raise taxes on farmers. But ideological hostility against AFJPs makes a repetition of this highly unlikely.
While the administration is presenting the initiative as a structural counter reform, saying it has no plans to "grab the cash," there is unquestionably a fiscal side to it.
"Argentina is in bad need of financial resources to fund it in 2009 and 2010 and the pension system presented an obvious opportunity," Barclays Capital economist Sebastián Vargas wrote.
Based on the new resources the social security counter reform provides, it looks less likely Argentina will face external payment difficulties in 2009-10.
The South American country has not had access to international capital markets since its historical US$100bn debt default in 2001.
In an attempt to lure foreign investors, last month Fernández said the government would pay off US$7bn owed to the Paris Club of creditor governments using central bank reserves and recently launched a plan to pay off bondholders who refused tough terms offered in the 2005 defaulted debt restructuring.
"The government seems to have grown skeptical market-friendly moves will deliver sought-after results and thus has moved to insulate the economy, protect domestic producers, seize social security resources and engage in fiscal expansion to drive aggregate demand during the electoral run-up," Vargas wrote.
Besides the negative impact on the local mood amongst the business community, the recent price action highlights other concerns, he said.
Pension funds were important providers of liquidity and operated, in many instances, as buyers of last resort at times of stress. Furthermore, there are concerns the government may cyclically offload equities and other instruments at a time of market stress, said Vargas.
Lastly, the perceived confiscation of pension fund assets has heightened worries over a potential deposit/currency run, he said.
Big foreign players in the Argentine pension market include BBVA (NYSE: BBV), MetLife (NYSE: MET), ING (NYSE: ING) and HSBC (NYSE: HBC).
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