Tuesday, October 21, 2008

Argentina Makes Grab for Pensions Amid Crisis - WSJ excepts

Hemmed in by the global financial and commodities bust, Argentina's leftist government found a novel way to scrape up the money to stay afloat: cracking open the piggybank of the country's private pension system. President Cristina Kirchner proposed to nationalize the private pension system, which has about $30 billion in assets, a move that would provide the government with much of the cash it needs in the short term to avoid default for the second time this decade. But analysts said the plan reinforces Argentina's image as a renegade in financial circles and represents a repudiation of the system of private pensions that has been in vogue in developing countries. The government told Argentines its move to nationalize private pension funds was aimed at protecting investors from losses resulting from the global market turmoil. President Kirchner said in a speech: "The main member countries of the [Group of Eight] are adopting a policy of protection of the banks and, in our case, we are protecting the workers and retirees." But economists said the motive is to provide the government with about $5 billon in annual pension contributions that it needs to plug a gap in the financing next year and avert a second debt default. "They were in a tight situation and this was an accessible source of funds," said Buenos Aires economist Aldo Abram. Argentina's financing needs are growing quickly as the global financial crisis pushes down prices of commodity exports such as soybeans. Coupled with unchecked government spending, the commodity downturn has created a gap of around $10 billion to $11 billion in what Argentina must pay on its debt between now and the end of 2009, according to economists. Mr. Abram, the economist, said the pension takeover would help the government close about half the gap in funds needed for its debt service, as about $5 billion in pension contributions go into public coffers rather than private ones. He said the rest of the funding needs could be obtained from a state-run bank or by dipping into currency reserves. The pension system in places like Argentina and Chile is much more free-market-oriented than in the U.S. The U.S. Social Security system is run by the government and is "pay as you go," meaning the government uses contributions from current workers to pay retirees. Latin American countries like Chile decided to give workers the option of creating individual retirement accounts run by private companies where workers would be forced to set aside money for their retirement - similar in some ways to a 401(k)-type account in the U.S.

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