Argentine Senate Approves Takeover of $24 Billion in Pensions

Argentine Senate Approves Takeover of $24 Billion in Pensions

By Eliana Raszewski

Nov. 21 (Bloomberg) -- Argentina’s Senate approved President Cristina Fernandez de Kirchner’s plan to nationalize about $24 billion in private pensions, a move the opposition calls a cash grab and the government defends as a way to protect retirement savings from plunging financial markets.

The chamber last night voted to back the plan after a 12- hour session. The bill was approved by the lower house on Nov. 7. The funds will be transferred to the state-run social security agency, known as Anses, for management and administration.

“Social security can’t depend on the risks of the financial system and speculation,” Senator Fabian Rios of the ruling Peronist party said during the debate.

Fernandez, 55, announced her plan to take over the country’s 10 private pension funds on Oct. 21. Argentine stocks and bonds tumbled on investor concern that government finances were weakening and another default was on the way, seven years after the country stopped payments on $95 billion in debt.

The president said the goal was to protect retirees from the global financial crisis and denied the move was to “grab the cash” as suggested by opposition leaders including former presidential candidate Elisa Carrio and opposition Senator Maria Eugenia Estenssoro.

Argentina’s risk of default “remains substantial,” even with added revenue from the nationalization of the pension funds, Goldman Sachs Group Inc. economist Pablo Morra wrote in a report released yesterday.

Default Risk

“Despite the significant transfer of resources to the government to take place under the pension reform, we believe the risk of a sovereign credit event -- default or distressed restructuring -- in 2009-2011 remains substantial,” Morra said.

Argentina’s economy is headed toward recession, which will undermine tax revenue and eventually pose “difficulties for the government to remain current on its debt obligations,” Morra said. Financing is further complicated because “credit markets remain closed to the government,” he added.

Fernandez’s original proposal was modified by the lower house to add restrictions on how the pension money may be used.

The bill requires the social security agency to invest the assets “profitably and safely” and sets up a 13-member oversight board. It also limits the amount that can be loaned to the government through bond purchases.

Still, Estenssoro and political analysts including Rosendo Fraga, who runs Nueva Mayoria pollster in Buenos Aires, said Fernandez will use the presidency’s broad powers and her control of Congress to get round those restrictions.

Without Controls

“We are in a democracy without parliamentary controls,” Estenssoro told reporters yesterday at the Senate. “The lack of controls is frightening, Anses will manage an amount that represents about 45 percent of the country’s gross domestic product without a serious control,” she said referring to the agency’s total funds.

Fernandez may skirt the restraints by using the so-called “super-power law” that enables the president to change the budget without congressional approval, Fraga said.

Argentina created the private pension system in 1994 as part of a program to reduce state involvement in the economy and give workers more control of their retirement savings. The move also aimed to increase investments in the local capital markets.

Pension funds seized by the government will become part of the state system, which pays workers a guaranteed pension equal to 1.5 percent of their monthly salary for each year they worked. By contrast, payments under the private system depended on the performance of the stocks and bonds in which their savings were invested.

‘Failed’ System

“I haven’t seen crowds in the streets defending the private pension funds,” said Miguel Angel Pichetto, head of the Peronist party in the Senate last night during the debate. “The private system has failed and there’s a general agreement on that.”

The government’s pension plan has also raised concern among businessmen about possible violations of property rights. Argentina’s biggest industrial chamber issued a statement on Nov. 11 saying the country should guarantee “the rules of the game won’t be changed.”

The plan to seek nationalization of the pensions “was a bad decision, and it has cost Argentina because markets have been crashing,” said Cristiano Rattazzi, president of Fiat Auto Argentina SA in a telephone interview on Nov. 18. “It’s the wrong measure.”

To contact the reporter on this story: Eliana Raszewski in Buenos Aires eraszewski@bloomberg.net

Last Updated: November 20, 2008 21:31 EST