The imposition at the weekend by the Argentine government of sweeping banking and exchange controls came as no surprise. However, it has posed considerable difficulties for custodian banks active in Buenos Aires and those of their clients which have investments there. Citibank Worldwide Securities Services, the leading agent bank in Buenos Aires, says exchange controls are making it impossible to remit sale proceeds and interest or dividend payments to broker-dealing and global custodian clients based abroad currently. Both groups of clients are significant holders of high-yielding US dollar-denominated government bonds, which the Argentine government is trying to swap for non-tradable loans with a lower interest rate in an effort to reduce the strain its interest bill is placing on the national finances. (The poor performance of the Buenos Aires equity market, coupled with the de-listing of several major concerns bought in recent years by Spanish bidders, means that bonds are the most significant Argentinian asset held by overseas traders and investors.) “Broker-dealers are impacted from a proprietary trading perspective,” explains Michael Goering, regional head, Lain America, at Citibank Worldwide Securities Services inMiami, Florida. “But our global custodian clients are even more impacted, not so much because of the size of the holdings they have as because they share our responsibility to inform their end-clients of what is actually happening in this crisis. We have been holding multiple conference calls every day with clients, and sending out three or four client communications a day as well, preceded and followed up by many phone calls to ensure that our global custodian clients are in a position to clarify the situation to their end-investors.”
Unfortunately, neither the economy ministry (headed by Domingo Cavallo, the economy minister) nor the Argentine central bank (headed by central bank president Roque Maccarone) has published any detailed guidelines or procedures on how the exchange controls will work in practice. All they have said is that local cash withdrawals by any account holder are limited to US$250 per week per bank; the export of physical currency is limited to US$1,000 per month per person; bank transfers abroad are limited to those amounts which are necessary for foreign trade operations; and that any transfers related to any other activity require the explicit approval of the central bank. Although dollars can be sent abroad if they are being used to pay for goods or services, foreign trade operations are not yet defined and the central bank has published no guidance on how to gain approval for payments which are not related to foreign trade operations. “Essentially, the borders are closed on withdrawals,” says Goering. “That has caused custodians like ourselves quite a problem, because 50 per cent of Argentine banks hold their US dollar accounts in New York. Dollar payments are automatically transferred there, and that is where client accounts are broken out and reported in detail. Client accounts in Argentina are all denominated in Peso. We have been unable to forward interest payments on dollar denominated instruments to individual US dollar accounts held by clients abroad. Instead, we have had to generate manual confirmations and call clients to provide them with payment confirmations.”
Citibank has hit upon the obvious answer: offer clients dollar-based accounts in Argentina, in addition to offering to convert the USD interest payments to pesos. But it is taking time to get the necessary approvals and instructions from clients to set them up and transfer money into them. The problem is compounded by the fact that the Argentine government has also stipulated that all new loans advanced by banks must be denominated in US Dollars, and all new peso deposits must bear an interest rate no higher than the maximum rate paid on US Dollar deposits. “Without the ability to issue new loans or overdrafts in Argentine pesos, the entire banking industry in Argentina is having to check that no loans or overdrafts are being advanced in pesos and to contact customers to get their approval to open US dollar accounts in Buenos Aires,” explains Goering. “The controls on cross-border activity are intended to prevent capital flight, but still allow dollar liquidity in the local financial system..” There is no way for a company to cover foreign exchange exposure at any price. The valuation of the Peso is increasingly abstract – it has become a virtual currency. He adds that clients can expect delays in receiving reports, let alone payments. “Inevitably, it is going to mean some delay for clients in actually seeing their balances,” says Goering. “There is a fair bit of confusion on everybody’s part as to exactly what is going to happen.” Although no procedures are published yet, and nobody knows when they will be, Citibank is already asking the central bank daily for approval to repatriate sale proceeds and interest and dividend payments to clients based abroad.
Once the exchange control operating procedures are clarified, and the immediate crisis has passed, attention will turn to the longer term. The Argentine government has declared that the measures will be limited to the period – 90 days, to be precise – which it believes it needs to complete the debt swap, and so convince the IMF its budget can be balanced. But it is hard to see how they can be lifted quickly. The controls were introduced primarily to halt a run on the banks which saw $1.8 billion withdrawn from banks in Argentina last week, driving up the inter-bank rate from 30 per cent on Wednesday to over 700 per cent by Friday. In an attempt to shrink the black economy (which is estimated to account for half the national income) by reducing the amount of physical cash in circulation, and drive payments into the banking system, additional incentives are being given to businesses to install ATM/credit card readers. So if the direct controls are lifted ninety days hence, something will have to have changed dramatically if capital is not to take flight again, and at an even faster rate. The good news is that the present crisis was so predictable, and has simmered for so long, that the level of foreign portfolio investment in Argentina is too small to risk a repeat of the Tequila Crisis or the Asian Flu or the Russian default of the 1990s. Custodians active in the country have noticed a steady deterioration in the level of foreign investment in Argentina throughout the last two years, interrupted by bouts of volatility around the crucial points in the IMF negotiations. Whether exchange controls will have the same impact on international perception of Argentina as they had on Malaysia after 1998 remains to be seen.