UPDATE 2-Argentine Senate approves pensions takeover law

Thu Nov 20, 2008 10:07pm EST

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(Updates with details)

By Helen Popper

BUENOS AIRES Nov 20 (Reuters) - The Argentine Senate gave final congressional approval on Thursday to a state takeover of $24 billion in private pension funds, a move that has raised investor concerns about Argentina's ability to pay its debts.

Senators voted 46-18 with one abstention to back the nationalization pushed by President Cristina Fernandez, who says it will protect workers and retirees from the global financial crisis. The lower house of Congress passed the bill on Nov. 7.

Opposition leaders criticized the takeover as a government attempt to bolster state coffers to meet mounting debts next year, when Fernandez also faces legislative elections.

"This is a historic change," said Miguel Pichetto, a senator from the ruling Peronist party.

Pichetto said it "will bring stability to financial markets and the investments pension funds have in local companies."

The approval helps Fernandez regain her political footing after a bitter farming conflict earlier this year in which she suffered a stunning defeat over a tax hike on soybean exports.

Opinion polls show there is widespread support for the nationalization among Argentines who complain the private funds charge high commissions and offer low returns.

Argentina's social security system has been mixed since 1994, with workers being able to steer obligatory contributions into either the state system or the privately administered funds, called AFJPs.

But government officials say a 20 percent slump in the pension funds' assets has left workers exposed to the global crisis.

Fernandez's pensions plan sent local debt and stock markets into free fall when she announced it unexpectedly last month, with critics branding it a desperate bid by the government to get its hands on fresh funds and even avert a debt default.

Latin America's No. 3 economy has racked up five years of sizzling growth, but the global financial crisis is slowing the boom.

Argentina owes $20 billion in interest and principal on its debt next year, and only $8 billion of that is accounted for in the government's financing program.

CONCERNS ABOUT USE OF FUNDS

Critics of the plan say the government is out to boost cash flow by raiding annual pension contributions of some $4 billion, which they argue will only serve to worsen Argentina's longer-term outlook.

"This looks to me like an act of desperation," said political analyst Jorge Giacobbe.

"Next year is going to be very tricky even with the revenue from the AFJPs. It's hard because of the payments that are due, plus the global problems and the bad or nonexistent relationship the government has with the people," he added.

To counter criticism, Fernandez agreed to create a commission that includes the political opposition to oversee how the money is invested.

Under the new law, the government will still be able to raise funds by issuing bonds to the social security administration, as it has done periodically in recent years because the country remains largely shut out of international capital markets.

Argentina has been hamstrung by lawsuits from holdouts who rejected a 2005 debt restructuring, three years after a $100 billion default during a deep economic crisis.

The pensions takeover means the state will become the biggest institutional investor in Argentina, holding shares in some of the country's top companies, a prospect that has angered many business leaders. (Additional reporting by Lucas Bergman; Editing by Peter Cooney)

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