Analysis: Argentina's inflation fuels spend-fast credit boom

BUENOS AIRES Thu Mar 10, 2011 2:29pm EST

BUENOS AIRES (Reuters) - On Buenos Aires' main shopping street, lined with shoe and handbag stores, fashion-conscious Argentines have found new ways to indulge their consumer urges.

Use of credit cards and personal loans in Argentina is surging as double-digit inflation encourages spending over saving. That helped stoke economic growth last year of about 9 percent, one of Latin America's fastest rates.

Retailers and banks are teaming up to let consumers pay for everything from imported perfume and soccer shirts to leather boots in as many as 12 interest-free installments if they use a credit card. Others offer hefty discounts.

Critics warn the credit boom is setting consumers up for a hard landing against a backdrop of slowing growth expectations. They say it deters saving, reducing funds available for the investment needed to sustain expansion.

Few shoppers had such concerns on Thursday on bustling Florida Street.

"It makes more sense to pay in installments, because inflation ends up steadily reducing what you have to pay back," said Nora Gonzalez, a 28-year-old accountant, as she browsed a shoe store window.

"If I bought those boots for 720 pesos ($175) it would have a huge impact on my monthly costs. In fact, I probably wouldn't be able to buy them at all," she said.

Argentina's minimum monthly wage is 1,840 pesos ($448).

Unemployment is falling steadily in Latin America's third-biggest economy, and with inflation estimated privately at about 25 percent, even short-term loans with interest rates of more than 45 percent are proving attractive.

Spending on credit cards surged 45 percent last year and lending in short-term personal loans climbed 30 percent, according to Moody's data. Payment in quotas grew 60 percent in 2010, Banco Galicia's own data shows.

"If you have nominal rates that are below inflation, which is what's happening in Argentina, you end up with real negative rates," said Boris Segura, a senior analyst at Nomura Securities in New York. "That is an incentive to consumer spending, whether it's being paid for from income or credit."

Around the world, high commodities prices are spreading the inflation phenomenon and putting central banks on alert, although inflation has been casting a cloud over Argentina's strong economic performance since 2005.

Several years of surging prices and discredited official data, which puts 12-month inflation at 10.6 percent, have hurt President Cristina Fernandez, who has run a high-growth, high-inflation economic model.

The center-left leader, who will likely run for re-election in October, continues to favor loose monetary policies and rarely utters the word "inflation.

"Credit has returned to Argentina," Fernandez said in her state of the union address last week.

Default rates are at "normal" levels and have not increased over the last year, a source at Visa in Buenos Aires said.

Argentina's banks, reluctant to lend in the form of less profitable mortgages or other long-term, fixed-rate loans, are taking advantage of the appetite for ready cash.

"The mortgage market is growing anemically, in fact it's been contracting since December 2009, whereas if you look at personal loans, there's been an explosion," Segura said.

Most mortgages are granted by state-run banks in Argentina, while the more profitable credit card and short-term loan business is dominated by private banks.

Argentina's overall credit rates remain among the lowest in the region, trailing far behind Chile, Brazil and Mexico where increasing credit supply has also fueled economic growth.

Whereas Brazil's government has moved to clamp down on lending to contain inflation, Argentina's government continues to encourage borrowing by printing money at a swift pace.

In neighboring Chile, credit has grown steadily with bank loans up a modest 5 percent in 2010 and more and more retailers offering interest-free installments for up to a year.

Zero-interest quotas are profitable because credit cards bring in administrative fees -- and missed payments carry high penalty rates.

"The problem is when people start clocking up missed payments, which come with very high interest rates," said Jorge Todesca, a former deputy economy minister who plans to run for mayor of Buenos Aires on an opposition ticket this year.

"For those who end up missing payments, 'interest-free' goes out the window," he said.

But for many Argentines, who have fresh memories of the devastating economic crisis of 2001/02, inflation appears to be tolerable for as long as they can keep on shopping.

"After the crisis, people just decided to spend money," said businesswoman Cristina Pezzella, 49, while shopping.

"People scrape together what they can and spend. Inflation is a product of how Argentines live."

(Additional reporting by Helen Popper, Luciana Lopez in Sao Paulo, Simon Gardner in Santiago; Writing by Helen Popper; Editing by Andrew Hay)