October 21, 2008 / 9:59 PM / 9 years ago

UPDATE 6-Argentina to seize pension funds, markets tank

(Adds cabinet chief comment, background)

By Helen Popper

BUENOS AIRES, Oct 21 (Reuters) - Argentina’s center-left President Cristina Fernandez on Tuesday signed a bill for a government takeover of the $30 billion private pension system in a daring and unexpected move that rocked domestic markets.

Labor leaders and lawmakers from the ruling Peronist party and some opposition groups applauded the nationalization as a way to guarantee pensions at a time of global market turmoil.

But the surprise move unnerved investors and sent Argentine stock and bond prices into freefall.

Critics said the government was looting pension funds ahead of a tough budget year when it has to find billions of dollars to pay and service debt, but the president said the private pension fund administrators were the looters.

“These were looting policies,” Fernandez said of the private system in a ceremony at the government’s National Social Security Administration, or ANSES, which will take over the pensions.

Congress, which is controlled by Fernandez allies, will debate the bill next week.

“The failed experiment” of private pensions is finished, ANSES Director Amado Boudou said at the ceremony with Fernandez, before hundreds of political supporters.

The reform took Argentina’s 10 pension fund administrators, known as AFJPs, by surprise and an industry group decried government claims that the funds had performed badly.

“The AFJP system is a solid mechanism that can be perfected, that has had an almost constant growth trend in the 14 years of its existence,” Sebastian Palla, president of the Union of Argentine Retirement and Pension administrators, said in a statement.

International banks and insurance groups BBVA (BBVA.MC), HSBC Holdings (HSBA.L), MetLife Inc (MET.N), and ING Groep NV ING.AS (ING.N) are among the companies that run the funds.

MARKETS SWOON

Earlier in the day, Argentina's benchmark MerVal stock index .MERV plunged 10.99 percent to a four-year low on news of the takeover of the country's biggest institutional investors.

“This is a major blow to the country’s already isolated capital markets, with the negative implications of economic growth and investment this entails,” wrote Latin America analyst Daniel Kerner of Eurasia Group consulting group.

Prices for Argentine’s 2033 discount bond sank 4.56 points to a bid/ask of 32.063/34.313 ARGGLB33=RR, a level that implies a risk of default, as offers greatly outnumbered bids.

However, the government may have reduced any risk of default on its debt because the takeover of pensions is seen as strengthening its ability to make debt payments next year.

Argentina’s debt obligations in 2009 are estimated to rise to $12 billion, but the global financial crisis has dashed any plans to go to international markets to issue new bonds.

Economists said more than $4 billion a year in contributions to pension funds would ease government financing needs in 2009, when the government faces mid-term elections. Public spending has historically risen in election years.

Cabinet Chief Sergio Massa said the government pensions administration would maintain the funds’ investment portfolios, which are mostly in Argentine government bonds and local stocks. Last year the government had restricted the pension funds’ investments in overseas assets.

A federal prosecutor accused the funds of illegally selling government bonds as news of the reform spread and a judge banned all the funds from trading on the Buenos Aires Stock Exchange for seven working days.

The private pension system has been unpopular among some Argentines due to high commissions and because there is not a guaranteed minimum pension.

The center-left government of Fernandez and her husband and predecessor Nestor Kirchner has gradually taken greater control of the economy, reversing some privatizations and free-market reforms of the 1990s.

When Argentina privatized pensions in 1994, many other Latin American countries were doing the same. The private pension system survived the deep economic and political crisis of 2001-2002 when Argentina defaulted on $100 billion in debt.

Despite a long history of pension funds being ransacked by governments looking for ready cash, more than a million people chose to return to the Argentine state system last year under the government’s last pensions overhaul.

Many Argentines are just fed up with all the changes:

“What happens in Argentina is that every day we wake up and there’s a different law,” said Irene Morganti, 77, a member of a club for pensioners in the Martinez suburb of Buenos Aires.

“We have the uncertainty that we don’t know if we’re going to stay with one system or the other and really, both have failed,” she added. (Additional reporting by Cesar Illiano and Walter Bianchi; Writing by Fiona Ortiz; Editing by James Dalgleish and Leslie Adler)

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