Argentine pension plan has local, global impact

By Fiona Ortiz

BUENOS AIRES (Reuters) - Argentina's surprise plan to nationalize its private pension system caused chaos on local markets on Wednesday and raised fears about a debt default, sending a ripple effect of fear about emerging-market investments into European stocks and Asian bonds.

President Cristina Fernandez, who has repeatedly criticized financial markets for speculating rather than investing in real production, announced on Tuesday she would send a bill to Congress for the state to take over the $30 billion in funds in the 14-year-old private pension system.

Fernandez defended the plan by saying that she was rescuing pensions from the global market crisis but some investors saw the plan as a sign of desperation by a government facing billions of dollars in debt obligations next year.

The plan is likely to pass Congress and be broadly popular in Argentina, where there is broad-based suspicion of the privatizations that took place during the 1990s when free-market reforms swept Latin America.

Fernandez and her husband and predecessor Nestor Kirchner are center-leftists who maintained a fiscal surplus and foreign reserves. She is not considered as left-wing as Venezuelan President Hugo Chavez and other socialist leaders in the region, such as in Bolivia and Ecuador.

Local stocks fell nearly 18 percent while locally traded bonds dropped an average 10 percent in response to the plan's announcement as the 10 investment funds to be nationalized are the country's largest institutional investors.

"Investors are extremely panicked. People start imagining things like Nestor and Cristina can start expropriating as if it were a war," said Eduardo Blasco, economist with Maxinver business consulting firm.

"If they're going to rob my house I don't care if it's worth $200,000, if someone offers me $40,000 I take it because it's going to be stolen anyway," Blasco said.

CRISIS

Argentina's country risk, as measured by the JPMorgan Emerging Markets Bond Index (EMBI+) soared to 2,000 basis points, a yawning spread between benchmark Argentine bonds and comparable U.S. Treasuries.

That risk level brought unwanted reminders of the time just before Argentina's historic 2001 default on $100 billion in debt, when the country went into a severe economic and political crisis.

Even though the pensions takeover would give the government more funds to tap to meet financing needs next year, the nose dive in sovereign bond prices shows deep market skepticism over the country's medium- and long-term economic health.

The takeover of pensions "decreases the risk of default in 2009 and 2010, but what's complicated are the perspectives for the medium and long-term," said the Chief Financial Officer at an Argentine bank, who asked not to be named.

He said yields on short-term peso debt have shot up to more than 90 percent. "The risk of default is overstated in the short term," the CFO said.

In Spain, where many companies have investments in Argentina, concerns grew that South America's No. 2 economy could move to nationalize more sectors.