International Financial Crisis

International Financial Crisis

Argentina's President Cristina Fernandez de Kirchner announced on Tuesday that the country would nationalize $30 billion in private pension funds to protect retirees from the global financial crisis. Her proposed bill still requires the approval of Congress, in which her center-left Peronist party holds a majority(Erro, 2009).

The nationalization of the ten funds would signal the end of Argentina's private pension system, created in 1994 by then-president Carlos Menem. This private alternative to the state pension system currently administers the retirement accounts of 9.5 million depositors (one-fourth of Argentina's population of 40 million).

The value of the funds' investments has fallen 40 percent on average this year, and President Kirchner said that the move was necessary to protect retirees and workers. This sentiment was echoed by Amando Boudo, Executive Director of the National Social Security Administration who said that “the government's only motivation to carry out this measure was to rescue our future and current pensioners from uncertainty.”

But critics say that the government is grabbing for money amid escalating debts, falling commodity prices and tax revenues, and global financial trouble. Argentina has been largely shut out of international capital markets since 2001, when it defaulted on bonds worth $95 billion, the largest sovereign-debt default in history. 2001 was also the last time the government sought to tap workers' savings to help finance debt payments, freezing savings accounts and converting dollar-deposits into pesos.

In response to President Kirschner's announcement, Argentina's main stock index, the Merval, tumbled twenty percent on Tuesday and Wednesday — the biggest two-day drop since 1990. (Faiola, 2010)

Argentine President Cristina Fernández de Kirchner didn't hold back on her evaluation of the financial crisis gripping the US during a speech in front of the UN in September.

In the last month, the world's largest economy has been rocked by the collapse of several major banks and financial institutions. Stock markets, which had already been heading downwards, went into freefall as the entire financial system creaked. In an attempt to restore stability, the US government passed into law a massive US$700 billion bailout plan at the start of October. This form of intervention was unprecedented in its scale and ambition, and did not go unnoticed by Kirchner or other critical South American leaders.

They told us South Americans that the market would solve everything, that the State wasn't necessary, that interventionism was mere nostalgia. Nonetheless, we're now seeing the most formidable act of state intervention in living memory, in precisely the place where they'd been telling us that the State was unnecessary.

Of course, Argentina is no stranger to economic crises. Seven years ago, the country went through the biggest sovereign debt default in history, plunging the economy into a devastating recession. (Hornbeck, 2009)

Perversely, this catastrophe may protect Argentina from the worst of the fallout in the current crisis. The domestic banking sector was left in tatters after the 2001 crash, and even today, public trust in banks is fragile. The limited use of credit in local markets prevented local banks from the ...