Argentine president forces leading banks to lend

July 5, 2012 - 1:38 PM
Argentina Mercosur Summit

Argentina's President Cristina Fernandez, center, delivers a speech at the Mercosur summit in Mendoza, Argentina, Friday, June 29, 2012. Fernandez announced that the Mercosur trade bloc will not slap economic sanctions on Paraguay after the ousting of its president because they felt it would hurt the Paraguayan people. Mercosur leaders criticized the impeachment and barred President Fernando Lugo's replacement, former Vice President Federico Franco, from attending the summit. (AP Photo/Natacha Pisarenko)

BUENOS AIRES, Argentina (AP) — Facing clear signs of a looming recession, Argentina's president is ordering the country's biggest banks to lend $3.3 billion of their clients' savings at rates below what many believe to be the inflation rate.

The requirements taking effect Thursday limit interest on the loans to 15 percent a year. The government says inflation is below 10 percent, but many analysts estimate it at around 25 percent, one of the world's highest rates.

President Cristina Fernandez says the government saved the private banks when they were in trouble, and now it's the banks turn to do their part to fan Argentina's decelerating economy by lending 5 percent of their deposits to small and medium-sized businesses.

Argentina, one of the world's leading grains suppliers, saw its economy expand by almost 9 percent last year on the back of high commodity prices and industrial output led by car sales to Brazil. But blistering growth has been reined in by less demand from its neighbor and leading trade partner Europe's economic woes and surging inflation.

Fernandez has said that Argentina's top 20 banks will lend more at a maximum interest rate of about 12 percent for a minimum three-year period. Economic analysts say the move is a quasi-subsidy imposed on the leading bankers that does not get to the core of what discourages investors: one of the world's highest inflation rates and one of the most volatile business environments.

"This is a negative development inasmuch as requiring banks to lend at negative real rates erodes the capital base of banks and by distorting the cost of capital will lead to a misallocation of credit," senior Goldman Sachs economist Alberto Ramos wrote in a research note.

"Furthermore, the forceful nature of the measure will contribute to erode even further business and investment sentiment."

The only way to restore investor confidence in Argentina will be to tackle the soaring consumer prices, said Fausto Spotorno, an economist at Orlando J. Ferreres & Associates consultancy.

"I have doubts that this is an encouraging measure," said Spotorno. "Inflation is discouraging people from saving and investing long-term because it's difficult to estimate the value of projects and if you win or lose."

The central bank was expected to announce more details on the measure soon. The center-left government gave the central bank more powers to regulate credit flows when it reformed its charter earlier this year by eliminating a monetary law that required base money to be backed up by foreign reserves beyond the state.

During the announcement of the new measure Wednesday, Fernandez said the state has had to carry the weight of supporting entrepreneurs and small businesses because bankers "don't seem don't seem to trust them since they're lending them less."

But analysts say boosting lending to companies will not be enough to lift Argentina.

"It helps, but it lacks the strength to reverse a tendency of economic deceleration," said Ramiro Castineira of Econometrica, a Buenos Aires-based consulting firm. "We're talking about $3.3 billion in loans in a year. That's not going to change Argentina's credit history."

Just days after Fernandez won an easy re-election in October, she began extending the government's reach in the economy with capital controls, import caps and more recently, the takeover of YPF, Argentina's largest energy firm. Fernandez has accused unnamed business groups of encouraging a run on banks to hurt her second mandate.

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Associated Press writer Luis Andres Henao in Santiago, Chile and Almudena Calatrava in Buenos Aires contributed to this report.