The Argentine government's decision on Saturday to partially freeze deposits will have a negative effect on banks in the short-term by causing the economy to contract even further, Standard & Poor's (S&P) Argentine financial services rating analyst Cristian Krossler told BNamericas.
For a 90-day period the public can withdraw only US$250 a week in cash from their accounts. The government also limited transfers of funds abroad to US$1,000 and took several further steps to dollarize the financial system, such as prohibiting banks from offering peso-denominated loans. International trade operations and debt payments are exempt from the restrictions.
The measures were taken to curb the outflow of deposits and soaring interbank interest rates, which reached levels of 900% in November, Krossler said. Argentina's financial system saw US$2bn in deposits, or 3% of total deposits, withdrawn last week over fears that the government would freeze deposits.
While curbing the chaotic withdrawal of deposits on Friday, Argentines are culturally unprepared to migrate to an electronic-based payment system, he said, which will cause consumer spending to decline.
"Argentina is a cash-driven society, like all of Latin America," he said.
Less cash on hand, coupled with an aversion to credit cards and the lack of retailer infrastructure for credit and debit cards, means the economy will continue to contract at least for the short term, he said.
Yet even if the measures are successful in stopping cash from leaving financial institutions and decreasing tax evasion, other sovereign variables will be the make-or-break factors for Argentina's ailing economy, Krossler said.
Top of the list is whether international debt holders accept the government's debt swap. Last Friday the first phase of the debt exchange was completed, with local debt holders reportedly swapping US$50bn in federal and provincial bonds for new bonds with long maturities and lower interest rates.
"If this second exchange period is successful, the probability is that the situation will be better in the medium-term. If not, there may be no long-term," he said.
S&P has recently downgraded Argentine banks' ratings for outstanding debts to a 'CC' status while deposits stand at a 'B' rating, Krossler added.
The affect of the crisis will be indirect and not significantly impact banks in Brazil, Chile and Mexico, analysts said, adding that Mexico should be the least affected. Asset quality has remained stable in these three markets, and is not expected to drop by a large percentage in the near future, according to S&P analysts at a conference call on Wednesday.
Brazil is the most susceptible to nominal asset quality deterioration, but should be cushioned thanks to conservative provisioning this year by Brazilian banks. High provisioning in the banking sector was enforced by Central Bank regulations in early 2001, S&P Brazil analyst Daniel Araujo said.
A significant threat to the Chilean and Mexican markets specifically is the current high level of unemployment, the analysts said.
In Chile, higher import tariffs imposed by Argentina have driven exports down by 6% so far this year, in addition to the indirect impact of slowing international markets. In contrast commercial and consumer lending should increase during 2002.