Despite falling commodity prices, too little investment and doctering inflation figures (in some cases, like Argentina), the continent was holding up relatively well, which is quite an achievement in itself as many previous crisis used to originate here. But never count out the ability of governments to shoot themselves in the foot. Especially the one in Argentina.

They are pulling off a stunt, seizing private pension funds which allows them to cancel the funds holding of government bonds as debt. Short-term gain for long-term pain, fairly typical for politicians. It’s immensely stupid.

The economically rather illiterate president uses the bank seizures in capitalist countries to come up with this socialist nonsense. As if the government will be able to run these funds any better than the private sector.

If anything, this measure shows they will not, because political logic clearly reigns supreme. This will also be the case in the way these funds are run. Returns for pensioners will be sacrificed for political expedience like financing government deficits. That’s what the seizure shows.

And financing deficits elsewhere will be that much more difficult because this country already has a pretty shaky reputation on the international capital markets (to put it mildly), so basically they shoot themselves in the foot. Who is going to buy Argentinian bonds after this? Answer: those just nationalized pension funds. They will have to, because nobody else will.

Argentina Default Looms, Pension Seizure Roils Market (Update3)
By James Attwood and Bill Faries

• Oct. 22 (Bloomberg) — Argentina’s planned seizure of $29 billion of private pension funds stoked concern the nation is headed for its second default in a decade.
• President Cristina Fernandez de Kirchner’s decision hurt markets already reeling from slumping commodity prices and slower growth. The retirement system, set up in 1994 to help bolster capital markets, owns about 5 percent of companies listed on the Buenos Aires stock exchange and 27 percent of shares available for public trading, data compiled by pension funds show.
• Argentine bond yields soared above 24 percent before the announcement late yesterday, and the benchmark Merval stock index tumbled 11 percent. The last time the government sought to tap workers’ savings to help finance debt payments was in 2001, just before it stopped servicing $95 billion of obligations.
• “It’s the final of many nails in the coffin from an institutional investor perspective,” Bill Rudman, who helps manage $3 billion of emerging-market equity at WestLB Mellon Asset Management in London. Argentina is “disappearing into irrelevance,” he said.
• The government’s proposal to take control of 10 funds, including units of London-based HSBC Holdings Plc and Bilbao, Spain-based Banco Bilbao Vizcaya Argentaria SA, still needs congressional approval. BBVA fell 6.5 percent in Madrid.
• Repsol Drops
• Repsol YPF SA, Spain’s biggest oil producer, slid 13 percent in Madrid, the steepest intraday decline since 1997. Repsol owns YPF SA, the largest oil company in Argentina, and said last month it would announce in November a date for the delayed sale of a 20 percent stake in YPF on the local stock market.
• Fernandez said yesterday her decision is “in a context where the biggest countries” are taking steps to protect their banks because of the global financial crisis.
• “Instead, we’re taking them for our retirees and workers,” she said during a rally in Buenos Aires.
• Argentina’s borrowing needs will swell to as much as $14 billion next year from $7 billion in 2008, RBC Capital Markets, a Toronto-based unit of Canada’s largest bank, said yesterday.
• South America’s second-largest economy has been shut out of international capital markets since its 2001 default. Holders of about $20 billion of defaulted bonds rejected the government’s 2005 payout of 30 cents on the dollar, and Fernandez has said she’s considering proposals to offer a new deal.
• Argentina’s Bonds
• The cost of protecting Argentina’s bonds against default soared yesterday, as five-year credit-default swaps based on Argentina’s debt jumped 2.38 percentage points to 32 percent, according to Bloomberg data.
• Credit-default swaps, contracts conceived to protect bondholders against default, pay the buyer face value in exchange for the underlying securities or the cash equivalent should a company fail to adhere to its debt agreements. An increase indicates a deterioration in the perception of credit quality.
• The proposed takeover “makes the chance of default in the short-term less likely by inflicting immense damage to the long- term credibility of the government and the financial system with its own people,” said Paul McNamara, who helps manage $1.2 billion of emerging-market assets at Augustus Asset Managers Ltd. in London.
• The peso was little changed yesterday, rising 0.1 percent to 3.2190 per dollar, as traders said the central bank intervened in the foreign exchange market to shore up the currency.
• Amado Boudou, the head of Argentina’s social security administration, said yesterday the government will keep the same investment mix for the funds, with 60 percent in bonds and 10 percent in stocks. He called the privately run system an “enormous error.”
• Government Debt
• Currently, about 55 percent of the 94.4 billion pesos ($29.3 billion) held by the private pension funds is invested in government debt, according to the pension regulator’s Web site. A takeover would allow the Fernandez administration to write off the sovereign bonds held by the funds, said Javier Salvucci, an analyst with Buenos Aires-based Silver Cloud Advisors.
• “It’s a short-term fix that may cause more fiscal and macro pain in the long haul, which has been typical of the last two administrations,” said Will Landers, who manages $5 billion in Latin American equities at BlackRock Inc.
• Since the pension system began in 1994, trading volume on the Buenos Aires stock exchange has quadrupled. The funds were net buyers of domestic equities for a third straight month in September, investing about $144 million, according to Deutsche Bank AG. They have about $4.1 billion in domestic stocks, strategist Guilherme Paiva wrote in an Oct. 15 note.
• The government’s plan is “one additional factor to count against Argentine assets,” said Vinicius Silva, an emerging market strategist at New York-based Morgan Stanley, which recommends that emerging-market equity investors have a “zero’ weighting in the country.
• Fund Sales
• Nestor Kirchner, Fernandez’s husband and predecessor as president, began tightening restrictions on private pension funds last year, requiring them to keep more investments in the country to sustain economic growth. The rules forced the funds to “repatriate” about $3 billion in mostly Brazilian assets, Sebastian Palla, chairman of the country’s pension fund association, said in February.
• Foreign emerging-market funds sold about $250 million in Argentine stocks through August this year in the biggest outflow since 2000, according to fund flow tracker EPFR Global in Cambridge, Massachusetts. The Merval is down 51 percent this year compared with 39 percent for the Bovespa in neighboring Brazil.
• Bond Yields
• Bond markets also have tumbled. The yield on Argentina’s 8.28 percent dollar bonds due in 2033 today surged 3.8 percentage points, to 27.905 percent at 8:12 a.m. in New York.
• The declines reflect concern that a 40 percent drop in commodity prices since July will slow growth in South America’s biggest economy after Brazil. Argentina gets more than half its export revenue from wheat, soybeans, corn and other commodities.
• Argentina’s growth will slow to 5 percent this year and 2.5 percent in 2009, RBC Capital Markets said. The economy expanded 8.8 percent on average over the past five years as Kirchner and Fernandez used surging tax receipts to boost government spending on everything from civil servant pay rises to energy subsidies.
• Seven years ago, as the government tried in vain to stave off a debt default, it pressured the pension funds to participate in bond swaps that pushed forward repayment dates. That December, strapped for cash to pay salaries, it ordered the funds to transfer $3.2 billion in bank deposits to state-owned Banco de la Nacion.
• The latest move is “much, much worse,” said McNamara at Augustus.
• “It’s not just shoving a little bit of debt in at the edge, it’s taking over the whole system,” he said. “It does even more damage to the concept of encouraging people to invest in the domestic financial industry.”