Usury in Argentina?

Michael Pollak mpollak at
Thu May 24 19:17:12 PDT 2001

Argentine banks deny allegations of profiteering

Financial Times, May 21, 2001


Argentine company balance sheets today generally bear testimony to almost three years of recession. But the country's banking sector appears to have emerged from the carnage completely unscathed.

Despite a slowdown in consumption and a deterioration in their credit portfolios, the leading banks all registered record profits last year. The market leader, Banco Galicia, posted net profits of $253m, up 60 per cent, while profits at Banco Rio and Banco Frances leapt by 74 per cent and 89 per cent respectively.

Such performance pleases shareholders, but it is causing increasing discontent among clients, including the government.

When leading banks indicated in March they would charge 13 per cent interest on a local issue of short-term sovereign bonds, Domingo Cavallo, economy minister, threatened to cancel the placement. "Argentina has no reason to pay more than Mexico," he declared, giving the banks little more than an hour to present an offer below 11 per cent.

The result was a small victory for Mr Cavallo: the issue was placed at 10.96 per cent. But with investor confidence in Argentina sagging, the latest round of local bonds earlier this month carried a 12.44 per cent coupon.

Indeed, for all Mr Cavallo's muscle-flexing, he negotiates from a position of weakness. "The banks know that the government has few alternatives and take advantage by charging high rates," says Roberto Drimer, a partner at the consultancy, Argentine Research.

Mark Turner, an analyst at Buenos Aires Trust Company, an investment boutique, believes the banks are helping prolong the recession by keeping rates high, feeding doubts about the government's ability to meet its debt payments and starving local companies of affordable credit.

If that was not enough, some of the same banks that lend to the government have reportedly helped drive up the interest on that debt by shorting government bonds.

"It's a short-term attitude of making money now," Mr Turner says. "They are using Argentina as a cash cow, but risk killing the cow."

Banks generally recognise that government business has bolstered the bottom line, but they deny profiteering. "Nobody likes high interest rates," says Raul Seoane, Galicia's head of strategic analysis, He argues that the rates are largely a result of higher financing costs faced by banks due to Argentina's country risk.

The banking system registered a negative 0.2 per cent return on equity last year, he points out. He argues the market leaders' record results come from continuing market concentration and an overhaul of their operations.

Until last year Argentine banks invested heavily in IT and restructuring, says Luciano Rolon at Allaria Ledesma, a local brokerage. Increased profits this year partly reflect lower investment with that process complete.

But it is not just the government that is sceptical. With local banks charging as much as 25 per cent interest on personal loans and paying interest on deposit accounts that scarcely covers account maintenance fees, many consumers are equally disgruntled.

"It is highly probable that Argentine rates are high by international standards, but this is not a mature market," argues Mr Seoane.

The local banking system is equivalent to only around 30 per cent of GDP, significantly less than the figure for neighbouring Chile and Brazil.

Mr Seoane echoes the opinions of many analysts in predicting competition in earnest once the economy recovers and interest on government debt drops sufficiently to make the consumer market more interesting.

Others, such as Mr Drimer, are less sanguine. "On the supply side there is little competition," he says. "On the demand side bank credit barely existed 10 years ago in Argentina, so there is a lack of banking culture."

While that situation persists the government could do more to control the market by dusting off a forgotten law that establishes maximum interest rates, Mr Drimer says.

Nevertheless, attempts to introduce interest rate caps on credit cards have already caused a storm of protest from the banks.

Weakened by a lack of investor confidence and simmering domestic political disputes, the last thing the government needs is to open a new conflict with its creditors.

"The banks have a lot of power," Mr Turner says, "and they know it."

Copyright © Financial Times group

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