April 20, 2002

Argentina to suspend all banking

BUENOS AIRES, Argentina (Reuters)--Argentina will shut down its creaking financial
system indefinitely starting next week, the Central Bank said Friday, amid fears an exodus
of deposits could break creaking banks.

The Central Bank declared a banking and foreign exchange suspension beginning
Monday, citing a shortage of cash in a system that has bled an estimated 10 percent
of total deposits since January and forced one major Canadian-owned bank to close

"The bank has decided to ... call a banking and foreign exchange holiday from the
close of trade on April 19 (Friday)," the Central Bank said in a brief statement. It
gave no further details.

A wholesale collapse of Argentina's financial system would be catastrophic for Latin
America's cash-strapped No. 3 economy, battered by daily protests by depositors
furious at a savings freeze and by jobless workers outraged at deepening poverty
and rising unemployment.

The Central Bank earlier forced Canadian-owned Scotiabank to halt most operations
due to cash problems, raising fears the government may be unable to prevent a
banking system collapse.

The 30-day closure of Scotiabank Quilmes, a unit of Bank of Nova Scotia, is a
high-risk strategy by the national leaders, effectively telling foreign banks to either
protect their local units with new cash or face closing them down.

"If they think it will be impossible to operate in Argentina, no one will want to stay,"
one bank analyst said.

Hundreds of people lined up outside Scotiabank's main Buenos Aires branch to
withdraw their salaries, one of the few operations Argentina's 11th-biggest bank can
still perform.

Within a few hours, other banks closed branches across the city and put guards at
the doors.

"I have 12 pesos ($4) to last me until the end of the month," said 28-year-old
telecoms worker Maximiliano Lopez, as he waited outside Scotiabank's downtown
headquarters. "I probably won't eat much today because that much money doesn't
stretch that far."

Argentina's near-bankrupt financial sector has hemorrhaged around $50 million a
day since December's freeze after many savers won lawsuits to overturn the ban on
letting them have their money.

The government now plans to return most depositors' savings as 10-year bonds, not
cash, further angering depositors.

Legislators are likely to support the plan, Congressional sources said.

Of all foreign banks operating in Argentina, Scotiabank is the first to clearly state it
is not willing to shore up its local unit until bank rules are clearer. Others have either
said nothing or are mulling cash injections.

Analysts and bankers now expect Scotiabank Quilmes to be broken up and
auctioned off.

"(The deposit drain) affects a lot of banks, and in the way these deposit withdrawals
are increasing, they are making it more difficult for other banks," said Gabriel
Caracciolo, an analyst for Standard & Poor's rating agency.

State workers in the poor Andean province of San Juan were still occupying
government offices to demand back pay Friday, a day after police dispersed
protesters in the northern province of Jujuy using teargas.

The protests in the provinces "are the most critical point" for the government now,
a presidential aide told Reuters.

Social revolt last December triggered riots and looting, toppled the government and
left 27 dead.

Argentina has asked for at least $9 billion in aid to avoid defaulting on International
Monetary Fund and World Bank loans.

International lenders have been demanding evidence that provinces will stop the
runaway spending that forced Argentina to default on part of its $140 billion debt

Tough stance

"The central bank's decision to suspend Banco Quilmes' operations for 30 days may
be a sign that the government is taking a tougher stand with the foreign-owned
banks," BCP securities analyst Walter Molano said in a research note.

Suspension of operations "may be a subtle way of encouraging the other banks to
capitalize their institutions or turn over the keys," Molano added.

Canadian Finance Minister Paul Martin urged Argentina to treat foreign and
domestic banks alike. Martin plans to meet with his Argentine counterpart Jorge
Remes Lenicov on the sidelines of a Group of Seven meeting in Washington this

"If every emerging market government thinks they can do whatever they want
because we (the banks) don't dare abandon a branch and will always come up with
money, that's a very bad incentive," said ING Barings economist Freddy Thomsen.

Remes Lenicov is scheduled to talk with U.S. Treasury Secretary Paul O'Neill and
IMF officials in Washington this week to press for aid. IMF sources have said the
lender will likely limit Argentina to the $5 billion it needs to repay existing debt to the
multilateral lending agency.

The government had originally said it wanted around $20 billion to help prop up its
ailing banking system, but gradually scaled back expectations.

The IMF wants Argentina to slash its bloated public sector, which would mean
firing tens of thousands in a country where nearly one in two already live in poverty
on a few dollars a day, and the government is scrambling to find alternatives so it
can pull the country out of its worst-ever economic crisis.

The IMF, which wants to see the virtually autonomous provinces deliver on a vow
to cut their fiscal deficits by 60 percent, has forecast the economy will contract
10-15 percent this year and that rising inflation is "unavoidable."

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