Argentina Scrambles to Avoid Financial Collapse

The Buenos Aires stock exchange was closed today in an indefinite suspension of banking activity as Argentina cobbled together a plan to avoid a collapse of its financial system.

Announced on Friday, the halt in financial activity is expected to last until congress approves a bill converting a large chunk of deposits into public bonds in a move that the government hopes will help prevent a wave of bank closures. Legislative sources have said the bill could be approved by midweek. Meanwhile, foreign exchange trading has also been suspended.

In a concession to the elderly and infirm, the government signalled its willingness to turn their bank savings into bonds with relatively short three-year maturities. The government had said that fixed term deposits denominated in US dollars would be turned into ten-year dollar bonds while fixed-rate peso deposits would be turned into five-year peso bonds.

Argentina's banking sector, considered to be technically insolvent after January's chaotic devaluation, has bled around $50m (£34.5m) a day due to successful court challenges of a deposit freeze decreed by the government in December.

The suspension of banking activity on Friday capped a chaotic week in which renewed outflows from Argentina's battered banks, many owned by European and US firms, heightened fears of a financial collapse of Latin America's third largest economy. Since December, Argentina has defaulted on much of its $141bn of public sector debt and devalued the peso, once pegged one-to-one to the dollar for the prior decade.

Argentina, a country of 37 million people, was hailed by Washington as a model of free market reform during the 1990s. Multinationals poured in money, and Wall Street lent Argentina's government and companies billions of dollars. Now, Argentina has emerged as a test of the Bush administration's efforts to get the International Monetary Fund to adopt a tougher line on developing countries seeking IMF help.

During the IMF's spring meetings in Washington this weekend, Horst Koehler, the Fund's managing director, said an IMF mission would travel to Argentina next month to negotiate a letter of intent on a new economic programme, a key step towards releasing aid.

But Mr Koehler also made clear that the IMF will continue to insist that Argentina pare back its budget and rein in spending and money-printing by profligate provincial governments. Over the weekend, the G7 group of leading industrialised nations noted their "serious concern" about Argentina and called on Buenos Aires to implement reforms.

Even though it declared a moratorium on foreign debt payments in December and subsequently defaulted on its foreign bonds, Argentina has kept up payments to its multilateral creditors, such as the IMF, the World Bank and the Inter-American Development Bank.

Argentine officials have not said how they would use new IMF money. But Argentina is expected to use at least part of it to make sure they remain current with the IMF. A default would be a blow to the IMF as it urged Argentina to privatise and open up its economy throughout the 1990s. Thanks to its extensive loan programs, the IMF is currently one of Argentina's biggest creditors.