BUENOS AIRES - After subtle arm-twisting from the government, Argentina's AFJP private pension funds have been giving a hand to the debt-plagued nation by purchasing trusts containing government-issued fixed-income instruments. The structured nature of the trusts allows the AFJPs to bypass the 50% cap on sovereign debt.
As a three-year recession refuses to loosen its grip, Argentina is struggling to find a way out of an acute debt crisis by renegotiating some of its US$128 billion in existing obligations and issuing additional bonds.
Given international markets' growing skepticism because of worsening fundamentals in the country, the AFJP funds, which as of April 30 had 50% of their $21.6 billion in assets directly in federal government bonds, are naturally seen as key hometown allies for the economic team headed by Domingo Cavallo, father of the peso dollarization plan that rescued the country from hyperinflation in the late 1980s. Mr. Cavallo is the third person to hold the finance minister position this year.
The 12 pension funds, which by law can directly invest only half of their assets in federal government debt, historically have hovered near this limit as interest rates are attractive and much of the portfolio can be valued at maturity, with no need to mark to market. But while they reached the direct-investment limits in late 2000, the government found a loophole in that pension funds also are allowed to invest 14% in trusts and mutual funds, a category that has been underused.
Pressure from government
With that in mind, beginning in late 2000 the economic team leaned on the AFJPs to participate in a fiscal package aimed at providing financing for all payments coming due in 2001, and enlisted the help of foreign-owned investment banks operating locally - HSBC Argentina Holdings SA, Banco Santander SA and BBVA Banco Frances SA - to wrap up packets of Argentine treasury bonds as trusts that were subscribed to by the pension funds. In return, the AFJPs were promised they could allocate up to 10% toward offshore vehicles - a commitment that has been put on hold given the ever-worsening situation of the economy, acknowledge industry and government officials.
The country's plan to meet its $27 billion in financing needs at the beginning of the year called for the AFJPs to assume $3 billion in government-issued debt in 2001, with local banks accepting $13 billion and foreign creditors picking up the difference.
The first two trusts, totaling $500 million, were placed in November and December. Since the pension funds receive monthly inflows between $200 million and $300 million, they have been basically agreeing to forgo all other investment options open to them, including local stocks and depository receipts of U.S. companies quoted in Buenos Aires, corporate and international bonds, mutual funds and short-term deposits.
So far in 2001, another $800 million in trusts were purchased by the AFJPs. At the end of April, AFJP exposure in trusts and mutual funds had risen to 8.9% of the overall assets and with purchases in May that number is expected to reach 10%.
For better or for worse, the valuation methodology has served to avoid public panic in the face of falling bond prices: since the AFJPs can value a percentage of fixed-income holdings on an accrual basis, considering all interest to be paid over the life of the instrument, the pension funds are reporting 1% monthly gains on bonds whose prices are nosediving in the market.
A clear example is the sovereign Global External Bonds 2017,which sport an 11.375% coupon. At the end of April, the AFJPs were valuing $1.05 billion of this issue on an accrual basis, and were marking to market another $559 million of this same paper. As a result, even though the bonds have fallen 17% in price since the beginning of the year, the impact on the funds' portfolios was a much more moderate 5.3% loss.
Pension managers interviewed said they believed the accrual method of valuations was not detrimental to contributors to the system given that the wide majority are not near retirement age. However, if the system were more mature, the valuations would be problematic as retirees would be cashing out at unrealistically inflated prices. Patricio Santangelo, investment manager at Generar AFJP, suggested the pension fund system is overestimating its assets under management by $700 million to $1 billion for not marking to market.
Meanwhile, the number of contributors in the mandatory system continues to fall to record lows. High unemployment has lowered the number of salaried workers contributing to the system while a slowdown in economic activity has affected independent workers' ability to afford monthly retirement contributions. Just 40% of those affiliated with a pension fund are making regular payments toward retirement, according to the latest report issued by the Pension Fund Superintendent.