BUENOS AIRES - After absorbing the painful blows of a December debt default and a devaluation of the peso a few days later, Argentina's pension funds are on the offensive, threatening legal action against the government to prevent further erosion of assets.
The 12 AFJP pension funds, which had been managing US$20.8 billion at the close of 2001, are fighting Executive Order 471, which coverts all direct government loans to the AFJPs - amounting to US$18 billion - to pesos at the "official" exchange rate of 1.40 pesos to the dollar. Given that a dollar in the free market bought roughly three pesos at the end of March, the conversion would cost from AFJP affiliates dearly in dollar terms.
The government loans in question were issued in late 2001, when then Finance Minister Domingo F. Cavallo tried to force a debt swap on local and international creditors. Before his resignation last December, Mr. Cavallo was able to complete only the local leg of the swap, with the AFJPs trading in outstanding high-yield bonds and trusts for a series of loans to the government at 7% a year.
Now the AFJPs, pointing to covenants in the agreement that voids the swap in the event of missed payments on the loans or changes in the underlying currency, say they want their bonds back, and they want to negotiate alongside international creditors for a better deal on their debt holdings. The industry association, the Uni¢n de AFJPs, threatened to bring the government before the International Court of Justice in the Hague should it not be successful in its attempts to undue the swap locally.
"We will seek all the legal remedies necessary because we are certain that the decree is a blow to private property, in this case the retirement funds of AFJP affiliates," said Enrique Feuillassier, a director of the Uni¢n de AFJPs. The individual AFJPs - many owned by top international firms such as Citigroup, Santander Central Hispano, Banco Bilbao Vizcaya Argentaria, HSBC Holdings and Metropolitan Life, have vowed to act as a bloc against the government and intend to argue the Executive Order is unconstitutional. Mr. Feuillassier also held out hopes for government softening of the order, noting the administration of President Eduardo Duhalde "tends to act first and negotiate second."
The crisis in Argentina has affected all sectors of the economy, which, after four years of recession, already was struggling. New foreign investment in Argentina is unlikely - especially in light of the the Duhalde government's interventionist policies, the International Monetary Fund's reluctance to rescue the country and the perception that the situation is likely to get before they get better. Further devaluation of the peso could have a continuing diluting effect on worker savings compiled since 1994, when the AFJP system kicked off. The AFJPs manage most workers' only pension savings, although some workers remain in a government pay-as-you-go system.
Not helping workers' perceptions of the AFJPs is the funds' close relationship with banks, which have borne the brunt of small-saver ire in the wake of a deposit freeze and a government-mandated conversion of dollar deposits to pesos. Although the government's declaration of default triggered the virtual collapse of the financial system, the common perception of the general public is that international banks have seized the dollars of small Argentine savers and repatriated the funds overseas.
These factors have led many to question the viability of the pension business, and the industry has stepped up its calls for more intense government enforcement of timely worker contributions, as many independent workers who must send a monthly check to the tax authority do not do so. "Emphasis must be placed on collection of contributions and oversight of delinquent and inactive accounts," said Horacio Canestri, executive director of the Uni¢n de AFJP. Nevertheless, given that unemployment is at 20% and the federal bureaucracy is nearly paralyzed, most industry insiders privately concede that near-term improvement in this area will be difficult.
If anything positive has come out of the crisis, it is the government's admission that the constant pressure it put on the AFJPs in 2000 and 2001 to discard private securities and compulsively buy federal and provincial debt was misguided. Labor Minister Alfredo Atanasof recently said the system's overall portfolio should be more diverse. He noted that a pension specialist from the International Labor Organization - Carmelo Mesa Lago - was invited to sit with the industry and government and make recommendations on how best to preserve and restore credibility to the AFJP system. Details of those recommendations, which likely would be included the investment options of the pension funds, should be issued before the end of April.
Some observers, including one of the "founding fathers" of the AFJP system, local consultant Daniel Marc£, see the AFJPs as potential drivers of the recovery in Argentina, as contributions from full-time workers will be among the few sources of capital for local debt and equity issuers. Mr. Marc£ stressed the need to prohibit further allocations to the government, given its previous default, although he acknowledged the debt-strapped government probably would find it hard to live without at least a portion of these contributions.