ARGENTINA'S PENSION GRAB
SETS DANGEROUS PRECEDENT
by Joe Duarte, MD
Joe-Duarte.com & IntelligentForecasts.com
October 23, 2008

A New Level Of Government Thievery

Imagine what would happen in the U.S. if the government decided to put your private retirement funds, ie. your IRA or 401-k into the National Treasury with no hint as to whether it would ever give it back.

That's just the latest chapter in Argentina's journey into a time warp. Last week the country, already seen in global financial circles as a high risk party to any transaction, told its creditors that it would not be able to make its scheduled foreign debt payments and was looking to renegotiate terms.

Now, faced with significant new problems, the country is considering the nationalization of the country's private pension system, a move akin to the U.S. government taking over the money in the 401-k plans and IRAs held by individuals, as well as private pension plans managed by corporations.

According to The Wall Street Journal: "Hemmed in by the global financial squeeze and commodities slump, Argentina's leftist government has seemingly found a novel way to find the money to stay afloat: cracking open the piggybank of the nation's private pension system."

The Journal added: "Argentine President Cristina Kirchner said the move to take over the private pension system was aimed at protecting investors from losses resulting from global market turmoil. Funds in the system, which is parallel to a government pension system, are administered by financial firms. The private system has about $30 billion in assets and generates about $5 billion in new contributions each year." In fact, the money grab, according to The Journal "would provide it with much of the cash it needs to meet debt payments and avoid a second default this decade."

What makes this a significant situation is that if it comes to pass, it would set a precedent for an elected government to take away its citizen's money without a proper taxation scheme, raising the potential for a global raid on individual savings, unleashing a new level of open thievery.

Furthermore, the proposal is open ended and its ends are not clear, making it a situation where "no one knows for sure what the government would do with the private system, economists said nationalization would let the government raid new pension contributions to cover short-term debts due in coming years."

So how bad are Argentina's problems? Well, they surely aren't much different than any other government's at the current time, other than the country defaulted on its national debt in 2001 and its reputation as a bad bet for lenders has never recovered. The Journal reports: "Argentina's financing needs are growing quickly as the global financial squeeze pushes down prices of its commodity exports, such as soybeans. Coupled with unchecked government spending, the commodity downturn has carved a gap of around $10 billion to $11 billion in what Argentina must pay on its debt between now and the end of 2009, according to economists. The payments are from debt restructured after a 2001 default and new debt issued locally."

And Argentina, although its situation may be worse than others, is not alone. According to The Journal: "The economic turmoil of recent months has exposed budget gaps in many emerging nations. They've run smaller budget deficits, but thanks less to spending restraint than to the income bonanza. Now they're being forced to make tough choices: Mexico this week said it will run a budget deficit next year of 1.8% of annual output rather than a balanced budget as planned."

In fact, countries such as Russia, Iran, and Venezuela, as we have pointed out here recently (before the New York Times ran its article on the same subject) are in the same boat, currently swimming in petrodollars from last year's price bonanza. But as oil prices have dropped, their crises may lie ahead.

In the case of other countries, the Journal sums the situation up succinctly, noting: "The economic turmoil of recent months has exposed budget gaps in many emerging nations. They've run smaller budget deficits, but thanks less to spending restraint than to the income bonanza. Now they're being forced to make tough choices: Mexico this week said it will run a budget deficit next year of 1.8% of annual output rather than a balanced budget as planned."

So who would be affected? According to reports, there are about 3 million Argentineans who use the private pension system, which was established in 1994. What makes this whole situation increasingly dangerous is the role that the private pension system plays as a source of capital for private enterprises and small businesses. If the government takes over this pool of money, it would sink into a black hole, not only pooring the individuals whose money is absorbed into the government's coffers, but also souring the private enterprise system.

And here are some other nuggets about the Argentinian president, according to The Wall Street Journal:

• "Three days after her inauguration in December, prosecutors in Miami charged four Venezuelans with involvement in a plot to hush up a scandal involving alleged contributions from Venezuelan leader Hugo Chávez to Mrs. Kirchner's campaign. Mrs. Kirchner, who had been expected to reach out to the U.S., derided the court case as a "garbage operation," suggesting the prosecution was politically motivated. Argentina's relations with the U.S. haven't found their footing since."
• "In March, Mrs. Kirchner picked a fight with Argentine farmers, who had been the motor of several years of rapid economic growth. The government tried to increase the tax on soybean exports. Farmers roiled the country with months of protest. The proposal was finally shot down in the Senate."
• "The nationalization, if approved by Congress, will also provide Mrs. Kirchner with more cash for political patronage in the run-up to next year's midterm elections. But it's doubtful she'll be able to arrest disenchantment with her government. Her approval ratings have dropped to around 30% from 50% when she took office."

Conclusion

All eyes should be on Argentina. If this money grab goes through, it will likely be the first of several others to follow elsewhere, especially if, and as things get worse around the world.

With a liberal administration possibly coming to the United States, it's no wonder that investors are increasingly edgy, as the increasingly greedy hand of governments is becoming a threat to private capital.

To be sure, we could be wrong, and this could be a regional phenomenon. Yet, it's a scary one no matter what, and one with the potential to lead to social unrest, and perhaps even the breakdown of social order altogether.

One savvy observer may have put it best: "José Piñera, a former Chilean cabinet minister who pioneered the privatized pension system and has served as a consultant to many other countries that have implemented it, called the nationalization proposal "just another step in Argentina's 100-year 'road to underdevelopment.'"

Yet, in these times, more than ever, there are plenty of other places around the world whose leadership would love the opportunity to transfer private wealth into their own pockets, in the name of some slogan.

© 2008 Joe Duarte, M.D.
Dr. Duarte's Bio and Archive

Joe Duarte M.D. is founder and Editor in Chief of Joe-Duarte.com. Dr. Joe Duarte's Daily Market I.Q. is a premium service that provides daily intelligence, trading strategies, and technical analysis at www.joe-duarte.com. Duarte offers free analysis and news coverage at www.intelligentforecasts.com . Dr. Duarte is a board certified anesthesiologist, a registered investment advisor, and President of River Willow Capital Management. He is author of "Successful Energy Sector Investing" and "Successful Biotech Investing" (Prima/Random House). Duarte's analysis appears regularly in major outlets including CBS MarketWatch and Investor's Business Daily.