Argentina: National Bank Holidays, 2001

Throughout the late 1990s, Argentine banks’ increasing dollarization and heightened foreign currency lending to unhedged borrowers increased the risk of a default. Simultaneously, as concerns about devaluation spread, the proportion of banking system liabilities denominated in foreign currencies also increased, reaching more than 70% of the total by September 2001 (Barajas et al. 2007). By the end of 2001, the Argentine banking system lacked the necessary dollar reserves to back dollar deposits. Per Setser and Gelpern, at this point, a bank holiday “was no longer avoidable” (Setser and Gelpern 2006, 478).

On November 28, 2001, the Argentine banking system experienced an accelerated systemwide banking run, with total deposits falling by 6% over the next two days. On December 1, the president of Argentina, Fernando de la Rúa, issued a decree which restricted demand deposit withdrawals for an initial period of 90 days (Argentina 2001a; Ennis and Keister 2009). The decree prohibited cash withdrawals of more than ARS 250 or USD 250 per week by individual or joint account holders at each financial institution, prohibited banks from granting loans in Argentine pesos, and placed restrictions on foreign exchange and transfers abroad. The initial presidential decree also gave the BCRA the authority to ease the restrictions once total deposits in the financial system had increased to a level comparable to September 30, 2001, and interest rates had stabilized (Argentina 2001a). These measures led to riots in which over 20 demonstrators were killed, culminating in the resignation of President de la Rúa and Minister of Economy Domingo Cavallo on December 20, 2001 (IMF 2003b).

On December 21, 2001, the government declared a countrywide bank holiday lasting through December 26, during which the new president, Adolfo Rodríguez Saá, announced that the country would default on the majority of its external debt. Following Argentina’s default and the end of its currency board—which had pegged the Argentine peso to the US dollar at 1 to 1—the MDE raised the withdrawal limit on demand deposits on January 9, 2002, to ARS 300 per week per account holder at each institution and to ARS 1,500 per month for pensioners, simultaneously pushing back the maturity dates of term deposits (IMF 2003b).

Following the second bank holiday, which began on April 19, 2002, and lasted for six days, the government passed legislation attempting to stem the withdrawal of deposits through court-ordered injunctions. However, per the World Bank, these measures failed to significantly reduce the burden of injunctions (court-ordered deposit withdrawals) on the banking system in the following months (IMF 2003b). Instead, court-ordered injunctions slowed in late 2002 as a result of depositors waiting for a potential Supreme Court ruling against the constitutionality of asymmetric pesoization (Gutierrez and Montes-Negret 2004).

On November 1, 2001, without prior consultation of the IMF, Argentine authorities announced a package of financial measures, which included a sovereign debt restructuring in two phases, the first targeted at domestic creditors and the second at international creditors. The following day, a communication between IMF staff and the executive board called these measures “not consistent with fiscal reality,” citing the risk that the announcement would cause a crisis in investor confidence and a possible bank run (IMF 2004, 56). Such a run occurred in late November, prompting the Argentine authorities to partially freeze demand deposit withdrawals on December 1, as part of a host of banking and foreign exchange restrictions intended to stabilize the banking system. On December 5, the IMF announced that it would not disburse a USD 1.3 billion tranche scheduled under the USD 22 billion Standby Arrangement (SBA) between the IMF and Argentina, citing projections that Argentina would breach its fiscal deficit target for the year with a large financing gap (IMF 2004).

Following the cessation of IMF funding and the implementation of withdrawal restrictions in December 2001, the government declared a countrywide bank holiday from December 21 to December 26. On December 23, Argentina defaulted on USD 141 billion in outstanding debt, excluding bonds issued to domestic creditors during the first phase of the government’s November debt restructuring (Blustein 2003). On January 3, 2002, President Duhalde announced the end of Argentina’s currency board, instituting a short-lived dual foreign exchange rate regime in which a rate of 1.4 ARS per USD applied to most trade and public sector transactions, with the remaining transactions conducted at predevaluation rates (IMF 2003b).

On February 4, 2002, the government approved the unification of the exchange rate regime, abolishing the dual rate. The same day, the government issued a decree requiring banks to convert their assets and liabilities from US dollars to Argentine pesos at an asymmetric rate. Per this decree (214/2002), US dollar-denominated assets and liabilities were to be converted 1 to 1 ARS to USD for loans to the private sector and 1.4 to 1 ARS per USD for loans to the public sector and US dollar-denominated deposits, indexed to inflation (IMF 2003b). The purpose of this policy, known as pesoization, was to prevent dollar-denominated debt from becoming too expensive for firms and households while preserving the value of their deposits when both were revalued in pesos. The result of pesoization was to increase the cost of peso devaluation for banks, since their dollar-denominated liabilities (deposits) were converted to pesos at a higher rate than their dollar-denominated assets (loans to the private sector). When the foreign exchange market opened under a unified rate on February 11, 2002, the Argentine peso depreciated to 1.8 against the US dollar (IMF 2003b). 

BODEN Bonds

On March 12, 2002, President Duhalde issued Decree 494/2002, which gave an option for depositors who had their deposits converted to Argentine pesos or rescheduled to enter into voluntary swap agreements for government bonds equal to the nominal value of their accounts. Articles 3 to 5 of the decree authorized the MDE to issue three new national public debt securities, called BODEN:

• Ten-year bonds due in February 2012 with 2% annual interest;
• Ten-year bonds due in February 2012 with annual interest of the six-month LIBOR rate plus 1%;
• Five-year bonds due in February 2007 with 3% annual interest paid quarterly.

The 10-year BODEN bonds were available for Argentina pesos at a rate of 1.4 to the US dollar (Argentina 2002c). To make these securities attractive, the government allowed them to be publicly offered to create a secondary market and to be used to repay certain types of loans as well as national taxes (BCRA 2003).

The decree also granted broad-based liquidity assistance in Argentine pesos to financial institutions that intended to subscribe to these securities to allow them to meet depositor demands. In order to be granted an advance, financial institutions needed to provide eligible collateral to the BCRA, which included specific government bonds, guaranteed loans to the Argentine government, certain provincial public sector debts, and other financing to the private sector at the discretion of the BCRA and MDE (Argentina 2002c; BCRA 2003).

The government established a broad-based capital injection program to compensate financial institutions for imbalances in their balance sheets resulting from asymmetric pesoization (IMF 2003b). On May 31, 2002, President Duhalde issued Decree 905/2002: Per Article 28 of this decree, financial institutions would receive government bonds as compensation for their losses stemming from the conversion. Article 29 established the nature of this compensation, which included access to BODEN bonds in US dollars at a favorable rate for the amount of an institution’s negative net equity position as of December 2001 with the corresponding pesoization applied (Argentina 2002d; BCRA 2003).

Aid from the Inter-American Development Bank and World Bank

In March 2002, the World Bank agreed to redirect USD 100 million worth of previous loans to Argentina to be used for emergency healthcare and education (Price 2002). That same month, the Inter-American Development Bank (IADB) agreed to a similar arrangement, redirecting USD 694 million worth of previous loans to Argentina to help the country rebuild its social services. Although these loans were substantially smaller than the scheduled payments from the IMF’s previous SBA, the IADB president stated that redirection of funds would allow Argentina’s government to alleviate “precarious social conditions” resulting from the banking crisis (Central Banking 2002a). In July 2002, the IMF gave Argentina an extension on repayment of its loans to prevent the country from defaulting on its new loan from the IADB (Central Banking 2002b).

On February 5, 2003, the IADB agreed to authorize a larger “fast-disbursing” loan of USD 1.5 billion to Argentina to support a social-protection program. The program, prepared in consultation with the World Bank and IMF, restructured the previous IADB loan and made USD 145 million available for immediate disbursement. The loan was for a five-year term, with a three-year grace period, at a variable interest rate of the six-month LIBOR dollar rate plus 400 basis points (Price 2002).

Sections 1 to 3 of Article 99 of the National Constitution authorized the president to issue decrees out of “necessity and urgency” with the endorsement of the Cabinet of Ministers when “exceptional circumstances” make it impossible to follow the regular procedures for passing laws (Argentina 1853, 15–16).

On December 1, 2001, President de la Rúa relied on these constitutional provisions to issue Decree 1570/2001 in response to a widespread run on the Argentine banking system. Article 2 of the decree prohibited cash withdrawals exceeding ARS 250 per week by individual or joint account holders at any institution and transfers abroad that did not pertain to payment of foreign trade expenses (Argentina 2001a). On December 5, 2001, President de la Rúa issued Decree 1606/2001, exempting certain transactions from the restrictions set forth in Decree 1570/2001 and authorizing the BCRA to establish further exemptions. Transactions exempted from the scope of Decree 1570/2001 included cash withdrawals:

• To cover the payment of salaries;
• To meet the payment of retirement benefits by nonbank entities;
• By exchange houses for their regular operations;
• Of funds deposited after the enactment of Decree 1750/2001; and
• Other transactions authorized by the BCRA. (Argentina 2001b)

On January 9, 2002, President Duhalde issued Decree 71/2002, detailing the end of the convertibility regime. Article 5 of this decree conferred on MDE the power to regulate the mode of disposition for depositors whose accounts were subject to withdrawal restrictions per Decree 1570/2001 (Argentina 2002a; BCRA 2003). The same day, the MDE used this new authority to issue Resolution 6/2002, which rescheduled time deposits under different timetables for savings banks and nonwage or pension savings banks and raised the withdrawal limit on demand deposits to ARS 300 per week per account holder at each financial institution and to ARS 1,500 per month for pensioners (MDE 2002a).

On January 30, 2002, Argentina’s Congress passed law 25, 563, which:

• Declared a national credit emergency lasting until December 10, 2003;
• Granted the president broad authority of the reorganization of the financial system;
• Restricted the ability of financial institutions to recover private sector debts in default (BCRA 2003; Congress 2002a).

Article 16 of Law 25,563 suspended the execution of judicial and extrajudicial proceedings for 180 days regarding the collection of assets deemed indispensable to the continuity of the debtor’s activities (BCRA 2003, 9) On February 4, 2002, President Duhalde issued Decree 214/2002, requiring the asymmetric pesoization of bank assets and liabilities (Argentina 2002b).

Throughout the crisis, nearly 200,000 cases were filed in Argentine courts by depositors seeking the release of their accounts from the withdrawal restrictions. Courts awarded depositors the rights to withdraw funds totaling over ARS 14 billion through injunctions (Ennis and Keister 2009).

On July 24, 2002, President Duhalde issued Decree 1316/2002, which ordered a 120 working day suspension of the execution of court-ordered injunctions seeking to restore depositors’ access to their entire accounts. This decree made exceptions for injunctions sought by individuals over 75 years old and in cases with sufficient reasons endangering the life, health or physical integrity of persons. In these cases, the BCRA was required to process and comply with judicial mandates within five working days (Argentina 2002e). Following a series of lower court rulings, on September 13, 2002, the Argentine Federal Court of Appeals found both the demand deposit restrictions and the 120 working day suspension of injunctions to be unconstitutional (IMF 2003c).

However, legal ambiguity persisted surrounding the asymmetric pesoization. On March 5, 2003, the Argentine Supreme Court found the compelled conversion unconstitutional in a limited ruling affecting only current rescheduled deposits (roughly ARS 12.6 billion at the time). While limited in scope, per the World Bank, this decision forced the government to offer additional opportunities for account holders to enter into voluntary swap agreements for the value of their rescheduled time deposits on March 20, 2003. Key features of the Supreme Court’s ruling included that:

• The conversion of deposits (although not bank assets) to Argentine pesos was deemed unconstitutional;
• The banks (rather than the Argentine Republic) were found to be responsible for repaying depositors;
• The ruling excluded previous voluntary transactions such as withdrawals; and
• A 60-day negotiation period before the courts would rule on dispensation. (Gutierrez and Montes-Negret 2004).

The Supreme Court ruling did not specify the timing, terms, or means of repayment (Gutierrez and Montes-Negret 2004).

The initial presidential decree vested the BCRA with the authority to establish rules necessary to enforce the demand deposit restrictions while ensuring that citizens could access a baseline of financial services (Argentina 2001a). Four days after the initial decree, the president issued a second decree (1606/2001), clarifying the terms of the restrictions, exempting certain transactions from the restrictions, and giving the BCRA the authority to set further exemptions going forward (Argentina 2001b).

The presidential decree ending Argentina’s convertibility regime from January 9, 2001, gave the MDE authority to reschedule term deposits (MDE 2002a; Argentina 2002a). The same day, MDE issued a new schedule for the maturities of term deposits in the Argentina banking system. For more details regarding the rescheduling of term deposits, see Key Design Decision No. 7, Details of Suspension, Gates, or Fees.

In his initial decree, the president cited the imminent nature of the crisis as grounds to implement the demand deposit withdrawal restrictions without waiting for the congressional approval (Argentina 2001a). The president also used the emergency powers of the executive to issue the decree freezing the execution of injunctions of 120 working days (Argentina 2002e). Ultimately, Argentina’s Federal Court of Appeals found both measures, along with the asymmetric conversion of bank assets and liabilities to Argentine pesos, to be unconstitutional upon review (IMF 2003b).

Article 10, Section i of the BCRA’s 1992 original charter required the president of the BCRA to submit an annual report on its activities to the Congress and appear before the Budget and Finance Committees of both chambers of Congress in public and joint sessions at least once during each legislative session to report on the BCRA’s monetary, exchange, and financial policies (BCRA 1992).

The initial announcement of the restrictions on demand deposit withdrawals took the form of a presidential decree: Per this decree, the restrictions were necessary to remove the risk of a systemic financial crisis and were only expected to last for 90 days, or until Argentina had finished its debt restructuring (Argentina 2001a; Lyons, Plumb, and Murphy 2001).

On December 1, 2001, during a press conference on the restrictions on demand deposit withdrawals, Minister Cavallo said, “Everything that we do will be to protect the savings of Argentines, to preserve convertibility, to preserve the one-to-one rate so that the economy can function well” (Lyons, Plumb, and Murphy 2001). In a televised address the following day, Minister Cavallo argued these measures would restore consumer confidence and bring down interest rates; however, per Bloomberg, these statements failed to reassure markets (Lyons and Plumb 2001).

Under the terms of the initial decree (1570/2001) from December 1, 2001, withdrawals were limited to ARS 250 or USD 250 per account per week by individual or joint account holders at each financial institution. Banks were also restricted from issuing loans in USD, and foreign exchange could not be transferred abroad without BCRA authorization (Argentina 2001a). On December 5, 2001, the president issued a second decree (1606/2001) exempting transactions needed to meet certain obligations (payroll, retirement benefits, etc.) from the restrictions. For a full list of these exceptions, see Key Design Decision No. 3, Legal Authority.

On January 9, 2002, the MDE raised the limit on all accounts to ARS 300 per week per account holder at each institution, with a provision allowing account holders receiving social security benefits to withdraw up to ARS 1,500 per month (IMF 2003b; MDE 2002a). If left undrawn, permitted withdrawals were cumulative (MDE 2002a). The MDE also allowed legal entities with demand accounts in USD to convert their balance to Argentine pesos at a rate of ARS 1.4 per USD. Individuals with demand accounts in USD could convert up to a certain amount of their balance at this rate, with the remainder to be rescheduled as if it were a time deposit and paid in installments according to a set schedule (BCRA 2003). On December 31, 2002, MDE raised the withdrawal limit to ARS 500 per week for current accounts held by natural persons and for all accounts at savings banks (MDE 2002b). For a figure of the changes in withdrawal limits during the crisis, see Figure 3.

The MDE’s resolution from January 9, 2002, also included a tentative timetable for when term deposits were to be rescheduled (MDE 2002a). On February 6, 2002, the MDE passed Resolution 42/2002, which established a definitive schedule for the rescheduling of term deposits, following the conversion of US dollar-denominated deposits to Argentine pesos (see Figure 4).

On October 31, 2002, the BCRA issued a resolution to increase the limit on demand deposit withdrawals to ARS 500 per account per week from savings accounts regardless of the type of account holder and from demand deposit accounts whose holders were natural persons. Legal entities holding demand deposit accounts could still only withdraw ARS 300 per week per account. (IMF 2003b; MDE 2002b).

The government lifted the restrictions on demand deposits effective December 2, 2002. Term deposits were gradually released between October 2002 and 2003, ahead of the initial schedule announced by MDE. Account holders for term deposits were restored throughout 2002 and 2003 through voluntary swap agreements in which they received either cash payments (pesoized) or government bonds (BODEN) for the total value of their accounts (see Key Design Decision No. 2, Part of a Program) (EIU 2003; IMF 2003b).

Deposits of demand and term accounts were subject to withdrawal limits of various degrees beginning December 1, 2001 (for more information, see Key Design Decision No. 7, Details of Suspension, Gates, or Fees). After raising the demand deposit withdrawal limit several times throughout the duration of the intervention, the BCRA lifted all restrictions on demand deposits effective December 2, 2002 (IMF 2003b).

Restrictions on term deposits remained in place until early 2003. However, prior to termination of restrictions, term deposit account owners could access their funds by entering into a voluntary swap agreement pursuant to which they agreed to accept either cash payments (equal to the amount of the deposit converted to Argentine pesos under the February 2002 asymmetric pesoization) or government bonds of equal value (EIU 2003).

Throughout the periods when restrictions were in place for both demand and term deposit accounts, numerous account holders sued for access to their funds, and the courts awarded injunctions granting access beyond the general limits based on hardship. From December 2001 to June 2003, roughly 200,000 cases were filed in Argentine courts and a significant number of these cases were resolved in favor of the account holder. The courts awarded depositors payments totaling over ARS 14 billion or 21% of deposits as of March 2002 (Ennis and Keister 2009). The courts also granted that accounts originally denominated in USD be paid out at the prevailing market exchange rate, rather than at the government-prescribed conversion rate (IMF 2003b).

In response, President Duhalde issued a decree (1,306/2002) on July 24, 2002, staying the execution and compliance of court-ordered injunctions for 120 working days. The decree stipulated that these executions would be processed in chronological order at the end of the suspension period (BCRA 2003). On September 13, 2002, the Federal Court of Appeals declared the demand deposit restrictions, balance sheet pesoization, and 120 working day suspension of court-ordered withdrawals unconstitutional (IMF 2003b).

In December 2001, the BCRA suspended the minimum capital requirements for banks, citing the widespread crisis across the financial system. New capital requirements for banks took effect in January 2004. The 2003 BCRA annual report notes that, as of December 2003, the banking system displayed favorable indicators regarding capitalization, including total capital integration across the financial system equal to 4.5% of risk weighted assets under the new minimal capital requirements (BCRA 2004).

The BCRA’s annual reports to Congress included an assessment of the solvency of the Argentine banking system. The BCRA report for 2002 noted several factors during the crisis that substantially changed the composition of banks’ equity positions:

• The asymmetric pesoization and indexation of bank assets and liabilities;
• The rescheduling of deposits;
• The release of funds through court-ordered injunctions; and
• The compensation granted to banks in the form of government bonds.

The report concludes that these changes deteriorated the solvency and profitability of the Argentine banking system, and that the system had not normalized by year end (BCRA 2002). Per the report, net assets in real terms had declined 27% for private banks and 13% for public banks. The report also states that the BCRA’s external auditors, KPMG, issued a special report reviewing the calculations made by banks regarding the value of government bonds they expected to receive as compensation for losses from pesoization (BCRA 2003).

The presidential decree that restricted demand deposit withdrawals also placed a host of other restrictions on Argentina’s financial system. The decree prohibited banks from granting loans in Argentine pesos, offering higher interest rates for deposits denominated in Argentine pesos compared to those in US dollars, and charging commission for conversions of Argentine pesos to US dollars or vice versa. The government also placed restrictions on foreign exchange and transfers abroad with the exemption of foreign trade operations, payment of expenses, or withdrawals abroad through credit or debit cards issued within Argentina (Argentina 2001a).

The decree regarding demand deposit restrictions from December 1, 2001, specified that the restrictions could be lifted once deposits in the Argentina banking system returned to their levels from September 30, 2001 (Lyons and Plumb 2001). Per Bloomberg, the authorities initially planned to keep the restrictions in place until Argentina had finished restructuring its debt, expecting the measures to last only 90 days (Lyons, Plumb, and Murphy 2001).

Throughout 2002, the BCRA issued communications gradually dismantling some of the restrictions placed on demand and term deposits. In May 2002, as part of the reorganization of the financial system, the government implemented a scheme wherein depositors could choose to exchange rescheduled deposits for government BODEN bonds. The option for voluntary exchange was only available to depositors for a period of 30 days, closing on July 16, 2002 (BCRA 2003).

On September 13, 2002, the Federal Court of Appeals found the demand deposit restrictions, pesoization of bank assets and liabilities, and the 120 working day suspension of injunctions unconstitutional (IMF 2003c). The following week, the president issued a decree that permitted holders of rescheduled deposits with a balance of up to USD 7,000 as of May 31 (excluding the exchange rate adjustment) to transfer these funds to a demand account during the next 30 days; it also permitted private banks to extend this limit to up to USD 10,000 at their discretion. In addition, the government offered a second voluntary swap for rescheduled deposits with an expanded set of options.^FThe second swap was also available to account holders who had participated in the first swap.Depositors could swap term deposits for BODEN with the additional guarantee of a put-back option if the value of the bonds fell below the value of the term deposit pesoized at the official rate from February 2002 (BCRA 2003).

On November 22, 2002, the MDE announced that the restrictions on demand deposits would be lifted effective December 2, 2002 (BCRA 2003; IMF 2003b). The restrictions on term deposits were gradually dismantled through the aforementioned voluntary swap agreements through mid-2003, with depositors receiving either cash payments in Argentine pesos or government bonds for the value of their accounts (EIU 2003).

An IMF report from September 2003, which authorized a new SBA arrangement for Argentina, noted several developments indicating improved public trust in the Argentine banking system. Per this report, in the first eight months of 2003, private sector deposits had risen by 15% and banking system liquidity had substantially improved (IMF 2003a).

The end of Argentina’s convertibility regime (a peg of ARS 1 to USD 1) in January 2002 led the BCRA to assume new responsibilities as an independent central bank. In a Central Banking interview, former BCRA president Mario Blejer explained that the BCRA had to establish new guidelines for liquidity support for banks without increasing the monetary supply to the point of hyperinflation (Central Banking 2002c). To create a market where the central bank could conduct open market operations and absorb excess liquidity, the government also created new public debt securities (called BODEN bonds). For more details about these bonds, see Key Design Decision No. 2, Part of a Package.

During the crisis, Argentina lacked an institution formally charged with restructuring. In May 2003, the government created a Financial System Restructuring Unit comprised of members of the MDE and BCRA for the purpose of establishing a medium-term plan for the restructuring of the Argentine banking system (MDE 2003). However, a report from the Economist Intelligence Unit from December 2003 noted that no formal role had been defined for this agency (EIU 2003).

During negotiations between Argentina and the IMF in September 2003, the BCRA also agreed to implement new capital requirements for banks throughout 2004 (EIU 2003). Pursuant to these negotiations, the IMF agreed to authorize a new three-year SBA of Special Drawing Rights 9 billion (424% of quota) for Argentina as part of a plan to help the country in “reestablishing sustained growth and reducing widespread poverty” (IMF 2003a).

Following the crisis, Argentina also faced high levels of nonperforming loans across the banking system. As of September 2003, 53% of the country’s total public debt (roughly USD 100 billion) and approximately 65% of private corporate debt (roughly USD 50 billion) was nonperforming. In response, the government created a public trust to assume responsibility for nonperforming mortgages over ARS 100 thousand for a single residence to protect debtors from foreclosure (EIU 2003). However, per the IMF, this covered a relatively small group of mortgages (IMF 2003a).