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11/06 14:56
Argentina's Banks Brace for Losses From Default (Update2)
By David Plumb
Buenos Aires, Nov. 6 (Bloomberg) -- Banco de Galicia y Buenos Aires SA, which has a third of its assets in Argentine debt, is worried.
The bank, the biggest owner of government bonds and provincial loans after state-owned Banco de la Nacion, is being forced to accept losses on the $4.9 billion of debt it holds as part of a default by Argentina. A wave of withdrawals and corporate bankruptcies may follow, analysts said.
The government is demanding domestic banks and pension funds swap their holdings for new securities that pay as little as a third the interest and mature later. Already, Argentina's banks own government debt equal to almost twice their net worth, and many would be insolvent if they valued holdings at market prices, according a J.P. Morgan Chase & Co. report.
``These guys are walking dead,'' said Ernesto Ramos, portfolio manager at Nicholas-Applegate Capital Management in San Diego, with about $200 million in Latin American stocks. ``There's going to be a banking crisis in Argentina.''
Shares of Galicia's owner, Grupo Financiero Galicia SA, have lost 65 percent since late June, compared with a 43 percent decline in Argentina's Merval stock index, as investors anticipate losses from government and corporate defaults. Shares traded in New York fell 14 cents, or 2.7 percent, to $5.08.
Corporate Defaults
Already, several of Galicia's biggest clients, including the Correo Argentino postal service, are in bankruptcy, and analysts said more companies probably will stop paying back loans. The bank, the nation's third biggest with $15.4 billion of assets, reduced corporate lending, in part as foreign-owned companies canceled loans to find cheaper financing abroad.
Galicia already is being squeezed by a loss of deposits. Argentines have pulled about $10.1 billion, or 12 percent of total deposits, since late June, including $1.2 billion in the last two weeks.
``Obviously we're worried, just like everybody else'' Jorge Scarinci, a Grupo Galicia spokesman, said last week. The bank ``has been focusing on building liquidity.''
Other banks have signaled the government's plan to restructure at least $95 billion of debt will push up costs. The government plans to detail terms of an initial swap with domestic investors later today. Fitch Inc. rating agency said the exchange represents a default.
Banco Rio de la Plata SA, the fourth-biggest bank, projects that a ``severe deterioration'' in Argentina, such as a default or peso devaluation, might cost it $750 million by increasing non- performing loans and reducing the value of its government bonds, Spanish parent Banco Santander Central Hispano SA said in a report.
Bad Loans
Santander also would have to increase capital at Banco Rio by as much as $500 million, it said. The bank put 750 million euros ($672 million) into a special fund to cover bad loans worldwide.
Spain's Banco Bilbao Vizcaya Argentaria SA last week set aside 66 million euros ($66 million) to cover losses from a default and devaluation, and said its Argentine unit may lose as much as the equivalent of two years' profit.
``A worst-case forced restructuring would seriously impair bank solvency,'' said Victoria Miles, an analyst at J.P. Morgan, in a report. ``A deposit freeze, imposed across all institutions, seems increasingly likely if deposit outflows resurface.''
Unlike Banco Rio and Banco Frances, Banco Galicia has no foreign parent to inject additional capital. Argentina's Escasany family owns the largest stake in the bank's holding company.
Overnight interest rates tripled to 190 percent as banks braced for a wave of withdrawals by depositors concerned the government would follow a default by abandoning the peso's one-to- one exchange rate with the dollar or freezing accounts. The rates have since fallen to about 90 percent. Banks own about a fifth of the government's $155 billion of provincial and federal public debt.
Regulators
Galicia and other domestic banks would need leniency from regulators on accounting rules and reserve requirements to survive if the dollar peg is abandoned, analysts said. Government officials have pledged to keep the exchange rate.
The government is offering domestic banks and funds new securities that pay interest of about 7 percent a year compared with as high as about 25 percent to help lower financing costs and start pulling the economy out of recession. Banks such as Galicia figure they are better off accepting securities that pay something rather than nothing, analysts said.
``The banks are looking at this in a positive way,'' said Manuel Sacerdote, president of BankBoston NA, a unit of Fleet Boston Financial Corp., said on Todo Noticias television.
Still, Galicia's provincial and federal government debt equals more than three times its equity, according to J.P. Morgan. Like other banks, it is betting that regulators will help keep the biggest in business, analysts said.
``Banco Galicia will be there after the crisis,'' said Robert Lacoursiere, an analyst with Lehman Brothers Inc. ``The question is whether its shareholders will be there too.''
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