Argentina suspends all banking activity
By Alan Beattie in Washington, Joshua Chaffin in New York and FT.com staff
Published: April 20 2002 00:59 | Last Updated: April 20 2002 18:09

The Argentine central bank on Friday declared a complete and indefinite suspension of all banking activity in the country, in a sign of its desperation at money leaking out of the shattered financial system.

The bank said the suspension of all deposit and foreign exchange operations would begin immediately following the close of business on Friday.

Although temporary halts have been called before, this is the first complete freeze since the country plunged into crisis around the turn of the year, following a default on its external debt and the suspension of International Monetary Fund crisis lending. A spokesman for the IMF had no immediate comment on the action.

On Saturday, finance ministers and central bank governors of the Group of Seven leading industrialised countries meeting in Washington as of "serious concern".

A spokesman for the Argentine central bank said the continued leakage of deposits from the banking system had led to the decision, which he said was taken jointly by the bank and the finance ministry. Jorge Remes Lenicov, the finance minister who was on Friday in a series of meetings in Washington, could not be reached for comment.

Lacy Gallagher, co-head of Latin American research at Credit Suisse First Boston, said the decision was probably a step towards replacing bank deposits with government-issued securities, a deeply controversial move which threatens to provoke fresh social unrest.

"The government is between a rock and a hard place," she said. Argentine authorities had been caught between the risks of hyperinflation if the banking system was allowed to implode and the threat of rising public anger if deposits remained frozen or were forcibly converted to bonds, Ms Gallagher added.

"Once you freeze the bank deposits its very hard to unfreeze them," she said. The forced conversion of deposits to bonds created long-lasting resentment when it was undertaken by previous Argentine governments during the 1980s.

The Argentine crisis seems likely to dominate this weekend's meeting of IMF shareholder governments in Washington. Mr Remes Lenicov is on Saturday due to present his country's case for a rescue package to the IMF's ministerial policy committee.

The IMF has been holding out for a comprehensive deal, including far-ranging reform of public finances and changes to bankruptcy laws, in return for a fresh aid package. Mr Remes Lenicov recently told the Financial Times the IMF's demands were unreasonable.

Speculation that the central bank had been planning a banking freeze have been circulating in Argentina's financial community in recent days, but local reports suggested the central bank had denied them.

The move is the latest by the Argentine government to infuriate foreign banks, including the forced conversion of dollar-denominated loans to Argentine pesos, which have left them shouldering huge losses on their operations in Argentina. Earlier yesterday the Central Bank ordered a 30-day halt in most of the operations of Canadian-owned Scotiabank, the first such interference in a foreign-owned bank