Argentina's President Eduardo Duhalde has given yet another convincing reason to foreign investors to shun his country. He is mulling a plan to forcibly exchange embargoed bank deposits for government bonds.
If this is what Duhalde is willing to do to his own countrymen, think what he might do to foreign investors.
Duhalde's government says it is attempting to limit the flow of funds hemorrhaging from the banking system. In fact, this plan, and any other loose talk about confiscating deposits, only maximizes the outflow.
The true extent of the consequences of such a plan is even greater. Not only does it encourage everyone to want to take their money out of the banks, it also creates a situation in which nobody volunteers to put new money into them.
Banks usually gain and lose deposits in the normal course of the day. Not in Argentina. Argentina's banking system is like a bad hotel whose manager, fearing vacancies, locks the guests in their rooms. Nobody checks out, but when word gets out about the lockdown, nobody checks in either.
Some depositors have obtained court orders to get round the restrictions on bank withdrawals. It is estimated that as much as 350 million pesos (US$111 million) left the banking system each day last week. Court-ordered injunctions on the deposit freeze have caused runs on some banks that have become insolvent as a result.
Scotiabank Quilmes SA, part of the Toronto-based Bank of Nova Scotia, faced such a court-sanctioned run on deposits.
Headquarters in Canada wisely declined to pump more money into its Argentine affiliate. When the Argentine central bank stopped lending, the curtain came down on Scotiabank Quilmes. On Friday, the Argentine authorities suspended the bank's operations.
The outlook for Argentina is truly dreadful. The IMF estimates the economy will shrink by between 10 percent and 15 percent this year. The economy contracted by 10.7 percent in the fourth quarter of 2001.
Argentina wants the IMF and other lenders to pony up US$20 billion to rebuild the banking system. There is no reason to believe such loans will be forthcoming.
The truth is that the banking crisis is not an easy nut to crack. Still, I would like to recount a parable that I think is significant.
It is about a bet between the north wind and the sun as to which could force a man to remove his coat. The north wind went first. It blew blast after blast of cold artic air down on the unfortunate man. The wind was trying to rip the coat right off his back. But the harder the wind blew, the more the man clung to his coat. Then the sun came out. Bathed in bright, warm sunshine the man removed his coat at once.
And that's what is so wrong about the way the Argentines are handling the banking crisis -- theirs is the north wind approach.
The more they restrict and threaten depositors, the more depositors want to take their money and run.
The moral of the story is that the only way to keep money in the banks is to make depositors want to keep their money there.
Argentina doesn't need a law to confiscate deposits by turning them into government bonds. It needs a bill that guarantees the free movement of capital.
Banking systems can only be stable when people trust that their money is safe and can be withdrawn at will. Until they can win such trust, Argentina's banks will remain paralyzed.
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