Argentina's central bank has ordered a shutdown of the troubled Latin American nation's entire banking system, less than a day after taking the unprecedented step of suspending most of the operations of Bank of Nova Scotia's Argentine subsidiary for a month.
The 30-day suspension imposed on Scotiabank Quilmes, following the refusal of parent Scotiabank and the central bank to prop it up with more capital, is the first such move against a foreign-owned bank in Argentina, which is in the midst of an ever-worsening political and economic crisis.
However, in a terse message it sent to all financial institutions in the country yesterday afternoon, the Banco Central de la Republic Argentina ordered a "holiday" or freeze on all banking and foreign exchange activities effective with the close of business yesterday.
The central bank did not indicate when it will lift the freeze. However, industry sources and news reports from Buenos Aires said the financial sector will be shut down until new laws governing it can be passed.
The Argentine Bankers Association alerted members earlier in the day that an order from the central bank was on the way.
Reuters reported that the suspension of all banking and foreign exchange operations could remain in effect until the Argentine Congress passes a bill that would convert most bank deposits into government bonds. The unpopular move would be aimed at plugging a leak of hundreds of millions of dollars of bank deposits that has occurred as depositors have succeeded in winning individual court orders overturning a government-instituted freeze on savings.
Before the central bank issued its order, Scotiabank indicated that it felt Quilmes had been wrongly singled out for suspension.
"This is a systemic problem -- this is much bigger than Quilmes," said Pamela Agnew, a spokeswoman for the bank.
Investors applauded Scotiabank's decision not to turn on the taps for Quilmes, Argentina's 12th-biggest bank, which is in line with previous commitments by management. They bid its shares up to a new 52-week high on the Toronto Stock Exchange.
Meanwhile, Finance Minister Paul Martin yesterday urged Argentina to treat all banks equally, according to a Reuters report. "We have asked the Argentine government for all banking institutions, foreign and domestic, to be treated the same," Mr. Martin told reporters in Halifax.
"They [Argentina] are in a very difficult situation, but there is no excuse."
Mr. Martin also said he plans to meet his Argentine counterpart on the sidelines at a Group of Seven meeting set for Washington this weekend.
Under the terms of the 30-day suspension, Quilmes, which has 93 branches and about 1,700 employees, will operate under the direct supervision of the central bank, Ms. Agnew said.
It will be restricted to providing a very limited number of services, including accepting loan payments and the deposit of pay or pension cheques, cash withdrawals against such cheques, and processing credit card transactions and payments.
"We had all hoped for a different outcome and are deeply saddened by today's announcement," Scotiabank chairman Peter Godsoe said in a prepared statement.
"Scotiabank Quilmes is a well-managed and solvent bank. However, the severe economic and liquidity problems in the Argentine banking system and the inability of Scotiabank Quilmes to secure additional liquidity from the central bank have resulted in this announcement."
Mr. Godsoe also said the latest development should have no material financial impact on Scotiabank, because it is already "fully provisioned in terms of its exposure to Quilmes."
Scotiabank took a $540-million after-tax charge in the first quarter in connection with its exposure to Argentina, where it is Canada's biggest single investor.
The charge slashed its profit for the quarter to $52-million or 5 cents a share from $510-million or 95 cents a year earlier.
Including its investment in Quilmes, valued at $308-million at Jan. 31, Scotiabank's exposure to Argentina totalled $1.06-billion at the end of the first quarter, less than 0.5 per cent of its total loan and acceptances outstanding.
It has already set up a total of $707-million -- pretax -- in provisions against this.
Ms. Agnew yesterday reiterated that the bank has no intention of injecting more money into Quilmes "in the absence of clear rules in Argentina."
Investors liked what they heard. Scotiabank's shares climbed to a new 52-week high of $55.88 apiece on the TSE, before falling back a little to close at $55.75, up $1.75 from Thursday's finish.
"I would suggest that investors are taking some relief in the reiterated commentary from Scotia management that they don't intend to send additional capital to the Argentine subsidiary at this point in time," said analyst Michael Overvelde of investment dealer UBS Warburg Inc.
"This has never been a real earnings-generation issue in terms of what Argentina provides to Scotiabank -- it's pennies," said analyst James Bantis of CS First Boston Corp.
"So the earnings power of Scotiabank remains intact."
Analyst Jamie Keating, meanwhile, said in a research note to clients that Scotiabank has already provisioned itself "adequately . . . to allow for a walk-away from its investment in Argentina."
If the Canadian bank is getting set to give up the keys to Quilmes and exit Argentina, it is not about to admit it publicly.
Mr. Godsoe said the bank is continuing to work closely with Argentine authorities "to help ensure this situation is dealt with properly, including maximizing returns to creditors and depositors and safeguarding the interests of employees during this period."
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