Credit closed to people, Argentina takes everything at 17%

Market crisis is already lashing Argentine economy. Due to uncertainty in the short term, more-than-one-year credits are becoming extinct. This situation is particularly observed in those loans granted to people to buy homes (10 years on average) and in outlays to small- and medium-sized enterprises (12 or 18 months). All this was foreseeable: interest rates have soared and instruments like LEBAC and NOBAC (Argentine Central Bank's Bills of Exchange and Securities) yield up to 17 per cent annual in pesos. Moreover, not even Argentina or any other emerging country is fit to issue debt instruments in markets. Will Argentine administration charge at banks for this virtual evaporation of medium- and long-term loans? What's clear is that getting financing at more than one year and at fixed rate is almost an impossible task. With a real inflation heading towards 20 per cent annual (and not showing signs of decreasing), nobody freezes funds in the long term. In parallel, rates of short-term loans have been increased.

Advances in current account in millions of pesos

Financial market turbulence has started to hit credit facilities development. For the time being, just those for companies. To be precise, current-account advances (one of corporations' favourite methods to finance working capital) have plummeted 7.2 per cent in a month, after showing a sustained increase during the first part of the year.

Between July 18 (just before start of crisis in global markets) and August 17 (last available Central Bank data), advances granted by banks plunged ARG$1 billion, from ARG$14.28 billions to ARG$13.25 billions (see chart). This means that companies have cancelled overdrafts in current account. This phenomenon stems from two reasons: trimming of financing limits and rate hike (interbank rate reached to 27 per cent at the end of last month), which led several corporations to reduce their credit exposure so as not to face the increasing cost of indebtedness.

Argentine firms face, in this way, several restrictions. They cannot obtain financing in foreign lands due to sharp rise of country-risk. To make matters worse, financing in domestic market has become more complicated as well.

Clearly, this is the first bank reaction to greater risk. Overdrafts are the ones granted more quickly, though the ones retreating first amid problems. The opposite situation is observed in another line of credit: discount of documents. During the already-mentioned period of time, they have increased 4.3 per cent, though with higher rates.

Personal loans

Personal loans (the most dynamic ones since financial system started to rally by mid 2003) have leaped 5.2 per cent in a month. This even entails pace acceleration during the last months. With salary rises, more people is fit to take this kind of financing and that shows on greater volumes.

Mortgage credits, where longer-term factors come into play, add up to ARG$12.20 billions.

"We are taking out folders approved in previous months. We'll have to see how will granting continue from now onwards, since rates tend to rise," the financial manager of a foreign entity explained. During the last weeks, banks' advertising offering mortgage loans has almost disappeared. Most of them preferred to focus on credit facilities allocated to consumption (shorter terms and higher rates). In hushed tones, everybody admits that new outlays for housing purchase are virtually closed.

With late leap of BADLAR rate (30-day more-than-ARG$1-million time deposits), which exceeded 10 per cent after having settled for several months below 8 per cent, it will be hard for banks to hold credit cost. This will be particularly observed in long-term lines of credit, though it will hit short-term facilities earlier.