The Corralito

THE CORRALITO—Expect an Argentina and Cyprus-like scenario in the West. Remember, such comes unexpectedly, has dire consequences, and is extremely painful!

The Argentine government froze bank accounts, known as the corralito, on December 1, 2001. Argentina's economic crisis was similar to the Great Depression, with output falling by around 20 percent.

On December 1, 2001, to stop this draining from destroying the banking system, the government froze all bank accounts, initially for 90 days.  Only a tiny amount of cash was allowed for withdrawal every week (initially 250 Argentine pesos, then 300), and only from accounts denominated in pesos. No withdrawals were allowed from accounts denominated in U.S. dollars unless the owner agreed to convert the funds into pesos. The lack of cash availability caused numerous problems for the general public and businesses.

Riots broke out, and depositors vandalized ATMs. Millions of middle-class Argentines were thrown into poverty.

US-denominated debt and deposits were forcibly exchanged for Argentine pesos at 1.4 pesos per dollar for deposits and 1.0 for debt.  The exchange rate spiked to 4 ARS/USD. The corralito was renamed corralón as people could not longer withdraw $250 per week, not because of a new limit but because they no longer had any dollars. Protests increased, and banks were closed for months.

Most banks stayed in the country during the crisis, withstanding severe damage to their reputations and (in certain cases) physical attacks. Others fled as soon as problems arose (for example, Scotiabank's Argentine branch, Scotiabank Quilmes).

BUENOS AIRES, 2001—A few months ago, Luis Gonzales was laid off from his job as produce manager at a suburban grocery store here. Like countless other Argentines who have recently joined the ranks of the unemployed, he took his severance pay--about $20,000--and put it in a savings account.

On Thursday, Gonzales awoke to find that the government was holding his money hostage. Under extraordinary new banking restrictions, he won’t be allowed to make any withdrawals until June 2003.

“I thought it would be safer to put my money in the bank,” said Gonzales, who now makes ends meet as a chauffeur. “But now I know I should have put it under my mattress instead or bought gold coins.”

Millions of Argentines found themselves in a similar situation, victims of a government plan to prevent a catastrophic run on banks.  Under the emergency measures, all deposits made in dollars were frozen between January and September 2002, depending on the size of the account. Because of the crashing Peso, Two-thirds of all bank deposits were kept in dollars.

By freezing the savings of so many people and businesses for so long, the measures brought a sizable chunk of this nation’s economy to a standstill. Even some accounts in Argentine pesos were frozen between March and December 2001. [This included the accounts with brokers!]

“If this keeps on going like this, they’re going to start a civil war,” said Analia Vazquez, whose pharmaceutical supply company suddenly lost the ability to spend $300,000 in desperately needed cash. “What they’ve done is install a financial dictatorship.”

Government officials said they had little choice but to implement the measures, given the precarious state of the banking system.  In the last nine months, nervous customers have withdrawn $15 billion, about 20% of all deposits.

In past economic crises in Latin America, governments have confiscated dollar deposits and converted them into local currencies at a devalued exchange rate, wiping out depositors' savings.

It is not hard to understand the devastating impact this will have on Real Estate, particularly on Real Estate acquired with a mortgage. Only physical gold and silver kept out of political reach survived the legal theft!

I wish those who still don't take precautions all the best—for they're going to need it!

November 3, 2024 - Francis D. Schutte

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