Argentina seizes pension funds

The economic crisis has caused chaos at local banks

The Argentine government has said it is to use money held in private pension funds to help pay its bills.

The move came just hours before Economy Minister Domingo Cavallo left for Washington for talks with the International Monetary Fund (IMF) on Friday in a bid to secure a fresh loan.

It's a tough decision and a serious one. It brings a default that bit nearer

Juan Aleman, economist

"The people have to remain calm. Nothing new has happened," said Mr Cavallo.

The move is the latest measure to be carried out by the government as it struggles to avoid defaulting on its $132bn debt.

On Wednesday the International Monetary Fund (IMF) blocked a $1.3bn loan deal for Argentina, reviving fears of a default.

The IMF said it could not hand over the money as it had been unable to complete the necessary financial review.

Paying the bills

The country's economy minister Domingo Cavallo said the pension deposits - from a compulsory payment system set up in 1994 - would be transformed into treasury bonds or government-guaranteed loans.

Mr Cavallo said the measure would be used to help pay the government's bills.

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"The funds will go into the Treasury's account at Banco de la Nacion so the bank can make regular payments and so other banks can make all pension and salary payments," he said.

Some international investors were uneasy about the move.

"For all intents and purposes they are confiscating funds," said Scott Grannis, an emerging market fund manager of Western Asset Management in California. "They are destroying confidence," he said.

Talks continue

As he left for Washington, Mr Cavallo remained upbeat about his talks with the IMF, insisting the blocking of the loan was a negotiation hiccup. "I can assure you that we are going to arrive at an accord", he said.

Cavallo is under extreme pressure to repay money

He also said he intended to complete the restructuring of the country's high-interest debt within 60 to 90 days, which should save Argentina about $5bn a year on debt repayment.

Despite Mr Cavallo's words, analysts said the IMF's decision to block the $1.3bn loan was a serious blow.

"It's a tough decision and a serious one. It brings a default that bit nearer," said economist Juan Aleman.

The country needs to make $900m in debt payments this month, and had been hoping to use the IMF money.

The decision comes less than a week after the government put a cap on the amount of money Argentines can withdraw from their private bank accounts to prevent economic fears triggering a run on the banks.