BUENOS AIRES - Argentina's bankers are still picking up the pieces. Consolidation, they say, is the order of the day. "Argentina had the worst financial crisis of any banking system in this century," said Manuel Sacerdote, country manager here for Banco de Boston SA, a Bank of Boston Corp. subsidiary that is one of this nation's largest private banks. "The banking system lost 17% of deposits in three months," he said, offering this comparison: "During the worst crisis in American history in the late-1920s, the U.S. banking system lost 20% of deposits - over three years." Bankers differ over the precise percentage, but all agree that between the end of February and the end of May, something like $8.8 billion left the Argentine banking system - as consumers, corporations, and foreign investors panicked over domestic political instability and the fear of possible spillover from the Mexican financial crisis. "People took their money and ran," says Lorna Martin, a bank analyst with PCA, a Buenos Aires-based credit rating agency. "The rich put their money in large foreign banks; everyone else opened safety boxes." Of the $8.8 billion that fled, some $3.2 billion was held by foreign investors and foreign banks. By the end of May, net nonaccruals for the Argentine banking system reached $5 billion, compared with total capital of slightly more than $14 billion, according to figures compiled by Banco Frances de Rio de la Plata. Since then, bankers estimate, about half of those deposits have trickled back - but confidence has been slow to return. Foreign banks have been slow to renew credit lines. And foreign investors remain wary of investing in anything other than short-term placements. "Argentinians remain suspicious because they have experienced every manipulation of deposits imaginable, including interest-rate manipulation and freezes on accounts," said Sergio Grinenco, assistant director at $5.5 billion-asset Banco De Galicia, one of the country's largest privately owned banks. "Even if we have undergone significant structural changes, attitudes are deeply rooted," he said. The panic triggered a massive liquidity crisis and an ongoing shakeout in Argentine banking. Since the end of last year, the number of banks, including investment banks and wholesale banks, has dropped from nearly 200 to about 135. More are expected to disappear as weaker banks get absorbed by stronger ones and smaller banks merge to gain economies of scale. Although banks with high credit ratings were able to continue functioning, bankers estimate that the crisis left 40 banks still legally alive but no longer running any operations. "I call them the zombie banks," says Christopher Ecclestone, manager at the brokerage firm Interacciones Global Inc. "They're banks that still exist but are no longer functioning because they have only $20 million in deposits and $120 million in loans. Bankers and analysts predict that by the time the shakeout is completed no more than 100 banks will remain. They add that about 40,000 of the 120,000 banking jobs that existed at the end of last year have already disappeared - and more are likely to go. Still, the financial strength of banks varies very much from institution to institution. Better-capitalized and better-managed private banks, and government-owned banks like Banco de La Nacion and Banco de la Ciudad de Buenos Aires, have emerged relatively unscathed from the crisis - as have most of the large foreign-owned banks. But smaller, poorly capitalized banks, some cooperative banks, and some of the larger provincial and government-owned banks have run into serious difficulties. Many of the banks owned and run by Argentina's provinces wound up among the worst off. "Provincial banks, including the large ones, were basically used as treasuries by local provincial governments to grant subsidies," explains one Argentine banker."They had a tradition of not getting paid back." "Many banks were consolidated, many were merged and others had problems - but very few failed," Mr. Sacerdote emphasizes. That, he adds, "tells you something about the strength of the financial system compared to only a few years ago." For surviving banks, the crisis has meant new opportunities to buy up other banks at rock-bottom prices. For instance, Bank of Boston acquired 93 branches from Banco Integrado Departamental. Banco de Galicia acquired licenses to open 40 branches, while Banco del Sud, a subsidiary of Banco Nacional de Mexico, acquired Banco Shaw. But even banks that survived the crisis are under pressure to reassess their strategies. Many of the big privately owned banks are concentrated in Buenos Aires and have been reluctant to do business with more than a narrow range of companies and customers in the metropolitan area. They will have to build nationwide networks and a broader range of customers to survive in the future. "Banking in Argentina is made up of very different regional markets and it's difficult for any one bank to target all those markets and not lose its focus," observed Luis Garcia, executive vice president at Banco de la Nacion Argentina, the country's biggest bank and the only one with a truly nationwide network. "Much of Argentina's economy is based on agriculture and made up of small companies - and that can mean risky lending for anyone not familiar with the local market," he said. Most private banks have been highly selective about their customers and have traditionally preferred to lend only to big customers, he says, adding: "They don't have experience making credit available to small and medium-size companies." The banking crisis in Argentina offers something of a case study of the risks involved in shifting from a highly inflationary, tightly regulated market to a stable economy in a deregulated environment. In an effort to break the runaway inflation that prevailed in the late 1980s and early 1990s, the Argentine government made the peso fully convertible and restricted the country's money supply by requiring that at least 80% of the monetary base be backed by either U.S. dollars or dollar- denominated bonds. That means the central bank now holds about $10 billion in cash or gold and about $2 billion in bonds to back some $12 billion worth of cash in circulation. The result has been a dramatic fall in inflation from more than 5,000% annually in the late 1980s to less than 2% this year. With confidence restored, deposits began moving back into banks, and banks began to lend rather than continue to make profits off the float on clearing operations and trading. Until the stabilization program began in 1992, "high inflation meant high spreads and high interest rates," said Ms. Martin. Stabilization meant banks had to offer more products, develop capital market activities, expand credit, and generally become more efficient, she said. Leading private-sector banks, she recalled, tried to become more efficient because they feared spreads would become smaller and competition would increase. But many other banks didn't. Many of the big provincial banks, Ms. Martin said, found themselves "involved in lending to sectors that have problems, are overstaffed, and have poor computer systems. " Bankers and analysts say inexperienced management, the Mexican financial crisis, and rumors that Argentina might revise its tight-money policy triggered the March-to-May crisis. But they also believe the collapse of many banks - and mergers among others - is a part of the transition to a more efficiently managed financial system. They also point out that the crisis accelerated a program of privatization already under way. They predict most of the remaining state- owned banks, with some exceptions, will probably be sold in the next few years, "We've got too many banks, there's no doubt about it," says Mr. Sacerdote. "The consolidation process will continue." "The merger process is only half over," says Mr. Ecclestone. "But the bargain-basement sale is nearing the end, and smaller banks with only 10 to 15 branches are looking weaker than ever." Any bank that wants to survive, he said, will need at least 100 branches because "that means you can have a branch in all the major cities." Bankers say the flight of deposits is also a warning to Argentina's government that it cannot afford to tamper with the financial system. "The lesson of the crisis is that stability is the winning ticket," says Mr. Grinenco. "The crisis sets a limit on what politicians can do, because there is a strong perception in the business community and public that capital needs to be preserved." Analysts and bankers also agree that given the still-low level at which banks are used by both corporations and consumers, there is ample room for banks to expand. "Most Argentinians don't even have a bank account," remarks Mr. Ecclestone. "Argentine households hold little debt," says Mr. Grinenco. "Only 3% to 5% of all households have mortgages." But they add a word of caution: "Argentina is ripe for banking services, including automated banking services and investment services," says Ms. Martin. "But we've still got a long way to go as a banking system."

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