Banks cannot be seen to need money

JUST a few months ago, it seemed that Argentina might, by a whisker, avoid plunging over the financial abyss. Bankers in London - and, far more important, in Madrid - appeared relaxed about the prospects for the country, its economy and its banking system.

No longer. There is a new air of fear over Argentina. Bankers - not a breed, on the whole, given to hyperbole or histrionics - are worried and exasperated. Argentina is looking increasingly like a basket-case.

'The trouble is that the rules keep on changing,' said one senior banking industry figure last week. 'I can tell you what I thought we were facing this morning. But I really don't know what the situation will be by the time I get back to the office this afternoon.'

The effect of such uncertainty and lack of clarity is devastating. Banks survive only as long as customers believe they can deposit and withdraw money at will. Remember the scene from Mary Poppins? Young Michael Banks was being pushed into depositing his tuppence. It appeared that the bank needed the money. So other customers withdrew all theirs. Confidence in the bank collapsed. Multiply the sums by several billion and that's what's happening in Argentina.

For those who have financial links with Argentina, the risks are on three levels. First, there is the simple fact that depositors are not being allowed free access to their money: they are being allowed to withdraw only $1,000 a month. The greater the restrictions, the greater the depositors' urge to take out money. Let's call this the Michael Banks effect.

Second, there are risks that the Government will make it increasingly difficult for investors, both within Argentina and beyond, to retrieve their money. For example, foreign banks operating there are expected to deposit a certain amount of foreign currency with the central bank.

Nothing unusual in that. Many other countries do the same. But in the current environment, might the government in Buenos Aires not now decide to use that money as its own and give only the vaguest of promises of repayment at a later date? Let's call that the fear-of-future factor.

And third, there are now clear signs that the Government's edicts - they change as fast as the presidency - are not being applied with the impartial rigour and consistency one might expect in a properly governed-society. A businessman with some years' experience in Argentina told last week of people arriving at banks flanked by a couple of off-duty policemen hired for the day and demanding that they be paid out, no matter what the Government had decreed.

Looked at from the wrong side of the teller's window, this is little more than formalised mugging.

Add these together - the Michael Banks effect, the fear of the future and the threat of being mugged - and Argentina is looking increasingly like an unattractive and risky place to have one's capital tied up. Because tied up is exactly what it's likely to be.

BA must do more
BIT by bit, hints are beginning to emerge of the expected revamp of British Airways to be announced by chief executive Rod Eddington next month.

The company is saying little. But more than one figure involved in the airline industry has used the term 'the old BOAC' to describe the new-look, pared-down BA that Eddington plans as a result of the company's so-called size and shape exercise. In other words, BA will abandon many lossmaking European routes to concentrate on intercontinental routes where it still makes money. (For the record, BA's short-haul routes have lost nearly £500 million over the past two years).

Hence BA would come to resemble something akin to BOAC before it merged with British European Airways almost three decades ago.

It is common knowledge that BA will cut some of its European routes. The only question is how many. The City appeared last week to be mildly miffed that perhaps only 17 European routes, about a quarter of the current total, might be dropped.

Perhaps. But at least one senior figure with regular and close contact with BA believes the cuts could be far more drastic - a welcome thing by the cold, calculating measure of the City.

And though it certainly appears that there has been a delay in BA's planned link-up with American Airlines, the feeling is that the alliance has been postponed, not abandoned.

All good news for Eddington. But even if he achieves a reasonably painless exit from a large swathe of its European routes, and clinches a deal with American, BA is still a long way from full recovery.

It is a huge organisation. Its low-cost rivals have taught it a painful lesson in how an airline can be run far more cheaply. BA will have to apply those lessons. Cutting a few routes and joining hands with a US competitor will not be enough.