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Never stand near a tree in a storm. And never hold bank stocks in a country threatened by a financial markets crisis.

For proof, witness the recent performance of three large Argentine banks:

Banco Galicia


Banco Frances



Banco Rio

(BRS) - Get Bristow Group Inc. Report

, all of which are listed in the U.S. as ADRs.

Amid growing fears Argentina could soon be forced to unpeg its peso from the dollar -- in essence devalue -- all three banks are down around 20% since the beginning of the month, compared with the benchmark


index, which was down 9%. Selling pressure on Argentine assets intensified Friday after hedge fund speculator

George Soros, speaking in Chicago, claimed the Argentine peso was probably overvalued.

The country, facing presidential and congressional elections in October, has quickly become a source of worry for investors, due to its poor trade performance and political battles over the growing fiscal deficit. Argentina's neighbor Brazil was forced to devalue in January after investors lost confidence in the government's economic management.

Banks get hit from many sides in emerging-market devaluation crises. In the most severe meltdowns, depositors withdraw their money, causing a run on the institution.

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Second, after devaluation, a bank's dollar-denominated borrowings become much more expensive to service in local currency terms, making default on foreign obligations more likely.

And lastly, the recession that usually follows a currency crunch collapses loan growth and causes difficult increases in bad loans.

Argentina's banks are not strangers to these sorts of problems. In early 1995, when the December 1994 Mexican peso devaluation caused a slump in confidence across Latin America, the country's banks experienced a frightening 18% decline in deposits.

Despite the current build-up in pessimism surrounding Argentina's fixed exchange rate, many Latin bank experts insist that the country's large financial institutions are now much better prepared for market turbulence.

The government wisely opened the sector up to foreign buyers. Spain's

Banco Santander

( STD) now owns Banco Rio, and Banco Frances is controlled by

Banco Bilbao Vizcaya

( BBV), also of Spain.

"The days of huge outflows in deposits are over, partly because of the entry of foreigners," says Daniel Abut, Latin banks analyst at

Goldman Sachs

. The knowledge that a large foreign parent is prepared to stand behind its Argentine subsidiary will persuade people to keep money in the banks, he adds.

Banco Galicia, however, is not owned by a foreign institution.

That doesn't overly worry Abut, who says Galicia, along with the other two institutions, have lent a lot more conservatively since 1995. "The system is a lot stronger."

However, Galicia does lend more than the others to lower-income borrowers, who may be more likely to have repayment difficulties in a prolonged recession, says Robert Lacoursiere, Latin banks analyst at

Bear Stearns

. Frances is showing a concerning amount of nonperforming loans, a fair proportion of which came from

Banco de Credito

, the institution it acquired over a year ago.

Galicia ADRs were off a hefty 6.71% Friday, though this was less than Rio's bruising 7.14% drop.

Other reasons to be reassured exist. The Argentine government has taken extensive measures to protect banks since 1995. It later set up a $7 billion to $8 billion credit line with foreign banks that it can draw on to add liquidity to the banking system in the event that deposits shrink substantially.

And Argentine banks are now subject to a special "liquidity requirement" that involves depositing assets equivalent to 20% of liabilities with the central bank, which can plough these assets back into the banks if liquidity dries up.

However, big weaknesses remain. Perhaps the largest is the fact that Argentine banks hold some $15 billion of dollar-denominated government bonds. At the end of March, Galicia possessed $1.2 billion in government securities, equivalent to 11% of total interest-bearing assets. Around 90% of these could be dollar-denominated, says Daniel Sarp, banks analyst at

Moody's Investors Service


Due to the huge size of its dollar borrowings, the government could well be forced to default on its bonds after a possible devaluation. In 2000, the government has to raise a daunting $13 billion in the market just to refinance bonds coming due.

However, to avoid default, the government could simply "dollarize" the economy -- i.e. ditch pesos and make the dollar Argentina's currency. This would be a politically risky move -- it raises all sorts of sensitive questions about sovereignty -- but it could secure for the government the dollars it would need to meet its obligations.

Also, the

International Monetary Fund

, which has a program with Argentina, may also provide financial assistance so that the debts could be met.