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Argentina's President Cristina Fernandez listens to a question at the government house in Buenos Aires, Monday, March 31, 2008.

Natacha Pisarenko/The Associated Press

Argentine President Cristina Fernandez is setting her interventionist sights on the country's banks. Fresh from nationalizing oil company YPF earlier this year, she is now forcing banks to lend roughly $3.3-billion (U.S.) to businesses by the end of this year at below-market rates. At 5 per cent of private sector deposits in a financial system with $148-billion of assets, that shouldn't have too much of an impact on bank profits. But it marks a worrying escalation of her war on private enterprise.

Her meddling may unsettle Argentines who still harbour bad memories of losing their deposits to state intervention during the debt crisis a decade ago – and some have already been spiriting some of their money overseas. It will also do little for banks. For-profit banks will try to compensate for losses elsewhere – witness how U.S. banks changed fee structures after Congress imposed restrictions on credit and debit card fees in the wake of the crisis. Likewise, Ms. Fernandez's project may easily result in higher rates for other products and customers.

Banks could also choose to invest money in sovereign debt or other higher-yielding assets, as Venezuela's lenders have done. Combined with the turbo-boost from a petrodollar economy, Venezuelan banks boast an unusual average return on equity of 51 per cent. That's unlikely in Argentina, but its finance houses are likely to do all they can to protect their equity returns, which averaged 27 per cent in the first three months of this year.

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And directing credit to pet areas of the economy risks opening up a can of worms. Other sectors are likely to knock on Ms. Fernandez's door seeking similar sweetheart deals. Hugo Chavez's Venezuela is a prime example. After taking office in 1999, he pushed banks to offer cut-rate loans to farmers. Now, more than half of Venezuela's overall bank lending portfolio is directed by decree to agriculture, mortgages, tourism, manufacturing and small businesses.

Venezuela offers another lesson: Only a handful of foreign institutions have stayed after years of Mr. Chavez's asset grabs . For now, Ms. Fernandez's intervention looks limited. But her track record suggests there will be more. That could further restrict the availability of credit in Argentina .

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