Argentina Economic and Financial Weekly for the week ending

UNCLAS BUENOS AIRES 001353

SIPDIS

SIPDIS

PASS FED BOARD OF GOVERNORS FOR PATRICE ROBITAILLE
TREASURY FOR DAS LEE, RAMIN TOLOUI AND CHRIS KUSHLIS NSC FOR SUE
CRONIN
AND OCC FOR CARLOS HERNANDEZ
USDOC FOR ALEXANDER PEACHER
USDOL FOR ILAB PAULA CHURCH AND ROBERT WHOLEY
USSOUTHCOM FOR POLAD
OPIC FOR GEORGE SCHULTZ AND RUTH ANN NICASTRI

E.O. 12958: N/A
TAGS: EFIN ECON ELAB ALOW AR
SUBJECT: Argentina Economic and Financial Weekly for the week ending
June 14, 2006


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Weekly Highlights
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- Venezuela buys another USD 243 million of Boden 2012 bonds.
- Bolivian and Argentine presidents will announce an agreement on
the price of Bolivian gas exports on June 29.
- GOA primary surplus reaches ARP 10.4 billion in the first five
months of the year.
- GOA to take over 20 percent of Aerolineas Argentinas stock.
- German Court rules in favor of two bondholders of GOA debt.
- Companies warn that they will not be able to maintain price
restraint agreements.
- Commentary of the Week: "Money Doesn't Fix Everything." (Note: We
are sending out the Argentine Economic and Financial Weekly early
this week due to travel schedules and Argentine Flag Day holiday on
Monday, June 19. Our end-of-the-report graphs, which track data on
a weekly basis, will resume with our June 23 issue. End Note.)

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Venezuela buys another USD 243 million of Boden 2012 bonds.
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1. On June 9, the GOA sold USD 243 million of Boden 2012 (a
USD-denominated bond maturing in 2012) sold to the Government of
Venezuela (GOV). The bonds have a market value of USD 200 million.
This is the GOV's sixth purchase this year of GOA bonds, and brings
its total 2006 purchases to USD 1.7 billion (at face value, or USD
1.4 billion at market value). In 2005, the GOV purchased USD 1.9
billion of GOA bonds (USD 1.6 billion market value).

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Bolivian and Argentine presidents to announce price agreement on
Bolivian gas exports on June 29.
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2. After more than 6 hours of negotiations, Minister of Planning
Julio De Vido returned to Buenos Aires from La Paz with a draft
agreement on the price of Bolivian gas exports to Argentina. The
presidents of Bolivia and Argentina are scheduled to meet on June 29
to close the final agreement. Although neither country provided
details of the draft agreement, the GOA has reportedly agreed to
meet Bolivia's offer price of USD 5.5 per million cubic meters. The
GOA had previously counter-offered a price of USD 5 per million
cubic meters. In exchange, Bolivia committed to guarantee a gas
provision to Argentina of up to 29 million cubic meters a day for
the next 20 years. [Argentina currently imports Bolivian gas at a
"solidarity" price of USD 3.20 per million cubic meters, while the
international price ranges between USD 2.00 and USD 8.00 per million
cubic meters.]

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GOA primary surplus reaches ARP 10.4 billion in the first five
months of the year.
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3. In a press conference on June 13, Minister of Economy Felisa
Miceli announced a primary fiscal surplus of ARP 10.4 billion in the
first five months of the year -- compared to ARP 9.9 billion in the
same period last year (up 5 percent y-o-y) -- and achieving 53
percent of the ARP 19.4 billion primary surplus target for 2006. In
May, the primary fiscal surplus reached ARP 3.9 billion (up 18
percent y-o-y),better than expected, while the overall balance
(including interest payments) stood at ARP 3.5 billion. During the
press conference, the Minister highlighted that revenues grew at a
rate of 17.5 percent, in line with the expenditure growth rate of
17.3 percent, and that the GOA anti-cyclical fund stands at USD 600
million. Private analysts also praised the GOA's fiscal policy of
decreasing the growth rate of expenditures and noted that the GOA
still will receive BCRA transfers for ARP 550 million, which will
boost the GOA primary fiscal surplus in coming months.

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GOA to take over 20 percent of Aerolineas Argentinas stock.
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4. On June 12, Cronista Comercial reported that the GOA and the
Spanish group Marsans -- owner of Aerolineas Argentinas (AA) -- are
working on an agreement in which the GOA will gain control of more

than 20 percent of AA stock. The agreement is expected to be
announced on June 21, when President Kirchner travels to Spain to
meet Prime Minister Rodriguez Zapatero. Under the negotiated
agreement, the GOA will gain its "golden share" and therefore will
hold decision-making power regarding the company's business.
According to the report, the GOA will pay for the shares through
subsidies to unprofitable AA routes beginning in July.

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GOA to announce renegotiation of its Paris Club debt.
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5. On June 12, Cronista Comercial reported that President Kirchner
will formally announce GOA's renegotiation of its USD 6.3 billion
Paris Club debt for on June 22 when he meets Spanish Prime Minister
Rodriguez Zapatero. However, technical negotiations will not be
finished until the end of the year. The GOA envisions a
renegotiation in which the GOA recognizes the principal and interest
arrears without a principal reduction, but with an extension on
maturities at lower interest rates.

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German Court rules in favor of two bondholders of GOA debt.
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6. On June 12, the Frankfurt Regional Supreme Court ruled that the
GOA must repay accrued interest and principal on GOA-defaulted bonds
worth EUR 5,000 held by two bondholders. The Court said that
Argentina has recovered economically and no longer meets the strict
requirements to justify a national state of emergency, and therefore
it must repay its debt. This ruling may set a precedent for many
other cases before German courts, although it will be difficult to
enforce given that Argentina has no assets to attach unless the
court allows assets held by the Argentine diplomatic offices in
Germany to be seized.

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Companies warn that they will not be able to maintain price
restraint agreements.
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7. Companies that are members of Copal -- an association of food
producers -- are requesting that Secretary of Internal Trade
Guillermo Moreno allow them to increase prices due to cost
increases. The companies agreed to maintain price levels until the
end of June, when they will meet with the GOA to study the option of
price increases on a case-by-case basis. . Secretary Moreno met
with representatives from major supermarket chains (including
Carrefour, Coto, Jumbo, Norte and Wal-Mart) on June 12 to ask for
stronger commitments to keep their prices unchanged. Private
analysts estimate a CPI increase of 0.7 percent m-o-m for June,
following May's increase of only 0.5 percent.

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IADB approves USD 40 million credit for Latin America Export Finance
Fund.
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8. On June 8, the Inter-American Development Bank and Crecera
Finance Management Company LLC announced a USD 40 million expansion
of a trade finance credit facility for Latin America Export Finance
Fund (LAEFF). LAEFF is a specialty finance company that provides
export finance loan facilities to companies in Argentina, Brazil,
Peru and Uruguay. The IADB financing consists of a five-year, USD
10-million loan from its ordinary capital, and of a three-year
syndicated commercial bank loan of USD 30 million that may be
renewable up to five years.

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GOA seeking to regulate private health services fees.
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9. Superintendent of Health Services Hector Capaccioli stated that
the GOA will gain control over private medical health services
before the end of 2006, which will allow the GOA to reach price
agreements with the sector to avoid rising fees in health care.
According to the superintendent, Congress will approve a bill to
regulate private healthcare in the second half of 2006. Private
healthcare provides recently voiced their demands to raise fees,

which they argue have not been properly adjusted since the 2002
devaluation.

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Informal employment decreases 3.2 percentage points to 44.3 percent
of employees.
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10. On June 13, the National Bureau of Statistics (Indec) reported
that 44.3 percent of employees (or 4.69 million people) living in
urban areas held informal jobs in the first quarter of 2006.
According to Indec's survey, informal employment dropped by 80,000
individuals since reaching 47.5 percent of employees (or 4.76
million people) in the first quarter of last year.

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Congress to amend the Consumer's Defense Law and increase the powers
of the Secretary of Coordination.
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11. Congress is expected to debate this week an amendment to the
Consumer's Defense Law that will increase the powers of Secretary of
Internal Trade Guillermo Moreno. Under the amendment, the Secretary
will be able to impose fines of up to ARP 5 million on companies
that do not comply with consumer defense regulations. Opposition
deputies from the PRO party criticized the amendment, arguing that
the same secretary will be in charge of arranging price agreements
with companies as well as applying fines to those same companies.

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BCRA increases passive repo rates by 0.25 percent.
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12. On June 13, the BCRA announced a 0.25 percent increase in its
repo rates, bringing its passive rates to 5.25 percent for one day
and to 5.75 percent for seven days (the rates at which the BCRA
borrows funds and absorbs liquidity). This is the second increase
in passive repo rates this year, and follows a 0.5 percent increase
in May. Active repo rates remained unchanged at 7.50 percent this
week, but they also have risen twice this year.

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Multilateral real exchange rate depreciates 0.2 percent m-o-m in
May.
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13. The BCRA's multilateral real exchange rate index -- which
measures the real exchange rate between the peso and a
trade-weighted basket of currencies -- depreciated 0.2 percent m-o-m
in May. The real depreciation is mainly mainly the result of
depreciation of the currencies of most of Argentina's trading
partners (Brazil, Chile, United States and Mexico) against the peso,
partially offset by an appreciation of the Euro against the peso, in
all cases mainly due to nominal changes and not to a different
evolution of price levels in Argentina compared to other countries.
The index is 3.5 percent above the level of the last twelve months
and 106.9 percent above its average value during convertibility.
[The BCRA's multilateral real exchange rate index weighs domestic
prices and the exchange rates of Argentina's main trading partners
according to their share of Argentina's exports and imports.]

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Commentary of the Week: "Money Doesn't Fix Everything.", by Nestor

O. Scibona from an article published in La Nacion on June 11
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14. Perhaps the World Cup will help moderate the electoral climate
that has taken over Argentina prematurely, more than a year before
the 2007 elections, after Roberto Lavagna erupted into the political
scene and became the target of an incipient dirty campaign on the
part of ruling party. If that doesn't happen, one will have to pay
more attention to the economic numbers than to unproven
gossip/accusations and partial truths


15. From the political angle, Lavagna has been reproached for
having received support from former president Duhalde and his
followers, as if Kirchner had not assumed power with the support
from the same godfather, nor as if most legislators who previously
supported Duhalde had not fled en masse to the lines of the ruling

party less than six months ago. From the economic angle, he has
been accused of favoring business clients of the consulting firm
that he founded 15 years ago, including some inaccurate accusations
(Acindar, for example, clarified that it did not use Ecolatina's
services),as if the regimen of tax deductions in question were not
driven by the President himself, from whose control no official
decision has escaped in the past three years.


16. Without being formally in campaign mode, the government has
increased public expenditures in the last few months at a higher
rate than fiscal revenues have grown, even though tax collections
continue breaking records. In the first four months of 2006,
against a 22 percent increase in revenues, primary spending driven
by the Executive grew almost 36 percent if one excludes transfers to
provinces (co-participation) and contributions to the social
security system, which are automatic transfers. In the former
category, funds set aside for public works grew 91 percent and
private sector subsidies 36 percent, according to calculations by
the Broda consulting firm.


17. In no way does this intensive use of fiscal savings jeopardize
the robust total primary surplus, although this year it could fall
to 3.2 percent of GDP, compared to 3.4 percent in 2005. Here, the
more troublesome data is about the provinces' fiscal situation,
which after a surplus of 0.7 percent of GDP last year could close
2006 with a deficit greater than one percent of GDP if they give
public employees the 19 percent salary increase set by the federal
government. In other words, this means that later on, some
provinces, like Buenos Aires could have problems paying December
salaries and end-of-the-year bonuses if they do not receive
assistance from the federal government.


18. If the government believes that continuing to increase spending
is the most effective political tool for the coming months, it runs
the risk of generating greater inflationary pressures, which it will
try to slow down with more price agreements or price controls, as
have been used up to now. But this entails another risk, which is
to discourage investment in sectors critical for economic growth.
This can't be fixed with money.

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Upcoming agenda
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19. Argentina has a hefty agenda of pending institutional
questions, beyond the macroeconomic soundness that protects it from
a crisis. The electoral campaign should really be a debate about
solutions for the future, before reviving doubtful focuses on the
past. Money cannot fix the fact that the Supreme Court remains
incomplete and that the government is avoiding a decision on whether
it will fill the two vacancies that prevent the Court from ruling on
questions of law/constitutionality or if it will reduce its
composition to seven members.


20. Nor can it fix that the executive branch is renegotiating
public service concessions in the energy sector, or that it is
washing its hands of their fulfillment. Nor that the University of
Buenos Aires continues to be leaderless after nearly two months due
to the use of force, without anyone being held responsible for it.



21. More public funding cannot resolve a problem that was
quantified by the National Institute of Statistics and Census
(INDEC): two out of every ten businesses cannot fill vacancies,
because they cannot find qualified personnel in distinct industrial
and service sectors. The reform underway in the education law
should concentrate on adapting its content to the real necessities
of the country; but it will be difficulty if one does not value the
culture of knowledge and if one makes businesses the enemies of
society.


22. For the umpteenth time, Congress postponed mortgage
foreclosures for 180 days, but it has not provided an in-depth
solution that allows for a normalization of relations between
debtors and creditors the reactivation of credit for housing for
middle and lower-income sectors. This isn't unusual, because
Congress has delegated broad powers to the executive branch,
including the power to apply discretionary tariff charges to finance
energy works that do not figure into any known plan. ...



23. None of these problems, nor many others, can be fixed with
money. They don't have the sex appeal of wars of provocation, nor
the attraction and distraction of goals scored by the national
soccer team. But it is time, for once, to go beyond discussing the
rigid divisions of being in favor or against, even if it's no more
than to restore the image of Argentine leadership in the face of a
new wave of political cannibalism. (Note: We reproduce selected
articles by local experts for the benefit of our readers. The
opinions expressed are those of the authors, not of the Embassy.
End Note.)


GUTIERREZ