ARGENTINA SCENE-SETTER FOR CODEL MCCONNELL

C O N F I D E N T I A L BUENOS AIRES 000020

SIPDIS

SIPDIS

H FOR CINDY CHANG
WHA/BSC FOR DOUGLAS BARNES

E.O. 12958: DECL: 01/04/2016
TAGS: PGOV PREL ECON PARM AR SNAR
SUBJECT: ARGENTINA SCENE-SETTER FOR CODEL MCCONNELL

Classified By: Ambassador Lino Gutierrez for Reasons 1.4 (B) and (D).


1. (C) INTRODUCTION AND SUMMARY: On behalf of Embassy Buenos
Aires, I warmly welcome your visit to Argentina on January
10-12. Your visit comes at a time of considerable ferment in
the Argentine political and economic arenas. On October 23,
President Kirchner won a resounding victory in mid-term
legislative elections. Based on these results, Kirchner has
tightened his already firm personal control of political and
economic policy. Kirchner's performance at the recent Summit
of the Americas gained no new friends for Argentina. His
criticism of the U.S. during his Summit speech and his recent
collaboration with Hugo Chavez has complicated our bilateral
relationship. As a member of the UNSC, Argentina has worked
closely with us on issues such as UN reform,
counterterrorism, non-proliferation, and regional issues such
as peacekeeping in Haiti. Argentina is seeking to
consolidate its impressive economic recovery from the
2001-2002 crises. It has successfully restructured over USD
81 billion of private debt, following the largest sovereign
default in history. Argentina also just canceled its debt
with the IMF by paying the remaining nearly USD 10 billion it
owed to the Fund. The debt restructuring will be a key
component in reintegrating Argentina into world capital
markets. END INTRODUCTION AND SUMMARY.

Background
--------------


2. (C) Argentina was once one of the richest countries of the
Hemisphere, achieving a GNP per capita that was among the
highest in the world in the early 20th century. However, the
history of Argentina over the last 70 years has been one of
economic decline and political instability. Many Argentines
are at a loss to explain how their country, blessed with rich
natural resources, a fertile land and manageable population
numbers, could have fallen so far. Some blame the military
dictatorships, which controlled events from 1930-1983; others
blame Peron and "Peronism;" and a significant number blame
external factors: the IMF, the U.S., and, to a lesser extent,
Europe. Gone are the "carnal relations" with the U.S. when
Argentina stood out as one of the top U.S. allies in the
world during the administration of former President Carlos
Menem during the 1990s. The 2001-2002 economic crisis, the
worst in Argentine history, changed all that. The election
of left-wing Peronist Nestor Kirchner in 2003 marked a
different approach in Argentine foreign policy, aligning
Argentina more closely to Brazil, MERCOSUR, and Venezuela.
That said, Kirchner has cooperated closely with the U.S. on a
number of issues, including counter-terrorism and narcotics,
and regional problems like Bolivia and Haiti.

Political Landscape
--------------


3. (SBU) Kirchner won a major victory in the October 23
legislative and provincial elections. Kirchner gained a
strengthened mandate and beat out his rivals for control of
the ruling Peronist Party (PJ). Kirchner is politically
strong at home and faces a weak and divided opposition.
Argentines give Kirchner much of the credit for the country's
Phoenix-like recovery from its 2001-2002 economic crisis, an
event equivalent to our Great Depression. His already high
approval ratings climbed last year after the conclusion of an
audacious debt exchange offer that offered private creditors
just over thirty cents on the dollar.


4. (C) Kirchner revels in a confrontational style, and is
quick to pick public fights with business leaders, foreign
officials, the Catholic Church, his own military, and
political opponents. Two examples in the past year are
illustrative. In the aftermath of a drug scandal at the
international airport in Buenos Aires, Kirchner fired
virtually every senior general in the Air Force (which was
responsible for maintaining airport security) for failing to
inform him of the ongoing investigation until five months
after it had begun. Kirchner also called for a national
boycott of Shell Oil gas stations because of price hikes at
the pump. Groups of unemployed workers loyal to Kirchner
promptly blockaded Shell gas stations across the country,
causing a 70% drop in sales. Kirchner later called Shell
"among the worst companies in the world."

Argentina Fumbles Summit of the Americas
--------------


5. (C) President Nestor Kirchner's performance at the
November 4-5 Mar del Plata Summit of the Americas gained no
new friends for Argentina. As chairman of the Summit
deliberations, he treated fellow leaders like errant
schoolboys and forged disunity where consensus may have been
possible. On the plus side, we reached our essential Summit
goals in the Declaration and Plan of Action and 29 of the 34
Heads of State present voiced support for the launch of FTAA
negotiations. However, Kirchner's obsessive focus on the
International Monetary Fund in his meeting with President
Bush, his explicit - and harsh - criticism of the United
States during his Summit speech, and his collaboration with
Hugo Chavez and the hard left will complicate our bilateral
relationship. Nevertheless, we do not expect Kirchner's
undiplomatic public posturing in Mar del Plata to affect the
excellent cooperation we continue to receive from Argentina
on the key issues of counter terrorism, counter narcotics,
and nonproliferation. Although many Argentine foreign policy
elites are privately aghast at Kirchner's Summit behavior and
press reaction has been mostly critical, we do not expect him
to pay a domestic political price.

Recalibrating our Relationship
--------------


6. (C) Kirchner's unfriendly attitude towards the United
States at the Mar del Plata Summit where he singled out the
United States for its support of IMF policies that had
brought "instability...misery, and poverty" to the region,
coupled with his government's open flirting with Hugo Chavez,
has established a new marker in our bilateral relationship.
Our policy to date had been to engage Kirchner often, and
provide him with the tools and support that would enable his
administration to succeed, and by extension, enable Argentina
to recover and prosper. We continue to have a wide range of
important interests and equities in Argentina, many of which
directly contribute to the security of the United States.
Argentina also remains a fully functioning democracy that
protects human rights and basically abides by free market
principles. Nevertheless, in the wake of the Summit we need
to focus most closely on our core interests, and be less
attentive to issues that primarily boost Kirchner's standing
in Argentina.

Kirchner's New Cabinet
--------------


7. (C) On November 28, the Casa Rosada named replacements for
several key cabinet positions. The most troubling nominee,
given her history of pro-Chavez and pro-Castro statements, is
the naming of former Ambassador to Venezuela Nilda Garre as
the new Defense Minister. A major surprise was the
announcement that Banco Nacion President Felisa Miceli would
replace Roberto Lavagna as Minister of the Economy.
Appointing Miceli as the new Minister of the Economy placed
economic policymaking firmly in Kirchner's hands. Kirchner
has proven to be an unpredictable economic policymaker.
Deputy Foreign Minister Jorge Taiana was tapped to be the new
Foreign Minister. Taiana has been the intellectual
powerhouse for the left in the Foreign Ministry during the
Kirchner administration. During an August 10 breakfast,
Taiana told me and the DCM that Kirchner would continue to be
very focused on domestic politics for the remaining two years
of his term. Taiana also cautioned us not to expect Kirchner
to initiate a more active foreign policy in the wake of a big
election win. Long-time Alicia Kirchner associate Juan
Carlos Nadalich was announced as the new Minister for Social
Development. The cabinet changes do not alter our
fundamental strategic interests in Argentina, but they will
make it more difficult for us to pursue them.

Economic Situation
--------------


8. (U) Argentina has had an impressive economic recovery
since suffering the worst economic crisis in its history --
including the largest sovereign default in history and a
devaluation of its currency -- in 2001-02. An export-led
boom triggered an 8.7 percent surge in real GDP in 2003, 9
percent in 2004, and estimated growth of 7.8 percent in 2005.
The Kirchner Administration has ably managed the nation's
public finances and achieved large budget surpluses.
Investment has increased to 18 percent of GDP, but still is
below the GOA's target. Unemployment declined to 12.1
percent in June, but has not fallen as fast as the economy is
growing, largely due to a slow recovery in the service
sector. Poverty has also fallen from the post-crisis level
of 60 percent, but remains stubbornly high. During the first
half of 2005, 38.5 percent of the population was living below
the poverty line and 13.6 percent was considered destitute.


9. (U) Argentina's robust economic recovery is the result of
major economic reforms in the 1990s, the adoption of a
market-based exchange rate regime in early 2002, and the
combination of high commodity prices and low interest rates.
Argentina has sound economic fundamentals and should continue
to perform well in 2006, but will need to lower its inflation
rate (6.1 percent in 2004, an estimated 11.4 percent in 2005)
and increase investment to sustain its growth, reduce
unemployment and poverty. Argentina negotiated a debt
exchange with 76 percent of its creditors in 2005. Argentina
canceled its debt with the IMF on January 3, 2006 by paying
the nearly USD 10 billion it owed to the Fund.

Regional Influence
--------------


10. (C) Argentina has played a positive role in promoting
human rights and democratic institutions in the hemisphere,
particularly in Haiti and Bolivia. Along with a number of
its neighbors, Argentina currently has 575 peacekeeping
troops in Haiti in support of MINUSTAH, reflecting its
traditionally strong support of UN peacekeeping operations
and commitment to Haiti. President Kirchner has been a
strong supporter of constitutional democracy in Bolivia over
the last year. Argentina sent a group of election observers
to the recent presidential elections in Bolivia, headed by
former Argentine Vice President and current Mercosur
President, Carlos "Chacho" Alvarez. In a December 22
meeting, Foreign Minister Taiana told me that Argentina's
policy towards Bolivia mirrors the U.S. policy of
constructively engaging the new GOB and steering them in a
moderate direction.


11. (C) In Venezuela, President Kirchner also played a
constructive role in pressing Chavez to hold a recall
referendum in 2004 and met with the Venezuelan opposition on
two occasions in 2004. More recently, Argentina has sought
stronger economic ties with Venezuela. President Kirchner
traveled to Puerto Ordaz to meet with Chavez November 22 to
discuss a proposed gas pipeline. In January 2005, Argentina
assumed a two-year seat on the UN Security Council.

Strong on Counter-Terrorism
--------------


12. (C) Kirchner's administration has strongly supported
counter-terrorism policies. The GOA has ratified all of the
12 international counter-terrorism conventions. Argentina is
a participant in the Three Plus One regional mechanism, which
focuses on possible terrorist-related activity in the
Tri-border region between Argentina, Brazil, and Paraguay.
Its border police, federal police, coast guard, and
intelligence services provide excellent cooperation on
monitoring potential terrorist activity, especially in the
Tri-border area. The GOA continues to make efforts to
strengthen its Financial Intelligence Unit to combat money
laundering and to beef up its National Arms Control Registry
(RENAR) in order to get a handle on the production and sale
of explosives.

Equally Strong on Non-Proliferation
--------------


13. (C) In numerous meetings with senior State Department
officials, the GOA has voiced strong agreement on almost all
of our arms control and nonproliferation objectives. On
Iran, the GOA favors a tough line. It voted with the United
States at the September 24 IAEA Board of Governors meeting to
refer Iran's noncompliance to the UNSC. The GOA is the only
South American country to have endorsed the Proliferation
Security Initiative (PSI) and has offered to host a PSI
exercise. On the IAEA Additional Protocol, the Argentines
traditionally have followed the Brazilians, but indicated
that they will eventually sign the AP with or without the
Brazilians. Finally, the GOA has implemented the Container
Security Initiative (which scans containers for WMD
components) and is in the final stages of negotiating an MOU
on the Megaports Initiative -- which will passively detect
radioactive materials moving through the Buenos Aires seaport
-- the first such agreement in South America.

Military-Military Cooperation
--------------


14. (C) The U.S. military enjoys excellent relations with
their Argentine counterparts. Argentine forces participate
frequently in exercises with U.S. and regional forces
(outside of Argentina) and are currently contributing about
575 troops to the Haiti PKO. We are stymied, however, by the
lack of a political-level agreement on immunities, (i.e.
administrative and technical immunities, as defined in the
Vienna Convention on Consular Relations, which would be
extended to U.S. service members on exercises in Argentina).
The lack of this type of agreement precludes many bilateral
exercises on Argentine territory. The Argentines
unfortunately confuse the immunities issue with Article 98,
which deals only with the International Criminal Court. We
are looking at a long-term Status of Forces Agreement to
resolve these issues.

GUTIERREZ