ECONOMY MINISTER MICELI'S VIEWS ON IDB, PARIS

C O N F I D E N T I A L BUENOS AIRES 002240

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E.O. 12958: DECL: 10/01/2016
TAGS: EFIN ECON AR
SUBJECT: ECONOMY MINISTER MICELI'S VIEWS ON IDB, PARIS
CLUB, HOLDOUTS, 2007 BUDGET

REF: A. BUENOS AIRES 2202

B. BUENOS AIRES 2080

Classified By: CdA Michael Matera. Reasons 1.4 (b,d)

Summary
--------------

1. (C) Minister of Economy Felisa Miceli told Charge
September 27 that President Kirchner's visit to the U.S.
showcased Argentina's rapid normalization and increasing
opportunities for investors. She questioned the logic of
recent U.S. votes in the IDB, but accepted Secretary
Paulson's explanation during their meeting in Singapore that
certain project proposals did not fit the U.S. view of the
IDB's role. She confirmed that the GoA will seek to
negotiate a Paris Club rescheduling in 2006, but ruled out
any deal before the 2007 elections with holdouts from the
2005 restructuring. The opposition criticized GoA lowballing
of macroeconomic assumptions, especially revenue projections,
during Miceli's September 26 presentation of the 2007 budget
to Congress. Miceli justified the conservative assumptions
as a means to keep the lid on spending, especially by the
provinces. End Summary.

Kirchner's U.S. Trip Highlights Rising Investment
-------------- --------------

2. (C) Charge and Econoffs met September 27 with Minister of
Economy Miceli to follow up on her recent trips to Singapore
and New York and to seek her views on Paris Club debt and the
2007 budget. Miceli, who came across as open and engaging,
argued that President Kirchner's visit to the U.S. had helped
to rebuild confidence in Argentina, and had highlighted the
opportunities for investors in Argentina's fast-growing
economy. She noted that investment has rebounded to 22.8% of
GDP, equaling the record high of 1998, and named Wal-Mart,
Cargill, and Occidental, as companies that in New York had
promised new investments to Kirchner.


3. (C) Miceli agreed with Charge's comment that still more
investment -- and especially investment in major
infrastructure development -- was needed to maintain high
Argentine growth rates. However, she maintained the party
line in response to his warning that many investors were
complaining of price controls -- particularly their often
arbitrary and unexpected application -- and that this could
dampen interest. She commented that businesses operating in
Argentina, unlike in the more competitive economies of the
U.S. and Europe, needed "to behave more responsibly," and
price controls were one tool to avoid price gouging by
forcing companies to price based on their costs of doing
business (Ref A). She argued that the government was taking
the necessary, cautious steps to prevent Argentina from
continuing on its normal path of economic crisis every ten
years.

Miceli's Views on U.S. IDB Votes
--------------

4. (C) Miceli said she had questioned the logic of U.S. IDB



votes during her recent meeting with Treasury Secretary
Paulson in Singapore (on the margins of the IMF/World Bank
annual meeting). In particular she was confused by the
"contradictory signal" the U.S. sent by voting against an IDB
satellite project, after supporting other IDB communication
projects. Nevertheless, she accepted Secretary Paulson's
explanation that certain projects, such as the satellite
deal, did not fit the U.S. view that the IDB should focus on
primary development initiatives. Miceli also acknowledged
that the U.S. has voted in favor of over 95% of IDB projects
for Argentina. Even more important, in her view, was the
strong U.S. support for the World Bank's Argentina projects.

GoA Plans to Settle Paris Club Debt but not Holdouts
-------------- --------------

5. (C) Miceli confirmed Finance Secretary Mac Laughlin's
statement during an earlier meeting with Emboffs (Ref B) that
the GoA's goal is to negotiate and conclude a Paris Club deal
before the end of the year (Note: Argentina owes
approximately $6.3 billion to Paris Club creditors, of which
about $3.5 billion consists of arrears and past due interest.
End Note). She, Mac Laughlin and key staff have developed a
proposal, and Mac Laughlin will travel in the near future to
several countries to discuss options and gain support for
Paris Club consideration of Argentine arrears.


6. (C) Miceli acknowledged two potential problems. She
admitted to some disagreement within her Ministry as to
whether an IMF agreement is a prerequisite for Paris Club
debt restructuring. Secretary of Economy Policy Oscar
Tangelson believes it isa requirement, while Mac Laughlin
has stated that Paris Club rules are flexible on this point
(Ref B). Miceli welcomed U.S. comments on this point, but
also emphasized that the GoA's proposal would be modest: no
nominal reduction or "haircut" in amount owed, just a grace
period and lengthening of the repayment period. She noted
that if an IMF agreement is a hard requirement, then there
will be no deal. The second complication is the $850 million
credit Spain granted to Argentina during the 2001 crisis,
which Spain would like to see repaid outside the Paris Club.
Miceli admitted to discussing this with Spanish government
officials during Kirchner's visit to Spain earlier this year,
and she acknowledged to Charge that the GoA would need to
harmonize the debt to Spain with the overall official debt
through the Paris Club.


7. (C) Miceli rejected any chance of working a deal before
planned October 2007 elections with holdouts from the early
2005 private debt restructuring agreement ("Canje"),in
contrast to Mac Laughlin's speculation that the GoA had a
window of opportunity before the end of the year (Ref B).
Nevertheless, she said the GoA could possibly address
holdouts sometime after the election, contradicting the GoA's
public position (and Argentine law) that the GoA will not
negotiate with holdouts. (Comment: while the "Cerrojo" law
from 2005 prohibits the GoA from reopening the last bond swap
or cutting one-off deals with holdouts, the draft 2007 budget
authorizes the Executive to "pursue the normalization of



public debt servicing." Several prominent local economists
have interpreted this as possibly cracking open the door to
an eventual solution. End Comment).

Miceli Views on GoA's 2007 Budget
--------------

8. (C) Miceli was pleased with the success of the GoA's
September 26 presentation of the 2007 budget to Congress,
although she noted the opposition's strong criticism of GoA
lowballing of macroeconomic assumptions. (Note: the budget
bill projects 2007 real GDP growth of only 4%, and 2007 CPI
inflation in the 7% range, both well below consensus
estimates. While the economy will likely decelerate in
coming quarters, most analysts expect real GDP growth of
about 6% in 2007, after growing at least 7.8% in 2006. End
Note).


9. (C) Miceli admitted that the government had purposefully
underestimated the figures, and agreed that GDP growth would
approach 6% in 2007. However, she justified the move as a
means to reign in spending, and claimed to be particularly
concerned with the state of provincial finances. In an
exasperated tone, Miceli stated that "sometimes I think
President Kirchner is the only person in Argentina who
understands the importance of a fiscal surplus." The key
point, she argued, was that the GoA needed to maintain an
annual primary surplus of at least 3% of GDP simply to meet
expected debt payments over the next 25 years. (Comment:
local analysts attribute the GoA's conservative numbers to
its desire to direct over-budget revenues to a "Superpower
slush fund," citing recent "Superpower" legislation that
allows the executive significant new powers to re-allocate
already budgeted funds and unanticipated revenues without
seeking congressional approval. They believe that lowballing
revenue estimates will give the Kirchner administration a
free hand to target unbudgeted revenues to social service and
project spending with an eye on October 2007 elections. End
Comment).

Comment
--------------

10. (C) A Paris Club deal would be positively received
domestically and internationally as a step on the path to
Argentina's post-crisis normalization, and would facilitate
the flow of incremental sovereign credits to Argentina --
including new sovereign export finance credits. And while
this appears doable -- with creditor goodwill and Paris Club
flexibility and creativity in finessing the GoA's
unwillingness to sign onto another IMF program -- a
resolution to the bond holdout issue appears out of the
question. Despite 2007 budget language that appears to offer
an opening and contrary to Mac Laughlin's argument that a
window of opportunity exists to settle with the holdout,
Miceli left no doubt that this will not happen before
elections. Whether Miceli has the political pull to deliver
an acceptable Paris Club deal -- or make any move on holdouts
post-election -- is unclear. Certainly the private sector
discounts Miceli as a lightweight, placed in her job to



implement the policies of her mentor, Planning Minister Julio
de Vido, and lacking power or direct influence with the
President. Many below her in the Ministry share this
sentiment (see Ref A),and she showed during the meeting that
she will toe the current party line on key policies such as
price controls and holdouts. Nevertheless, she demonstrated
confidence and command of the issues, and appeared interested
in building a relationship with the U.S. End Comment.
MATERA