Identifier
Created
Classification
Origin
06BUENOSAIRES2576
2006-11-17 15:23:00
CONFIDENTIAL
Embassy Buenos Aires
Cable title:  

ECONOMY MINISTER MICELI SEEKS SUPPORT ON GSP,

Tags:  EFIN ECON ENRG EINV BEXP AR 
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C O N F I D E N T I A L BUENOS AIRES 002576 

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TREASURY FOR AFAIBISHENKO,AJEWEL,WBLOCK
E FOR THOMAS PIERCE, WHA FOR WHA/BSC AND WHA/EPSC
PASS NSC FOR JOSE CARDENAS
PASS FED BOARD OF GOVERNORS FOR PATRICE ROBITAILLE
EX-IM BANK FOR MICHELE WILKINS
OPIC FOR GEORGE SCHULTZ AND RUTH ANN NICASTRI
PASS USTR FOR SUE CRONIN AND MARY SULLIVAN
USDOC FOR 4322/ITA/MAC/OLAC/PEACHER
US SOUTHCOM FOR POLAD

E.O. 12958: DECL: 11/14/2016
TAGS: EFIN ECON ENRG EINV BEXP AR
SUBJECT: ECONOMY MINISTER MICELI SEEKS SUPPORT ON GSP,
JUSTIFIES PRICE CONTROLS, DISCUSSES PARIS CLUB AGREEMENT

REF: A. BUENOS AIRES 2240

B. BUENOS AIRES 2556

C. BUENOS 2202

Classified By: Ambassador E.A. Wayne for Reasons 1.4 (b,d)

Subject
-------
C O N F I D E N T I A L BUENOS AIRES 002576

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TREASURY FOR AFAIBISHENKO,AJEWEL,WBLOCK
E FOR THOMAS PIERCE, WHA FOR WHA/BSC AND WHA/EPSC
PASS NSC FOR JOSE CARDENAS
PASS FED BOARD OF GOVERNORS FOR PATRICE ROBITAILLE
EX-IM BANK FOR MICHELE WILKINS
OPIC FOR GEORGE SCHULTZ AND RUTH ANN NICASTRI
PASS USTR FOR SUE CRONIN AND MARY SULLIVAN
USDOC FOR 4322/ITA/MAC/OLAC/PEACHER
US SOUTHCOM FOR POLAD

E.O. 12958: DECL: 11/14/2016
TAGS: EFIN ECON ENRG EINV BEXP AR
SUBJECT: ECONOMY MINISTER MICELI SEEKS SUPPORT ON GSP,
JUSTIFIES PRICE CONTROLS, DISCUSSES PARIS CLUB AGREEMENT

REF: A. BUENOS AIRES 2240

B. BUENOS AIRES 2556

C. BUENOS 2202

Classified By: Ambassador E.A. Wayne for Reasons 1.4 (b,d)

Subject
--------------

1. (C) During the Ambassador's November 14 courtesy call,
Economic Minister Felisa Miceli welcomed the possibility to
reengage on economic and trade issues and lobbied for
Treasury Secretary Paulson to visit Argentina. In response to
Miceli's request for support on maintaining Argentine GSP
privileges, Ambassador noted that the U.S. Congress would
have the final say. The Ambassador commented that U.S.
companies report they are doing well, but remain concerned
about price controls and would invest more with clearer and
more consistent regulatory and policy rules. Miceli argued
that price controls were necessary to control inflationary
expectations, but agreed on the need to exit from this
practice. She said the GoA had requested formal negotiations
with the Paris Club, and hoped to reach agreement soon, but
repeated an earlier statement (Ref A) that the GoA would not
deal with the 2005 debt exchange holdouts before 2007
elections. The Ambassador explained that the U.S. has
supported the majority of IDB loans to Argentina. He urged
Miceli to support Monsanto's latest proposal to resolve its
disputes in Argentina, and to address the legal gaps on
terrorist financing. Miceli said she hoped to resolve the
Monsanto issue, and added that was in the process of clearing
the final GoA draft Counter-Terrorism Finance law. End
Summary.

Ambassador's Courtesy Call on Minister Miceli

--------------

2. (C) Ambassador met with Felisa Miceli, Minister of Economy
and Production, as part of a first round of courtesy calls on
GoA Ministers. The call followed on the heels of an earlier
meeting with Planning Minister De Vido (Ref B). Miceli
welcomed the meeting and commented that Argentina had felt
the absence of a U.S. Ambassador over the last few months.
She mentioned that Treasury Secretary Paulson had promised
her -- when they met in September on the margins of the
annual IMF/World Bank meetings in Singapore -- that he would
visit Argentina. The Ambassador agreed that it would be
useful to enhance our dialogue on financial sector and
capital market issues. He recommended starting out at the
staff level and then see how best to have higher level
discussions. (Note: Miceli agreed to this strategy, but
later issued a press release implying that Secretary Paulson
would visit Argentina in 2007. End Note).

Miceli Urges Use of BCTI to Discuss GSP
--------------

3. (C) Miceli was eager to create opportunities for greater
U.S. trade and investment, and welcomed the possibility of
reviving the U.S./GoA Bilateral Committee on Trade and
Investment (BCTI),which last met in October 2003, as a
vehicle to engage our two governments. She saw the BCTI as
the appropriate forum for raising issues such as Argentina's



request to retain GSP benefits, without having them become
public and subject to press speculation. The Ambassador
explained that the USG was pursuing a serious and fact-based
approach on GSP benefits. He noted that the USG review
process is ongoing and that Congress would have the final say
on renewing and extending GSP benefits for Argentina and
other countries. He also underscored that certain groups in
the U.S. (including groups representing holdouts from the
2005 debt exchange) were critical of Argentina and were
exercising their rights to urge Congress not to renew
Argentina's access to GSP.

Ambassador Highlights Investment Climate Concerns
-------------- --------------

4. (C) Ambassador praised Argentina's strong post-crisis
recovery, adding that many U.S. companies report they are
doing well and are reinvesting in their operations, albeit
incrementally. Based on his recent meeting with the AmCham
Executive Board (septel) and other discussions with U.S.
companies, the Ambassador noted that U.S. companies see
excellent business opportunities, but are moving cautiously.
They would be inclined to invest more with clearer rules of
the game with regards to regulation and pricing and tax
policies. They are particularly concerned with explicit and
implicit price controls. The Ambassador pointed out that
Argentine subsidiaries of U.S. companies must convince their
headquarters that the business climate is sufficiently stable
and predictable to merit large and long-term investment.
Clearer rules and a renewed GoA commitment to enforce such
rules over a long term investment horizon would enable these
companies to compete more effectively for a larger share of
their headquarters' global investment budget. The Ambassador
noted that EXIM had recently opened for short and medium term
financing for the Argentine private sector, a move that
potentially enhances opportunities for U.S. investments.

Miceli Justifies Price Controls to Curb Inflation
-------------- --------------

5. (C) Miceli wished that the GoA had not been forced to
implement price and export controls, but argued that these
heterodox measures were necessary to permit the relative
prices of nontradable goods and services to adjust to a new
post-crisis steady state. Miceli claimed that, in the years
following the 2001/2 crisis, "the government enjoyed a double
surplus (fiscal and current account) for the first time in
100 years," and the Central Bank was pursuing prudent
monetary policies. She said that when GoA officials asked
businesses in 2005 why they were increasing prices despite a
stable macroeconomic environment, the answer they received
was, "just in case," a precaution based on Argentina's past
tendencies to fall into hyper-inflation traps. Miceli noted
other factors as well, including high international commodity
prices which benefited Argentine exports but also put upward
pressure on local tradable good price levels. She also
accused local industries of being uncompetitive and pushing
for protectionist barriers to support their monopolistic and
oligopolistic tendencies (Ref C) .


6. (C) Given this scenario, Miceli argued that while the GoA
wants to return quickly to market based pricing, the use of


price controls allowed the GoA to anchor expectations for
wage demands, constrain oligopolistic behavior, and
facilitate the adjustment of relative prices by holding down
inflationary pressures until supply caught up with the strong
growth in domestic demand. And the GoA could do this without
restraining growth, which could not accomplish through more
orthodox macroeconomic policies. Miceli concluded that more
competition in the market, through increased investment and
lower protectionist barriers for sectors such as textiles,
would reduce inflationary pressures and eliminate the need --
"probably by 2008/2009" -- for the controls. (Comment: As
the IMF noted in its July 2006 Article IV, the imbalance in
relative prices between tradable and non-tradable goods is a
minor part of the inflation story. The real source of
inflationary pressures is an economy operating above
potential, with increasing government expenditures,
accommodative monetary policy, and a commitment to
maintaining an undervalued exchange rate, all fueling
aggregate demand. End Comment).

GoA Approaches Paris Club; No Move on Holdouts
-------------- --

7. (C) The GoA has begun its official approach to the Paris
Club to renegotiate its $7.2 million debt. Miceli noted that
her Finance Secretary Mac Laughlin sent a letter November 9
to the Paris Club President requesting the opening of formal
negotiations. Although the GoA has not completed its formal
rescheduling offer, she said the details were largely worked
out at the technical level. Miceli emphasized the importance
of closing this chapter of the post-crisis recovery this
calendar year, as a critical step in normalizing Argentina's
relationship with international capital markets.


8. (C) The Ambassador welcomed the GoA's initiative and said
the U.S. was open to constructive dialogue in the framework
of Paris Club policy and precedent. He mentioned that
Argentina's relatively strong financial situation (almost $30
billion reserves and a primary fiscal surplus of almost 4%)
put it in a good position to pay its more than $3.5 billion
in arrears to Paris Club creditors. He noted that an IMF
agreement was a requirement for rescheduling, and hoped the
Club and Argentina could find a way to move forward. Miceli
responded that the GoA had repaid its IMF debt and closed
that program, so renewing any IMF agreement beyond annual
Article IV discussions was not an option. Nevertheless, she
was optimistic that the July 2006 Article IV report could
serve as a basis for discussion with the Paris Club.


9. (C) Miceli commented that the GoA-IMF relationship was
improving and she anticipated a visit from IMF Managing
Director Rodrigo de Rato in January to discuss the global
financial system and developing countries' concerns with IMF
policies raised at the September Singapore annual meeting.
She said it was time for each side to move beyond past
recriminations. Both Argentina and the IMF, she said, had
made mistakes and both bore responsibility for aspects of the
nation's financial crisis.


10. (C) Miceli reiterated past assurances (Ref A) that the
GoA would not deal with holdouts from the 2005 debt exchange



prior to the 2007 elections. She held out hope that, if the
GoA could negotiate an agreement with Paris Club creditors
and resume payment on official debts in 2007, it could
consider opening negotiations with holdouts in 2008. Miceli
emphasized that any accommodation with holdouts would entail
high political costs, as the GoA would find it difficult to
explain to the Argentine public that it should make payments
on the $24-odd billion outstanding to holdouts when Argentine
law (referred to locally as the "padlock law") is clear that
the restructuring offer closed in 2005 and cannot be
reopened. Ambassador Wayne responded that groups of holdouts
in the U.S. had taken this issue to the courts and were also
lobbying Congress. He underlined the USG's responsibility to
defend U.S. citizens' interests and urged continued dialogue
on the subject to come to a resolution as soon as possible.


11. (C) Miceli agreed that Argentina was suffering as a
result of the default to Paris Club creditors and the
holdouts, noting the GoA's plan to solicit proposals for
large infrastructure projects, including for new power plants
and a high-speed rail link from Buenos Aires to Cordoba. By
coming to terms with Paris Club creditors, she said,
Argentina would regain access to their export credit agency
credits, lowering large infrastructure project costs
significantly. She also admitted that the holdouts situation
limited the GoA's ability to issue debt under international
law, which increased the GoA's risks and costs. (Note:
Economy Ministry finance officials estimate the GoA is paying
a significant 35-50 basis point premium for issuing
internationally traded debt under local law. End Note).

U.S. Support for IDB Loans to Argentina
--------------

12. (C) The Ambassador explained that the USG supported the
great majority of IDB loans to Argentina. He clarified that
U.S. decisions to abstain from or vote against several
projects earlier this year were due to concerns with the
particular loans, and did not reflect any change in U.S.
policy towards Argentina. Miceli thanked him for the
explanation and acknowledged U.S. support for most IDB (and
all World Bank) lending to Argentina. She did, however,
comment that she had found it strange that the U.S. voted in
September against an IDB supported satellite project, given
NASA's involvement in the project.

Ambassador Urges GoA Support for Monsanto Offer
-------------- --

13. (C) The Ambassador urged Miceli to support Monsanto's
latest proposal to resolve its disputes with Argentine
producers over royalty payments for its trademark GMO Roundup
Ready seeds and herbicides. He stressed the potential
benefits as Monsanto brings a new generation of products on
line. Miceli said she had met with Monsanto in the past and,
while the GoA could not appear to be taking sides in what is
essentially a negotiation between Monsanto and domestic
agricultural players, she would encourage a resolution. She
noted that Monsanto's new head of Argentina operations had
asked for a meeting, which she had accepted. She also
commented that Monsanto's relationship with the GoA's
Secretary of Agriculture, which had been rocky in the past,

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seemed improved of late. She expressed hope that the latest
Monsanto offer to drop it legal actions in Europe in exchange
for forward royalty payments would help facilitate some
agreement.

Counter-Terrorism Finance Law in Final Stages
--------------

14. (C) Miceli said she was in the process of clearing on the
Justice Ministry's final draft of counter-terrorism financing
legislation. The Ambassador stressed that given Argentina's
good practical cooperation on terrorism, it would be very bad
for Argentina to be sanctioned by the Financial Action Task
Force (FATF). Miceli agreed it was inexplicable that the GoA
had not completed it earlier, but appeared optimistic that
the government would soon submit it to Congress. (Note: The
Financial Action Task Force has given Argentina until
February 2007 to submit a draft law to Congress, or else face
sanctions, possibly including a public statement or even
suspension of FATF membership. End Note).

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

15. (C) This was a cordial and productive first meeting with
Economy Minister Miceli. She reiterated standard Kirchner
administration justifications for the GoA's heterodox
macroeconomic and micro price control policy mix and offered
little new insight into the GoA's strategy on normalizing
relations with Paris Club creditors and on post-election
settlement with bond holdouts. Miceli was clearly overly
optimistic about the ease of reaching a Paris Club accord and
will benefit from some education and coaxing along the way if
an agreement is to be reached. It was clear that her
approach to the bondholder issue was based on domestic
political considerations. Her comment on the need for the
GoA to stand apart from Monsanto's battle with agricultural
producers on GMO seed royalty payments was not consistent
with past behavior of her Agriculture Secretary, but we can
hope that it might reflect a sincere desire to move ahead.
Ambassador will take up the Minister on her request for
regular meetings to discuss broad economic and investment
concerns. Embassy urges Treasury staff level visit soon to
test the waters and prepare for higher level talks, and looks
forward to working closely with USTR to possibly resume more
regular bilateral talks. End Comment.
WAYNE