Identifier
Created
Classification
Origin
06BUENOSAIRES408
2006-02-21 12:39:00
UNCLASSIFIED
Embassy Buenos Aires
Cable title:  

Argentina Economic and Financial Weekly for

Tags:  EFIN ECON ELAB ALOW AR 
pdf how-to read a cable
VZCZCXYZ0003
RR RUEHWEB

DE RUEHBU #0408/01 0521239
ZNR UUUUU ZZH
R 211239Z FEB 06
FM AMEMBASSY BUENOS AIRES
TO RUEHC/SECSTATE WASHDC 3538
INFO RUEATRS/DEPT OF TREASURY WASHDC
RUCPDOC/USDOC WASHDC
RUEHRC/USDA FAS WASHDC 2083
RUEHC/DEPT OF LABOR WASHDC
RHMFISS/HQ USSOUTHCOM MIAMI FL
UNCLAS BUENOS AIRES 000408 

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 February 17, 2006


--------------------------------------------- --------
Weekly Highlights
--------------------------------------------- --------

- The peso was unchanged against the USD, closing
again at 3.08 ARP/USD.
- Venezuela buys a further USD 308 million of Boden
2012 bonds.
- Limited negative impact of foot-and-mouth disease as
the EU only bans Argentine beef exports frm the
infected region.
- GOA reached price-restraint agreements with
wholesale distributors.
- GOA announces changes in social plans.
- Telefonica agreed to suspend its ICSID arbitration
claim against the GOA.
- Monthly economic activity index up 9.1 percent in

2005.
- Commentary of the Week: "Doubts and certainties
about the Bilateral Agreement Signed with Brazil"

--------------------------------------------- --------
MARKETS
--------------------------------------------- --------

--------------------------------------------- --------
The peso was unchanged against the USD this week,
closing again at 3.08 ARP/USD.
--------------------------------------------- --------

UNCLAS BUENOS AIRES 000408

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 February 17, 2006


-------------- --------------
Weekly Highlights
-------------- --------------

- The peso was unchanged against the USD, closing
again at 3.08 ARP/USD.
- Venezuela buys a further USD 308 million of Boden
2012 bonds.
- Limited negative impact of foot-and-mouth disease as
the EU only bans Argentine beef exports frm the
infected region.
- GOA reached price-restraint agreements with
wholesale distributors.
- GOA announces changes in social plans.
- Telefonica agreed to suspend its ICSID arbitration
claim against the GOA.
- Monthly economic activity index up 9.1 percent in

2005.
- Commentary of the Week: "Doubts and certainties
about the Bilateral Agreement Signed with Brazil"

-------------- --------------
MARKETS
-------------- --------------

-------------- --------------
The peso was unchanged against the USD this week,
closing again at 3.08 ARP/USD.
-------------- --------------


1. The peso remained flat versus the USD this week,
closing at 3.08 ARP/USD. Earlier in the week, the
peso depreciated one cent to 3.09 ARP/USD after the
Central Bank (BCRA) purchased USD 64 million in the FX
market on February 14. Then the BCRA kept up its
active intervention by purchasing a total of USD 247
million which was neutralize by increased exporters
sales as well as inflows to purchase domestic bonds,
allowing the peso to recover its lost cent and close
the week at 3.08 ARP/USD -- unchanged from last
Friday's close. The peso exchange rate has
depreciated 1 percent since the beginning of year.

-------------- --------------
ECONOMY / FINANCE
-------------- --------------

-------------- --------------
Venezuela buys a further USD 308 million of the Boden

2012.
-------------- --------------


2. On February 14, the GOA reopened the Boden 2012

and sold USD 308 million (face value) to Venezuela.
This debt sale is the third purchase during 2006,
bringing the 2006 accumulated amount to USD 929
million (face value) and USD 750 million effective
value. In 2005, the GOV purchased USD 1.9 billion
worth of GOA bonds (USD 1.6 billion effective value).
The GOV is reportedly planning a new purchase of USD
250 million of GOA bonds by the end of February.

-------------- --------------
Limited negative impact of foot-and-mouth disease as
the EU only bans Argentine beef exporters from the
infected region.
-------------- --------------


3. On February 15, the European Union (EU) announced
its decision to ban Argentine beef imports from only
eight departments from the Province of Corrientes --
where an outbreak of foot-and-mouth disease was found
last week. This decision will help to moderate the
negative impact from the disease since the EU in one
of the largest markets for Argentine beef exports.
Meanwhile, Israel announced it will ban beef imports
only from Corrientes, while Chile stopped all beef
imports from Argentina. Many countries have not yet
announced any decision. According to Secretary of
Agriculture Miguel Campos, exports of beef are likely
to fall by around 20 percent or USD 280 million in
monetary terms as a result of the outbreak. However,
Campos added that the losses are unlikely to be as
large as initially feared, since many countries are
limiting the export ban to the infected region, which
represents a very small share of Argentine production.

-------------- --------------
IADB to approve USD 500 million-loan to Argentina.
-------------- --------------


4. Argentina's representative at the Inter-American
Development Bank (IADB),Eugenio Daz Bonilla, stated
February 13 that the IADB may approve the USD 500
million adjustment loan to Argentina during its
February 22 meeting. The IADB board will discuss the
loan approval after having received an assessment
letter from the International Monetary Fund (IMF)
complimenting Argentina's recovery but also pointing
out pending reforms. If approved, this loan would be
the first adjustment loan received by the GOA without
the umbrella of an IMF program. Meanwhile, the World
Bank (WB) maintains on hold loans to the GOA for USD
875 million.

-------------- --------------
GOA reached price-restraint agreements with wholesale
distributors.
-------------- --------------


5. The GOA closed a new agreement with the country's
leading wholesale distributors on February 14. These
new price-restraint agreements aim to maintain prices
on 300 basic goods unchanged for one year, but also
are subject to a bi-monthly monitoring of any changes
in the economic environment. The Ministry of Economy
and President Kirchner announced that they expected to
close a new agreement with the Buenos Aires Central
Market next week, which is the main price maker for
fruits and vegetables in the country. According to
local media, the agreement will include a list of
prices of the most popular goods in order to stabilize
prices for those goods. Reaching an agreement with
the Central Market is key to the GOA's anti-inflation
effort, since fruits and vegetables prices represent
3.7 percent of the Consumer Price Index.

-------------- --------------
GOA studying increasing the minimum income tax
threshold, as demanded by unions.
-------------- --------------


6. On February 16, Deputy Agustin Rossi -- the head
of the Peronist block -- stated that the executive
branch can implement an increase of the minimum
threshold for the income tax paid by employees by
decree as foreseen in the 2006 Budget Law.
Reportedly, the GOA will increase the minimum
threshold by 20 percent as well as reduce the tax rate
for the excess income above the threshold, beginning
in April. According to analysts, this measure will
have an annual fiscal cost of ARP 530 million. Unions
have been demanding this measure for some time.
However, Hugo Moyano -- the leader of the CGT union --
stated that unions will only accept a minimum
threshold of ARP 3,000 per month for single employees
and ARP 4,000 per month for married employees -- much
higher levels than the GOA is proposing. Currently,
the minimum threshold is ARP 1,835 per month for
single employees and ARP 2,235 per month for married
employees. Reportedly, the GOA is also considering
increasing the minimum threshold for the wealth tax to
ARP 200,000 from its current level of ARP 102,000.

-------------- --------------
GOA announces changes in social plans.
-------------- --------------


7. On February 13, the GOA announced a reform in
social programs, by which recipients of the Head-of-
Household Program can voluntarily choose to receive
Training and Employment Insurance while they retrain
to improve their skills to look for a job. The aim of
the measure is to boost job creation by setting up
Employment Offices that will serve as a link between
employers and job seekers. Head-of-household
recipients receive ARP 150 per month, while the
Training and Employment Insurance Program will provide
ARP 250 per month for a maximum of two years. The
Ministry of Labor estimated that 500,000 individuals
will subscribe for the new Training and Employment
Insurance Program in 2006.

-------------- --------------
GOA to amend the Labor Risk Law.
-------------- --------------


8. On February 14, President Kirchner announced that
the GOA will send to Congress a bill to amend the
Labor Risk Law by next week. According to local
media, the Senate will start debating the bill in
early March - when Congress begins its ordinary
sessions. Under the bill, workers who suffer work
accidents will have to choose between obtaining
compensation provided by insurance companies and
presenting claims before civil courts to request
greater compensation. Employers have long requested
an amendment of the Labor Risk Law to prevent
employees from seeking compensation from both sources.
However, employers would have preferred legislation
limiting employees to obtaining compensation from
insurance companies instead of having the option of
presenting claims against employers in civil courts.

-------------- --------------
Telefonica agreed to suspend its claim against the
GOA.
-------------- --------------


9. The GOA and Telefonica signed a Letter of
understanding February 14 in which the company agreed
to suspend its claim against the GOA for USD 2.8
billion in the International Center for the Settlement
of Investment Disputes (ICSID -- an independent
tribunal associated with the World Bank). [ Note:
Telefonica's claim before the ICSID is the largest the
GOA faces.] In exchange for suspending its claim,
Telefonica will be able to extend for one hour the
period in which it charges the highest tariff and to
increase by three times the rates on incoming
international calls. These changes will provide an
additional annual income of approximately USD 20
million for the company. The agreement, however, does
not include any direct increase in tariffs. President
of Telefonica in Argentina Mario Vazquez announced
investments worth ARP 1 billion in Argentina during

2006. On February 16, Minister of Planing De Vido
stated that the GOA expects to reach an agreement with
Telecom (the other largest telephone company) at the
beginning of March, following Telefonica's agreement.

-------------- --------------
BCRA rolls over its maturities.
-------------- --------------


10. The BCRA received bids of ARP 1.2 billion in its
February 14 Lebac auction, above the ARP 893 million
in Lebacs that came due during the week. This allowed
the BCRA to roll over its maturities for the third
time in several weeks, accepting bids for ARP 1
billion. The yield on the 63-day Lebac dropped from
7.0 percent to 6.98 percent. The yield on the 42-day
Lebac and 140-day Lebac remained unchanged at 6.80
percent and 7.65 percent, respectively. Lebacs for
other maturities were withdrawn due to lack of
interest. As in the previous auction, investors
concentrated more than 70 percent of their bids in
Nobacs of more than 9 months. The BCRA accepted ARP
742 million of Nobacs (72 percent of the accepted
amount in the auction). The yield on the nine month
Nobac reached 3.13 percent, while the yield on the 434
and 679 day Nobac remained unchanged at 6.19 percent
and 5.56 percent, respectively.

-------------- --------------
Monthly economic activity index up 9.1 percent in

2005.
-------------- --------------


11. The monthly economic activity index increased a
strong 8.1 percent y-o-y in December, slightly below
the BCRA market survey forecast of 8.3 percent. The
index jumped an impressive 9.1 percent in 2005, above
market consensus of 9 percent and after increasing 9
percent in 2004 and 8.3 percent in 2003. The increase
in the index is mainly attributed to a 7 percent
increase in industrial activity, pushed by the
construction component as well as exports performance.
The strong 2005 growth will provide a 4 percent carry-
over effect for 2006. The BCRA consensus survey
estimates a 6.8 percent increase in the index for

2006. However, some private analysts predict GDP
growth as high as 8 percent for 2006. The monthly
economic activity index is viewed as a reliable
leading indicator of GDP.

-------------- --------------
Commentary of the Week: "Doubts and Certainties about
the Bilateral Agreement Signed with Brazil". By Felix
Pena. [Note: Translated and used with permission of
the author, from an article published February 8 in La
Cronista Comercial. End Note.]
-------------- --------------


12. The region needs a solid relationship between
Argentina and Brazil. The Competitive Adaptation
Mechanism (MAC) can contribute to this. But Mercosur
also needs to search for a mechanism with greater
reach.


13. The bilateral agreement is a very long text with
several parts open to interpretation.


14. In the current South American context, anything
that helps strengthen relations between Argentina and
Brazil is positive. The region's pace of evolution is
accelerating.


15. In each country in the region, two simultaneous
processes are being put to the test by contradictory,
rending forces at the global level, both in the area
of security as well as economic competition. One is
the consolidation of strong and stable democracies.
The other is the construction of modern economies,
supported by social cohesion, technical progress and
international competition. Both feed on each other,
require a lot of coordination of social energy, and
implicitly require recognition of the fact that
politics and economics are closely linked in the real
world. Argentina and Brazil -- especially together
with Chile and Uruguay -- can play the roles of hard
core democracies that contribute to the stability of
the region.


16. An analysis of the question of safeguards (or
"competitive adaptation") should be taken from this
political perspective.


17. Technically, the new protocol implements the
Agreement on Economic Complementarity - ACE 14 -
reached in December 1990 in ALADI and that, in turn,
is based on the still extant Treaty of Integration
between Argentina and Brazil, signed in 1998. A legal
basis is article 22 of ACE 14, in which both countries
agreed to introduce corrective mechanisms for

potential disequilibria in the enjoyment of the
benefits of the agreement. What was recently agreed,
therefore, is something that was foreseen.


18. Will this new agreement contribute to strengthen
the bilateral relationship, reducing the recurrent
commercial disputes that almost always exist in a few
sectors of production or, at least, neutralize the
political tensions between the two countries created
by these disputes?


19. It is premature to make predictions yet, and we
won't gain much by being overly optimistic.
Nevertheless, it is useful to note a few risks with
the intent of preventing the creation of future
problems that affect the quality of bilateral
relations. At least three risk factors are evident
from reading the text of the agreement.


20. The first is the result of the technical
legislation used. It is a very extensive text that
opens up several areas to interpretation problems and,
therefore, to its peaceful application. A more
austere text would have been better, following various
precedents that exist on safeguards in trade
agreements. Much will depend on the efficiency of the
Monitoring Commission and of the willingness of the
sectors involved to reach agreements. As a last
resort, the agreement provides for technical
arbitration by an Experts Group. Its decision will be
obligatory and not subject to appeal. But the non-
compliance of the parties with the decision, which is
the suspension of the competitive adaptation
mechanism, could be very costly in political terms,
because it would require the "rejection of the
agreement" (one assumes that this refers to rejecting
the new protocol).


21. The second risk results from the fact that the
new agreement remains outside of the dispute
resolution mechanism agreed in the Protocol of Olivos.
Because it is not an instrument of Mercosur, a party
cannot resort to that mechanism in the case of a
controversy. Experience indicates that these
controversies are frequent in any agreement on trade
or regional integration. For example, the diversion
of trade that originates from other preferential trade
agreements could be a source of future controversies.


22. The third risk is that Mercosur has not been able
to create a similar instrument. If it does create
one, according to article 29, the new protocol will no
longer be applicable. And if it doesn't create one?
That could affect Mercosur and open the door to
problems because trade relations between Argentina and
Brazil will become excessively bilateralized. This
would not be a problem except for the asymmetries of
relative economic size and relative competitiveness
between the two countries, which was precisely one of
the reasons given for negotiating the new protocol.
An excessive bilateralization does not appear to be
convenient for Argentina.


23. We proposed a flexible architecture for Mercosur
in an article written with Fabio Giambiagi that
appeared in La Cronista on November 11, 2005. But we
had imagined it being the result of a consensual
process involving the other two partners and always
within the parameters of the fundamental Treaty.


24. Given the sensibilities exhibited in recent
times, both in Paraguay and Uruguay, it would seem
advisable to proceed in this way as soon as possible,
to substitute a similar Mercosur instrument for this
new protocol. [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