Identifier
Created
Classification
Origin
07BUENOSAIRES1004
2007-05-22 18:23:00
CONFIDENTIAL
Embassy Buenos Aires
Cable title:  

ARGENTINA IN PLAY: RE-ENGAGING ON ECONOMIC AND

Tags:  PREL ECON EFIN EINV AR 
pdf how-to read a cable
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RUCPDOC/USDOC WASHINGTON DC
RUEHC/SECSTATE WASHDC 8205
INFO RUEATRS/DEPT OF TREASURY WASHINGTON DC
RUEHC/DEPT OF LABOR WASHINGTON DC
RHMFISS/HQ USSOUTHCOM MIAMI FL
C O N F I D E N T I A L BUENOS AIRES 001004 

SIPDIS

SIPDIS

TREASURY FOR PAULSON, KIMMITT, LOWERY, LEE, TRAN, JEWELL
USDOC FOR GUTIERREZ, BASTIAN
PASS FED BOARD OF GOVERNORS FOR KROSZNER
USSOUTHCOM FOR POLAD

E.O. 12958: DECL: 05/21/2017
TAGS: PREL ECON EFIN EINV AR
SUBJECT: ARGENTINA IN PLAY: RE-ENGAGING ON ECONOMIC AND
DEBT MANAGEMENT

REF: A. BUENOS AIRES 801


B. BUENOS AIRES 680

Classified By: Ambassador E.A. Wayne. Reasons 1.5 (b,d)

------------------------
Summary and Introduction
------------------------

C O N F I D E N T I A L BUENOS AIRES 001004

SIPDIS

SIPDIS

TREASURY FOR PAULSON, KIMMITT, LOWERY, LEE, TRAN, JEWELL
USDOC FOR GUTIERREZ, BASTIAN
PASS FED BOARD OF GOVERNORS FOR KROSZNER
USSOUTHCOM FOR POLAD

E.O. 12958: DECL: 05/21/2017
TAGS: PREL ECON EFIN EINV AR
SUBJECT: ARGENTINA IN PLAY: RE-ENGAGING ON ECONOMIC AND
DEBT MANAGEMENT

REF: A. BUENOS AIRES 801


B. BUENOS AIRES 680

Classified By: Ambassador E.A. Wayne. Reasons 1.5 (b,d)

--------------
Summary and Introduction
--------------


1. (C) We need to re-engage with Argentina on broad economic
policy and debt management issues. This re-engagement should
be both with GoA officials and with this nation's vibrant and
diverse civil society and media. In the big picture,
Argentina is in play. We should not abandon the field to the
models and approaches being offered by Chavez, especially
when there is so much skepticism about him among Argentines.
More narrowly, we can and should influence Argentine thinking
and actions on economic policy in the future.


2. (C) Below the rhetorical fog of an election year, many
Economy Ministry, Planning Ministry and Central Bank
officials are acknowledging the need for post-election
economic policy changes. They are beginning to contemplate
politically feasible ways to regularize debt arrears and
relations with international capital markets and, more
broadly, how to modify Argentina's heterodox economic model
in ways that will temper inflationary pressures and permit
growth to continue at more sustainable levels. In the media,
commentators and editorialists regularly call for policy
changes and warn of the consequences of if the GoA fails to
evolve its approach to economic management.


3. (C) This is not about liking Kirchner or not; it is about
supporting a market orientation and democratic institutions
in Argentina. While the Kirchner administration's politically
calculated populist rhetoric often makes the GoA difficult to
deal with, Argentina remains a large and important economy in
Latin America and we have common interests in many areas --
including law enforcement and security -- that are a base for
gradually improving relations.


4. (C) Low-key, substantive discussions at senior USG levels
on these themes would help convince Argentina of the near
term benefit of paying down its Paris Club arrears and of
settling with bond holdouts; strengthen the hand of local
officials who favor market liberalizations and want to work
with us; and counter the siren's call of Venezuelan populism
in a nation with the highest anti-American polls in the
hemisphere. A senior U.S. presence sharing our outlook with
the media here can particularly influence public discourse
for the better if handled carefully.


5. (SBU) Action Recommendation: Near term engagement
opportunities include requested bilaterals at the June 10-12
Americas Competitiveness Forum in Atlanta between Economy
Minister Miceli and Treasury Secretary Paulson and between
Planning Minster De Vido and Commerce Secretary Gutierrez.
We understand that Secretary Paulson is considering a visit
to Brazil, Uruguay and Chile in July. Adding Argentina to
Secretary Paulson's regional itinerary would allow him to

SIPDIS
engage a broad range of senior GoA officials and equally
importantly with civil society and the media. We think the
impact could be very positive and substantial.
End Summary

--------------
The Consequence of Limited Engagement
--------------


6. (C) In the year and a half following President Kirchner's
poor treatment of President Bush at the Mar de Plata Summit
of the Americas, senior level bilateral engagement has been

limited to visits by U/S Burns, A/S Shannon, Attorney General
Gonzalez and DUSTR Veroneau. President Bush's March 2007
Latin American tour, which included stops in Brazil and
Uruguay but not Argentina, was certainly marred by President
Kirchner's decision to grant Chavez a venue here for his
parallel "anti-imperialist" tour. Subsequently there has
understandably been a hiatus in senior level meetings given
President Kirchner,s unacceptable behavior. But, the
challenge for USG policy is much broader. We need to counter
pervasive anti-American sentiment here: Argentina has the
lowest U.S. approval ratings, in the mid-20% range, of any
country in the Western Hemisphere. A central USG policy
objective here must be to counter this anti-Americanism, to
take the opportunity to demonstrate we care about the country
and people of Argentina (independent of its President,s
antics),that we support Argentine democracy and its
market-based approach and that, of course, we are looking out
for our economic interests and those of our citizens. One
unfortunate result of not engaging at senior levels is
leaving the field open to Chavez and others to present their
vision of South America,s future unopposed.

--------------
GoA Reaching Out on Debt and Economic Policy
--------------


7. (C) We think there are specific opportunities to engage in
the economic field. In recent discussions with Ambassador
(BsAs 680) Economy Minister Miceli and Finance Secretary
Chodos have made clear that the GoA appreciates the
importance of resolving Paris Club arrears and subsequently
addressing bond holdouts as steps on the path to fully
re-integrating Argentina into global capital markets.
Practically, they also understand that clearing Paris Club
arrears is a condition precedent for Argentina to re-gain
access to G8 export credit agency credits which are needed to
accelerate construction of urgently needed energy and
transportation infrastructure upgrades.


8. (C) Both Miceli and Planning Minister De Vido, as well as
Investment Coordinator Nofal have also hinted at the GoA's
post-election intent to gradually unwind inefficient and
unsustainable price controls that are already leading to
shortages and black markets in primary consumption items.
Central Bank Governor Redrado (BsAs 801) has acknowledged the
growing structural disequilibria imposed by the GoA's
pro-cyclic stimulation of aggregate demand and maintaining
low and sometimes net negative real interest rates. He told
the Ambassador and Federal Reserve Bank Governor Kroszner May
15 (Septel) that he is quietly urging Minister Miceli and
other key GoA officials to use all available policy tools --
monetary, fiscal, exchange rate, and wages -- to slow the
post-election growth of aggregate demand and bring about a
soft landing, with a more sustainable 4-5% annual real growth
rate and lower inflation. Miceli told Kroszner and
Ambassador (Septel) that she has approval to try to build a
consensus on a long-term development strategy, drawing from
the experiences of Chile, Ireland, South Korea and others.

--------------
Countering Chavez' Populist Message
--------------


9. (SBU) Rapid Argentine GDP growth since the 2001/2 economic
crisis has dramatically reduced unemployment, poverty and
indigence. However, such growth has also aggravated income
inequality and made Chavez' populist message more appealing
to segments of Argentine society, particularly those who
remain in the informal economy. But, while the GoA's
economic policy mix does include doses of selective market
interventions and state ownership, the Argentine economy
remains broadly private sector oriented. Senior GoA

officials have regularly announced that Chavez's socialist
path is not for Argentina.


10. (SBU) Despite Argentina's market orientation and
relative wealth (Argentina's per capita GDP is second only to
Uruguay's in South America and roughly 1.5 times that of
Venezuela's),Chavez has been able to exploit this nation's
lack of access to investment capital and international
financing. Burgeoning growth has strained domestic energy,
roads, port facilities and sanitation infrastructure to the
breaking point. But domestic and foreign investors,
concerned by the GoA's affinity for abrupt regulatory and tax
policy shifts and by growing structural disequilibria
inherent in the GoA's economic management model, are not
investing the volumes of long term capital needed to develop
priority infrastructure. Unresolved post-crisis defaults on
official Paris Club and private bondholder debt are
complicating Argentina's access to the volume of new
sovereign credits in global capital markets it needs to fund
this infrastructure development on its own.


11. (C) Chavez has worked successfully to fill the resulting
financing and investment gap. He has provided the Kirchner
administration important breathing space in international
financial markets by acting as an intermediary to place $4.2
billion in new GoA sovereign debt issues at a time when bond
holdout lobbies are demanding more aggressive USG efforts on
their behalf and continuing efforts to attach vulnerable GoA
assets abroad. Venezuela also structured a high profile
rescue of a struggling Argentine dairy cooperative, offering
a long-term barter solution (loans for commitments to export
powdered milk) that avoided a buy-out by a U.S. investment
fund and fit well with Kirchner administration efforts to
retain local Argentine control of key economic sectors. The
two countries have signed numerous other economic cooperation
agreements that will primarily benefit Argentine exporters.
The obvious quid pro quo for this support has been GoA
advocacy for Venezuela within Mercosur and the UN (e.g.
support for the GoV's Security Council candidacy and, most
recently, support for Chavez' Bank of the South initiative.),
and offering Chavez an Argentine platform for his particular
brand of Bolivarian rhetoric (e.g. the March 9 anti-Bush
stadium rally).


12. (C) GoA officials, including De Vido and Foreign Minister
Taiana, tell us that the government views its relationship
with Venezuela through a pragmatic lens, taking what Chavez
is willing to offer and making sure he delivers on all/all
promises. For its part, Venezuela does not appear to have
provided Argentina any significant subsidies or outright
grants: In fct, GoA debt instruments purchased by Venezuela
have,
according to Emb Caracas reporting, netted the GoV Finance
Ministry a tidy profit as it "flips" its inventory of
Argentine debt to select domestic constituencies and to
international investors at favorable exchange rates (albeit
at the expense of the Venezuelan Central Bank). The GoV's
rescue of the Argentine dairy cooperative offered financing
at market-linked rates and required Venezuela to purchase
Argentine powdered milk at prices linked to global commodity
levels.

-------------- ---
Paying Down Paris Club Arrears in GoA's Interest
-------------- ---


13. (C) The obvious counter to the influence that Chavez'
financial support has bought him in Argentina is to help the
GoA regain direct access to international financial markets
and to work with the GoA to develop the kind of investment
climate that will attract the volume of domestic and foreign
investment needed to build new foundational infrastructure at

competitive costs.


14. (SBU) Argentina's access to private international
financial markets will remain significantly restricted and
more expensive pending Argentina's resolution of $20
billion-plus in "bond holdout" debt. The GoA has repeatedly
made clear that this issue is simply too politically
sensitive to deal with prior to upcoming October/November
elections despite our many urgings that they resolve the
issue. The GoA has also made clear that a Paris Club
agreement must come first. Billions in G8 export credits and
OPIC-like investment financing could be made available to
Argentina soon after the GoA clears its nearly $4 billion in
arrears and interest due on official Paris Club debt. Within
the Paris Club, official USG Exim and OPIC credits (along
with FMF and EDA) have been blocked under Brooke and 620-Q
sanctions that were triggered in 2003 by arrears on a USAID
credit. Not being able to provide FMF and EDA to the
Argentine military ties our hands at exactly the moment the
Ministry of Defense finally is looking at providing
much-needed upgrades to equipment and systems. The military
remains an important, pro-democratic institution in
Argentina, predisposed to the U.S. Venezuela, China, Russia
and others will gladly fill the gap in our absence.


15. (SBU) Currently, the GOA remains unwilling to pay down
Paris Club arrears out of its ample reserves or fiscal
surplus. An alternative rescheduling of arrears would
require that GoA and official creditors overcome the
stumbling block of an important Paris Club precedent that
requires an IMF monitoring program be a part of any
rescheduling. An IMF program remains politically
unacceptable to a GoA that made a substantial populist play
out of its 2005 $9.5 billion pay-down of IMF outstandings.
Yet the benefits for Argentina of finding some mechanism to
clear Argentine Paris Club arrears would be substantial: A
host of G8 export credit agencies appear eager to resume
lending to support the kinds of capital goods exports that
would help build Argentine infrastructure and improve
efficiency.


16. (SBU) In addition to export credit agency financing, G8
investment credit agencies like our OPIC could support the
kinds of foreign investment Argentina needs to incorporate
modern technologies and international best practices into its
productive economy. Post continues to encourage the GoA to
resolve outstanding investment disputes, many dating from the
2001/2 economic crisis and to commit to the type of
regulatory policy transparency and consistency that will both
attract longer term investment and lower the risk premiums
that such long term commitments of capital demands. The GoA
is well aware that it is short of the kind of long term
investment needed to build and modernize basic infrastructure
and sustain higher levels of economic expansion, domestic
employment and income generation.

--------------
Comment and Action Request
--------------


17. (C) Argentina is debating its economic future. High and
medium-level Economy Ministry, Planning Ministry and Central
Bank officials are quietly reaching out to Post in search of
politically acceptable ways to regularize debt arrears and
relations with international capital markets and, more
broadly, to modify Argentina's heterodox economic model in
ways that will temper growing inflationary pressures and
allow for a soft landing that will sustain reasonable growth
levels. Private sector figures and media commentators are
trying to counter Chavez-like visions of the economy in
public and private. It is time for senior Washington
decision makers to re-engage with Argentina's government and

with this nation's vibrant and diverse civil society and
media on broad economic policy and debt management issues.
Low-key, substantive discussions at senior USG levels on
these themes would help convince Argentina of the near term
value of paying down its Paris Club arrears and settling with
U.S. and other bond holdouts; strengthen the hand of local
officials who favor market liberalizations and want to work
with us; and counter the siren's call of Venezuelan populism
in a nation with the highest anti-American polls in the
hemisphere.


18. (C) Argentina is in play and we should not abandon the
field, especially when there is so much skepticism about
Chavez among Argentines. Chavez has worked smart and
successfully to influence domestic debate and to address
Argentina's financing and investment gap. Senior Kirchner
administration officials tell us they are getting value from
Venezuela and discount the costs associated with the
political (eg. Security Council seat advocacy, Banco del Sur
participation) and polemical support the GoA provides Chavez
in exchange. We need to work equally strategically to
counter the influence that Chavez' strategy has gained him in
Argentina. President Kirchner is famously obsessed with a
daily tally of consolidated GoA revenue/payment flows and
renewed availability of cost effective official export
credits would go a long way to dampening the appeal Chavez
holds for him. This, in turn, requires a renewed effort on
our part to sit down with the GoA economic team and clarify
the benefits of paying down Paris Club arrears. Argentina is
now five years beyond its 2001/2 economic crisis and
resolution of these official arrears is long overdue. The
USG has a clear interest in putting the Paris Club impasse
behind us.


19. (SBU) Action Request: A large GoA delegation, including
the Economy Minister, Planning Minister, Investment
Coordinator and Governor of Cordoba Province has agreed to
attend the June 10-12 Americas Competitiveness Forum in
Atlanta. Post requests that Commerce Secretary Gutierrez and
Treasury Secretary Paulson agree to meet with their GoA
Planning and Economy Ministry counterparts at this important
conference. We also understand that Secretary Paulson is
considering a visit to Brazil, Uruguay and Chile in July.
Adding Argentina to Secretary Paulson's regional itinerary
would allow him to engage a broad range of senior GoA
officials and equally importantly with civil society and the
media. We think the impact could be very positive and
substantial.
WAYNE