ARGENTINA STRIKES DEBT DEAL WITH SPAIN, CONTINUES

C O N F I D E N T I A L BUENOS AIRES 000140 SIPDIS SIPDIS TREASURY FOR NANCY LEE, AFAIBISHENKO, AJEWEL, WBLOCK, LTRAN PASS NSC FOR JOSE CARDENAS, ROD HUNTER PASS FED BOARD OF GOVERNORS FOR RANDALL KROSZNER, PATRICE ROBITAILLE EXIM BANK FOR MICHELE WILKINS OPIC FOR JOHN SIMON, GEORGE SCHULTZ, RUTH ANN NICASTRI USDOC FOR 4322/ITA/MAC/OLAC/PEACHER E.O. 12958: DECL: 01/24/2017 TAGS: EFIN ECON EINV AR SUBJECT: ARGENTINA STRIKES DEBT DEAL WITH SPAIN, CONTINUES PURSUIT OF PARIS CLUB RESCHEDULING REF: 2006 BUENOS AIRES 2486 Classified By: Ambassador E.A. Wayne for Reasons 1.4 (b,d) Summary -------------- ¶1. (C) Economic Minister Felisa Miceli and new Finance Secretary Sergio Chodos forcefully argued the GoA case for a SIPDIS Paris Club restructuring deal during a January 24 meeting with the Ambassador. Miceli said the GoA and Spain had completed a separate deal on the repayment of Argentina's $835 million Spanish loan, and pleaded for Paris Club creditors to support a rescheduling deal on the remaining $6.3 billion debt, without requiring a prior IMF agreement. Chodos recounted his January 23 meeting with U.S. Treasury officials in Washington, and said that Argentina's only options seemed to be to "pay all or nothing." The Ambassador emphasized the IMF's important role in Paris Club debt arrangements and cautioned that the Paris Club did not want to create a bad precedent, which would create problems for future debt agreements with other countries. He also noted that Argentina's high growth rates and large reserve base indicated a capacity to pay. If this were not the case, the GoA needed to detail reasons it was unable to pay foreign creditors. He urged the GoA to weigh costs against the benefits of clearing arrears: access to Export Credit Agency (ECA) credits and new assistance. Chodos said the GoA faced serious financing restraints (paras 10 - 13),and Miceli added that the opportunity cost of paying down arrears was reduced funding for infrastructure and social projects. While both accepted the logic of the Ambassador's arguments, they offered little hope that the GoA would pursue an informal agreement. Clearly, much work will be needed to see if there is a viable path to agreement. End Summary. Spanish Loan: A Done Deal -------------- ¶2. (C) Ambassador originally sought the meeting to prepare for Deputy USTR Veroneau's visit and to get Miceli's views on the Mercosur summit (septel). However, Miceli included Secretary Chodos in the meeting and clearly wanted to focus SIPDIS on the prospects for a Paris club agreement. Miceli opened the meeting by saying that Argentina and Spain had agreed on a debt restructuring deal separate from the Paris Club. The deal would cover the roughly $835 million loan that Spain provided in conjunction with IMF lending in 2001. (Note: this followed months of promises from both countries that they would resolve this debt within the Paris Club ambit or in conjunction with a Paris Club agreement. End Note). Miceli noted that the agreement was complete, save minor edits, and the two countries would sign it in February and it would enter into force in March. She said Argentina would pay the debt over six years, with a three year grace period. The Ambassador asked if Spain would proceed with the agreement or wait to implement it until a Paris Club arrangement was reached. ¶3. (C) Chodos commented that it made sense to separate this deal from other official debt, because the Spanish loan could not be considered a straight bilateral credit. Rather, Spain had clearly integrated this $835 million loan with the IMF loan, going so far as to issue it under New York law. He added that the GoA had even considered paying off the Spanish loan when it prepaid the $9.5 billion debt to the IMF in January 2006, but in the end concluded that it was already borrowing too much from the Central Bank to pay the IMF debt, and the reserve situation was not as strong then as it is now. Miceli's Paris Club Vision -------------- ¶4. (C) Miceli explained that the GoA had engaged in informal discussions with Paris Club Chairman Musca since December. She thought it made little sense to submit a formal proposal to the Club until she had received assurances of support from key creditor nations. However, it quickly became clear that Paris Club members were insisting on an IMF agreement as a precondition, while the GoA was interested in a straight-up debt rescheduling. In an exasperated tone, she asked what the advantage was to Argentina of negotiating an IMF agreement, and said if this was the main obstacle there would be no deal. She reiterated that the GoA would not "return to the IMF under this administration," and would "never again relinquish sovereignty over policy design." ¶5. (C) Miceli argued that the Paris Club needed to find a "new scheme" to deal with the IMF issue. She proposed using either annual Article IV consultations as a base or working with the IMF to issue a "comfort letter," and emphasized that Argentina wanted to reach a reasonable agreement that satisfied creditor interests and accommodated Argentina's financial constraints. She added that such a deal would be a "great gesture" by wealthy creditor nations, and an "acknowledgment of the pain Argentina had suffered during the recent financial crisis." She concluded that of all the Paris Club creditors, Germany appeared the most sympathetic to Argentina's situation, and cited Planning Minister De Vido's talks this week with Economics Minister Michael Glos in Germany. (Note: Germany remains Argentina's largest Paris Club creditors, with 34% of outstanding debt and arrears. End Note) Chodos: Is the Choice All or Nothing? -------------- ¶6. (C) Chodos characterized his long meeting in Washington on January 23 with Treasury DAS Nancy Lee and new Director of the Western Hemisphere Office Luyen Tran as constructive and candid. However, he came away with the sense that Argentina faced only two real options: "pay all or pay nothing." While accepting Treasury's logic that Paris Club creditors were unwilling to create a precedent by restructuring Argentine arrears and debt without an IMF agreement, Chodos was clearly despondent that there did not appear to be any room for negotiation. He concluded that he did not see why E the Club could not create a "tailor made" agreement for the "special" Argentine case, and alleged that it smacked of "discrimination," since the Club had been much more accommodating to other countries such as Nigeria. Ambassador: Cannot Set a Precedent -------------- ¶7. (C) The Ambassador urged Miceli to consider developing an informal payment plan for clearing arrears, as had been discussed in Washington. He noted that formal negotiations would take a long time and Paris Club members would be preoccupied with avoiding a precedent-setting arrangement making agreement problematic. He emphasized the important role that the IMF played in providing justification for a country's inability to make debt payments. As important, he said, IMF-monitored reform programs enable concerned governments to convince their populations and legislatures that countries receiving Paris Club treatment are improving their economic management. ¶8. (C) The Ambassador noted that the challenge of the Paris Club was to maintain a global view. While all countries have priority cases, they must take into account the interests of all creditors, as well as ensure the credibility of the structure, and agreement is by consensus. Therefore, while Germany might be sympathetic, it will not likely press too hard to find a special solution for Argentina. A consensus will need to be built. Since Chodos had raised it, the Ambassador recommended that the GoA review Nigeria's Policy Support Instrument (PSI) with the IMF, as well as other types of staff-monitored programs, to see if these programs' more limited conditionality might be acceptable. (Comment: Chodos agreed, but the political environment likely precludes an official rapprochement with the IMF. End Comment) ¶9. (C) While recognizing that Argentina was still recovering from the 2001/2 crisis, the Ambassador noted that Argentina's high growth and large official reserves strongly suggests -- at least to Paris Club creditors -- a capacity to pay. Therefore, Argentina needs to provide clear and compelling evidence if this is not the case. The Ambassador also emphasized the benefits of clearing arrears -- improved reputation, potential access to ECA programs, and new assistance, and commented that the GoA must balance the costs and benefits. In the case of the U.S., clearing the arrears would remove obstacles to EXIM and OPIC projects, and would open access to various types of military assistance and U.S. Treasury technical assistance related to anti-money laundering and counter-terrorism finance. He also noted that for the U.S. any debt restructuring proposal would have to be submitted to Congress, which would closely scrutinize the capacity to pay issue. GoA Financial Constraints -------------- ¶10. (C) Chodos agreed that Argentina's financial situation appeared relatively solid on the surface: four years of 8-9% growth, a 3-4% primary surplus and overall fiscal surplus in 2006, balance of payments surplus, $33 billion reserves, and continuing reserve accumulation of over $1 billion per month. However, he noted that the GoA faced significant financing constraints (outlined below). Miceli also complained that issuing new debt to pay the over $3.5 billion arrears would take away from infrastructure and poverty alleviation projects -- and during an election year. (Note: Chodos argued that total arrears, including interest, substantially exceeded $3.5 billion, and approached 70% of total debt to official creditors. End Note) Furthermore, Miceli highlighted the costs of market debt, compared to a potential Paris Club rescheduling: no grace period and higher interest rates. ¶11. (U) Financing Costs: According to information available to the Embassy, Argentina debt payments currently total approximately $10 billion or higher per year through 2011, before falling to near $5 billion per year through 2015 and then climbing sharply again to over $14 billion due in 2016. GoA payments on the GDP warrant (offered as an inducement to bondholders to accept the GoA's debt exchange offer in 2005) and the GoA's debt buyback program add an additional $2 billion due in both 2007 and 2008. Total debt amortization (in US$ billions) 2007 13.7 (15.4 incl. GDP warrant and buy-backs) 2008 10.6 (12.6 incl. GDP warrant and buy-backs) 2009 11.8 2010 9.93 2011 10.9 ¶12. (C) After taking into account the GoA's estimated primary surpluses in 2007 ($8.5 billion) and 2008 ($9 billion),the GoA is facing financing gaps, which it must cover by issuing domestic bonds of $6.86 billion in 2007 and $3.6 billion in ¶2008. In a January 25 follow-up conversation with Econoff, Chodos noted that the GoA would struggle to issue an additional $3.5 billion in debt in 2007, and it would likely result in higher interest rates on all Argentine new issuances. ¶13. (C) Chodos also confirmed to Econoff on January 25 that the GoA is constrained in what it can borrow from the Central Bank (BCRA). The decree that modified the Convertibility Law in 2002 states that BCRA official reserves must fully back the monetary base, and any surplus can be used to pay off "international financial organizations." The monetary base is currently ARP 79 billion and reserves are approximately US$32.6 billion, leaving a surplus of US$6.9 billion at current exchange rates. (Note: BCRA President Redrado stated separately last fall that the definition of international organizations does not cover the Paris Club, so a new law would be required to allow surplus reserves to be used to pay the Paris Club. See Reftel. End Note). Although this amount is sufficient to cover Paris Club arrears, Chodos told Econoff that the BCRA's charter also limits (or "caps") lending to the federal government to 12% of the monetary base (currently equivalent to $9.5 billion). The GoA borrowed reserves in January 2006 to pay its $9.5 billion outstanding debt to the IMF. Chodos was unable to give the exact status of GoA repayments to the BCRA, but commented that the GoA is still close to its borrowing limit, and would need to ask Congress to increase the cap to use additional reserves to pay Paris Club creditors. Chodos also pointed out that the IMF loans were directed to the BCRA, which then on-lent these funds to the GoA. So, the prepayment to the IMF was legally different from the payment of Paris Club credits, which creditors lent directly to the GoA. Comment -------------- ¶14. (C) This was the most candid conversation Post has had to date with GoA officials on Paris Club options. Miceli and Chodos have both said in the past that President Kirchner is pressuring them to complete a Paris Club deal early this year, presumably so that he can demonstrate to the voting public that he has completed Argentina's post-crisis normalization and likely to obtain ECA support for large, election-year infrastructure projects. Both were subdued, as they are realizing that the two sides are far apart and their options are limited. An obvious question is why Argentina would be unwilling to issue new debt as a swap for existing Paris Club debt, when on paper this would not significantly change the overall debt, and would simultaneously bring tangible new benefits. We speculate that the answer, in addition to concerns about higher interest costs, is that there are fewer repercussions to delaying payment to official creditors than to the market. An obvious solution would be for the GoA to develop an informal payment plan to clear arrears, but GoA officials will clearly need convincing that the benefits Argentina gets from access to ECAs and new assistance will outweigh the costs. Such an option was likely not among those presented to President Kirchner, and he would need to bless any new approach. End Comment. WAYNE