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

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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

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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