IMF CANDIDATE STRAUSS-KAHN LOBBIES FOR ARGENTINE

C O N F I D E N T I A L BUENOS AIRES 001809 SIPDIS SIPDIS TREASURY FOR CLAY LOWERY, NANCY LEE, AJEWEL, WBLOCK, LTRAN NSC FOR JOSE CARDENAS, ROD HUNTER PASS FED BOARD OF GOVERNORS FOR RANDALL KROSZNER, PATRICE ROBITAILLE PASS EXIM BANK FOR MICHELE WILKINS PASS OPIC FOR JOHN SIMON, GEORGE SCHULTZ, RUTH ANN NICASTRI USDOC FOR 4322/ITA/MAC/OLAC/PEACHER E.O. 12958: DECL: 09/10/2017 TAGS: EFIN ECON EINV AR SUBJECT: IMF CANDIDATE STRAUSS-KAHN LOBBIES FOR ARGENTINE SUPPORT, CAUTIONS ON PARIS CLUB REF: A. BUENOS AIRES 1785 ¶B. BUENOS AIRES 1745 Classified By: Economic Officer Chris Landberg for Reasons 1.4 (b,d) Summary -------------- ¶1. (C) Dominique Strauss-Kahn, France's candidate for Managing Director of the IMF, capped a four-country tour through Latin America with two days of meetings in Buenos Aires. French Embassy officials called the meetings with GoA officials "surprisingly cordial," particularly with President Kirchner and First Lady (and Presidential Candidate) Cristina Kirchner. The Kirchners apparently also gave the impression they would support Strauss-Kahn's IMF candidacy. GoA officials stressed their opposition to Canada's IMF reform plan, and expressed strong interest in negotiating a deal with the Paris Club. Strauss-Kahn took a firm line during meetings and in a television interview on the need for the GoA to pay down roughly $4 billion in Paris Club arrears or sign an IMF program to resolve the Paris Club impasse. End Summary. Strauss-Kahn Lobbies for Argentine Support -------------- ¶2. (C) Former French Finance Minister Dominique Strauss-Kahn visited Argentina September 2-4 as the final stop on a four-country lobbying tour through Latin America. Following visits to Mexico, Chile, and Bolivia (in that order), Strauss-Kahn spent two days meeting with the GoA officials who will decide whether the GoA supports his candidacy for IMF Managing Director. In addition to President Nestor Kirchner and First Lady, Senator, and leading Presidential Candidate Cristina Fernandez de Kirchner, Strauss-Kahn also met with Economic Minister Miguel Peirano, Foreign Minister Jorge Enrique Taiana, and Central Bank President Martin Redrado. Redrado reportedly included the Central Bank Governors of Paraguay, Uruguay, and Ecuador in the meeting. The French Embassy hosted his visit, and also organized meetings with the private sector and an interview on the influential television show, "A Dos Voces" (Two Voices). Hints of a Possible Reconciliation with IMF -------------- ¶3. (C) Given Argentina's troubled and conflictive history with the IMF, French Ambassador Frederic Baleine du Laurens told Ambassador that he was surprised by how cordial the meetings were with GoA officials, particularly with the Kirchners. This was reflected in subsequent local press stories, with GoA sources commenting on the positive interaction between the Kirchners and Strauss-Kahn and suggesting that this might be the beginning of the GoA's reconciliation with the IMF. French Economic Counselor Michel Planque told Econoff that the Kirchners gave the impression that they would support Strauss-Kahn's nomination, but did not offer official support either in the meeting or subsequently to the press. ¶4. (C) EconCouns Planque noted that Strauss-Kahn bowed to local political realities and acknowledged in both private and public that the IMF had made grave errors in the 1990s, leading up to Argentina's 2001-02 financial crisis. He also accepted that the 60-year old institution needed to adapt to the changed status of emerging market economies. (Comment: However, Planque said local press reports exaggerated Strauss-Kahn's support for less rigorous IMF conditionality. End Comment). Central Bank President Redrado told the Ambassador that both the President and Senator were exceedingly gracious in outlining their criticisms of the IMF to Strauss-Kahn. ¶5. (C) The Kirchners and Economy Minister Peirano emphasized their opposition to Canada's IMF reform plan, which proposes a realignment of voting shares and participation on the Executive Board. Peirano, in particular, highlighted that Argentina would likely lose its Executive Board seat under the Canadian plan (since Argentina currently has only 1% voting shares). Instead, GoA officials pushed for a two-tiered voting protocol that, on key issues involving emerging countries, would add to the normal vote (based on quota weight) a second majority vote where each country has one vote (Strauss-Kahn announced his support for such a system after departing Buenos Aires). Tough Line on Paris Club -------------- ¶6. (C) Argentina's relationship with the Paris Club figured heavily in Strauss-Kahn's meetings with the Kirchners and with Minister Peirano and Central Bank President Redrado. The GoA officials stayed on message in claiming to want to sign a deal and pay GoA arrears (currently approximately $4 billion out of a total debt of roughly $6.3 billion). However, they continued to reject any possibility of agreeing to an IMF oversight program (a Paris Club prerequisite for a debt restructuring deal). Both Kirchners called it "absurd" that the GoA had been unable to strike a deal until now, according to the French Ambassador. They also made clear their intention to make it a priority during the transition between the October 28 Presidential election and the December 10 inauguration of the next President (with the clear presumption that Cristina will be the next President). ¶7. (C) Strauss-Kahn, who was accompanied by Ambroise Fayolle, Co-Chair of the Paris Club Secretariat, reportedly maintained a fairly hard line on the requirements for a Paris Club deal during his GoA meetings. EconCouns Planque reported that Strauss-Kahn asked the Kirchners why the GoA could not just use its official reserves to clear arrears, or just pay them out of the Budget. The Kirchners (and separately other GoA officials) rejected these options, pointing at their weakening fiscal situation and impact of recent global market volatility. The other option discussed, according to the French Ambassador, was that Argentina could devise its own plan and present it to the creditors for discussion and negotiation. The French Ambassador added that the Kirchners did not rule out any role for the IMF in an eventual agreement, but it could not appear as IMF conditionality. Reportedly, President Kirchner urged Strauss-Kahn to resurrect the idea of setting up a special credit line, allowing countries to borrow many times their IMF quotas (with limited conditions attached). Planque also reported that Strauss-Kahn took an even harder line during discussions of Export Credit Agencies' (ECA) support for infrastructure projects in Argentina, clarifying that no ECA would break with Paris Club solidarity. ¶8. (C) In the subsequent television interview, Strauss-Kahn stated that the GoA needed to negotiate with Paris Club members, not with the IMF, regarding its Paris Club debts. He said that "Paris Club's rules required an accord with the IMF" (for debt restructuring),but emphasized that it the Paris Club's -- and not the IMF's -- precondition. Finally, he commented that Argentina's official reserves level and high real growth rate made this a solvable problem. While avoiding the appearance that he was offering solutions, he nevertheless offered that the two clear solutions were to use reserves to pay or, "resolve it according to Paris Club rules," meaning negotiate with the IMF. Comment -------------- ¶9. (C) Central Bank President Redrado told Ambassador he was extremely pleased that the visit had gone so well, especially as he had promoted and organized it. The Kirchners appear to see the upcoming change in the Argentine Presidency as an opportunity to thaw relations with the IMF and resolve the Paris Club impasse. GoA officials have noted this increased interest in recent meetings with Emboffs (reftels). Local newspapers have also recently expanded their reporting on the administration's intent to clear Paris Club arrears. The GoA's motivation is to gain access to export credit agency financing and improve Argentina's reputation as a safe place to invest. The press is also reporting that Cristina Kirchner is discussing Paris Club options during her trip to Europe this week, which may include a meeting with Germany's Prime Minister. ¶10. (C) Renewed GoA attention to the subject is welcome. Unfortunately, the GoA may have missed its window to handle the issue painlessly. The GoA's vaunted primary fiscal surplus has dwindled significantly (septel) as a result of a roughly 50% increase in election-year spending. Reserves are trending downwards, falling $1 billion in the last month, as the Central Bank struggles to deal with higher volatility and lower liquidity in both global and local markets. Also, interest rates in Argentina have increased significantly since mid-July, resulting in much higher borrowing costs. Issuing international dollar-denominated or local-currency debt to cover the cost of clearing Paris Club arrears is now a much more expensive option. End Comment. WAYNE