CENTRAL BANK PRESIDENT ON PARIS CLUB, ICSID

C O N F I D E N T I A L SECTION 01 OF 02 BUENOS AIRES 002225 SIPDIS SIPDIS NSC FOR DAN PRICE, DAN FISK PASS FED BOARD OF GOVERNORS FOR KROSZNER, ROBITAILLE PASS TREASURY FOR LOWERY, O'NEIL PASS EXIM BANK FOR MICHELE WILKINS PASS OPIC FOR JOHN SIMON, GEORGE SCHULTZ E.O. 12958: DECL: 11/14/2017 TAGS: EFIN ECON ETRD AR SUBJECT: CENTRAL BANK PRESIDENT ON PARIS CLUB, ICSID AWARDS, ECONOMIC CONCERNS -- EXPECTS ONLY GRADUAL ECONOMIC POLICY IMPROVEMENTS UNDER CRISTINA GOVERNMENT REF: BUENOS AIRES 2212 Classified By: Ambassador E.A. Wayne for Reasons 1.4 (b,d) Summary -------------- ¶1. (C) During a November 11 meeting, Ambassador urged Central Bank (BCRA) President Martin Redrado(protect strictly) to use his considerable influence to steer the debate within the GoA on developing a workable Paris Club proposal and on paying ICSID arbitral awards. Discussions on Argentina's position in Doha Round negotiations were reported Ref A. On the Argentine economy, Redrado said he main concerns were inflation and wage increases, but he thought the BCRA's handling of the international financial turmoil over the last three months vindicated his managed float exchange regime and reserves accumulation policies. He predicted that President Cristina Fernandez de Kirchner's administration would implement gradual economic policy improvements, probably "more gradual and limited than many like." End Summary. Ambassador Makes a Pitch for GoA Paris Club Payments -------------- -------------- ¶2. (C) Ambassador noted that there was clear interest within the USG to work with the GoA to conclude an agreement with the Paris Club (on its $6.5 billion debt and $4.5b arrears). He said that IMF officials who Ambassador recently met with in Washington also expressed interest in helping Argentina and creditors in the process, but that the IMF was probably not willing or able to help to the extent that press reports suggested following the September visit of the new IMF Managing Director Dominque Strauss-Kahn. ¶3. (C) The Ambassador recommended that the GoA look at the recent accord between Angola and the Paris Club, as a possible template. The Ambassador also emphasized that having an IMF agreement was not a precondition to hold talks, so recommended increased dialogue with the Paris Club Secretariat. He added that the expectation was that an SIPDIS Argentine proposal would include substantial up-front, good-faith payments on arrears. The key, the Ambassador said, is that Argentina put a serious workable proposal on the table. ¶4. (C) Redrado noted that the IMF's Head of Western Hemisphere Affairs, Anoop Singh, planned to visit Buenos Aires, November 14-15, for low-profile technical talks. Redrado hoped to discuss economic challenges and plan for Article IV consultations in 2008, and said he had also arranged for a meeting with 30 local economists and had developed a schedule of technical meetings for IMF and BCRA staff. (Singh did visit and Post will seek readout from local the local IMF Resrep). Redrado said he agreed in general with the Ambassadors comment and would try to work with appropriate authorities to encourage a way forward. He added that he would attend the G-20 meetings in South Africa. Redrado predicts GoA ICSID payouts will deter interest in BITs -------------- - ¶5. (C) Ambassador noted the deep concern in Washington over the indications from GoA Procurador del Tesoro Osvaldo Guglielmino (who acts as the GoA's top financial liability lawyer) that the GoA will not pay the recent ICSID award in favor of CMS Energy. The Ambassador noted that the result of such an action could be extremely damaging for Argentina, in terms of its reputation with other governments and foreign investors. It was a particularly bad signal for the GoA to send as President Cristina Fernandez de Kirchner was about to assume office, as one of her priorities is reportedly to attract more investment. The Ambassador noted that the USG had received prior assurances from Guglielmino that the GoA would pay final awards, and he urged Redrado to use his influence to ensure Argentina met its treaty obligations. He said EEB A/S Sullivan would meet with GoA Ambassador Bordon to present the full USG position on this matter in the next few days. Ambassador also asked who he should see in the GoA to address this matter when he receives formal instructions. ¶6. (C) Redrado said Argentine Ambassador (to the U.S.) Bordon had called him about this issue three weeks ago, wondering whether the GoA really had adopted a policy not to pay ICSID BUENOS AIR 00002225 002 OF 002 awards. Redrado recommended that the Ambassador raise the issue with the GoA's Legal and Technical Secretary, Carlos Zannini (who is one of the Kirchners top confidants). Through Zannini the issue would get the attention of the Kirchners. ¶7. (C) That said, Redrado questioned the CMS ICSID tribunal's decision and, more broadly, the entire mode of ICSID operation. In his "frank" opinion, he said that it made little sense that a country should have to pay damages to foreign companies' claims that were the result of an economic crash and severe devaluation. He thought this set a bad precedent for bilateral investment treaties. He further predicted that if Argentina was forced to pay on its numerous claims ( with a face value totaling in the range of $13 billion),the majority of which date to the 2001-02 financial crises, there would be much less demand for BITs around the world. The Ambassador responded that in fact demands for BITs remain high, and the specific challenge in the CMS case is that Argentina had pledged to pay if it lost. Redrado Worries About Inflation, Wages, but Argues BCRA Priorities Correct -------------- ¶8. (C) Redrado noted that his two key economic concerns were high expenditures and salary increases, which were both driving aggregate demand and increasing inflationary pressures. He argued that any inflation targeting regime had to have a salary component, because 20%/year wage increases were incompatible with single digit inflation. The Ambassador noted that you also can not have two inflation rates, the "official" rate of 8-9%, which the IMF refers to as "measured inflation," and the actual inflation rate, which independent analysts estimate at 15-20%. Redrado disagreed that inflation was so high, saying that several indices he monitors -- other than the CPI -- suggest inflation is running in the 13-14% range. Nevertheless, he agreed that it was crucial that the GoA implement needed policies to slow down the overheating economy and inflation. ¶9. (C) Redrado said he was pleased with how the BCRA's monetary and exchange rate policies had responded to the global financial turmoil of recent months, noting that the peso had even strengthened following the October 28 Presidential election. He continued to argue that Argentina is not ripe for a free floating exchange regime and will likely not be ready for several more years. ¶10. (C) Redrado indicated that he was walking a line between Argentine industrialists, who want a further depreciation of the peso (to increase their competitiveness),and local analysts and the IMF advocating for a stronger peso to help fight high inflation. The industrialists want the peso dollar exchange rate to depreciate from its current level of 3.12 - 3.15/dollar to over 3.30/dollar, but Redrado worried that Argentines, still very wary from previous crisis, would react by shifting out of pesos into dollars, which would increase local and foreign expectations of a financial crisis. ¶11. (C) However, he also disagreed with the IMF's Anoop Singh's argument that the BCRA should let the peso appreciate, as Argentina's terms of trade would indicate should happen. He said he would agree with Singh if this were 2010, but in 2007 Argentina was still in recovery mode from the 2001/2002 crisis, and still needed time to adjust. Gradual Policy Shifts Under Cristina Administration -------------- -------------- ¶12. (C) Redrado noted that he expected President Cristina Fernandez de Kirchner to make very gradual improvements to economic policy, with a focus on improving fiscal and wage policies to dampen inflation pressures. However, he said the changes "will be more gradual and limited" than either he, the Ambassador or many other observers would like, and until the new cabinet and president were in place, it would be difficult to measure how and to what degree GoA policies could be influenced. WAYNE