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

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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