Argentina Economic and Financial Weekly, December 26, 2006,

UNCLAS BUENOS AIRES 000044 SIPDIS SIPDIS EB/ESC/IEC FOR SGALLOGLY, MMCMANUS,JIZZO WHA FOR WHA/BSC AND WHA/EPSC E FOR THOMAS PIERCE PASS NSC FOR JOSE CARDENAS PASS FED BOARD OF GOVERNORS FOR PATRICE ROBITAILLE PASS USTR FOR SUE CRONIN AND MARY SULLIVAN TREASURY FOR ALICE FAIBISHENKO USDOC FOR 4322/ITA/MAC/OLAC/PEACHER US SOUTHCOM FOR POLAD E.O. 12958: N/A TAGS: ECON EFIN EINV ETRD SUBJECT: Argentina Economic and Financial Weekly, December 26, 2006, to January 5, 2007 ¶1. Provided below is Embassy Buenos Aires' Economic and Financial Review, covering the period December 26, 2006, through January 5, ¶2007. The unclassified email version of this report includes tables and charts tracking Argentine economic developments. Contact Econoff Chris Landberg at landbergca@state.gov to be included on the email distribution list. -------------- Weekly Highlights -------------- -- Argentina's Supreme Court Validates 2002 "Pesification" of Bank Deposits. -- U.S. Court of Appeals rules in Argentina's favor on frozen Central Bank assets. -- GoA sends draft terrorism finance bill to Congress, appoints Financial Intelligence Unit Director. -- CPI inflation ends year in single digits, at 9.8%. -- Current account surplus narrows to $1.7 billion, but net capital inflows increase to $1.1 billion in Q3 2006. -- Tax revenues increase 25% in December, bringing full-year revenues to ARP 150 billion. -------------- Banking and Finance -------------- Argentina's Supreme Court Validates 2002 "Pesification" of Bank Deposits -------------- -------------- ¶2. On December 27, the Argentine Supreme Court handed down a long-anticipated ruling declaring constitutional the GoA's 2002 decree forcing conversion of dollar deposits to devalued pesos (known as "pesification"). The Court ruled in the case of a depositor whose dollar-denominated bank deposits were frozen in the so-called "corralon" in 2001 and later "pesified" in 2002. The Court denied the depositor's claim to recoup his deposits in U.S. dollars, ruling instead that his bank must compensate his outstanding legal claims at a peso amount equal to the pesified deposits he would now hold under the terms of the original decree. The restitution formula applies a currency conversion rate of ARP 1.40 for each dollar, then indexes the balance to inflation and adds a further 4% annual interest rate applied retroactively since the pesification was implemented. (Note: the formula effectively converts dollar holdings of plaintiffs at the current 3.08 ARP/USD exchange rate, which the Court intended. End Note). The ruling sets a precedent for the more than 300,000 pending cases in the judicial system (of which some 50,000 have reached the Supreme Court),and the majority of plaintiffs are expected to accept similar deals based on the same formula. The Court sought to strike a balance between what it deemed politically and socially acceptable and what it considered financially feasible for banks. A statement issued by the court noted that, "the aim of the ruling is to find social peace and show that a consensus is possible over difficult questions affecting the community." U.S. Court of Appeals rules in Argentina's favor on frozen Central Bank assets. -------------- -------------- ¶3. On January 5, the U.S. Court of Appeals for the Second Circuit in New York affirmed the January 2006 order of the U.S. District Court for the Southern District of New York (Judge Thomas Griesa), which vacated "restraining notices and orders of attachment imposed with respect to an account of the Banco Central de la Republica Argentina at the Federal Reserve Bank of New York [FRBNY]." Judge Greisa had ruled that these assets were protected from attachment by the Foreign Sovereign Immunities Act (FSIA) of 1976. The appeal stemmed from the attempt of plaintiffs EM Ltd. and NML Capital, Ltd., both holdouts from Argentina's sovereign debt exchange, to recoup losses stemming from Argentina's December 2001 default by attaching $105 million of BCRA funds held at the FRBNY. The plaintiffs argued that Argentine President Kirchner had made the BCRA funds attachable when he issued decrees that gave the GoA the authority to use BCRA funds to repay the IMF. ¶4. The Second Circuit concluded that the BCRA owned the FRBNY funds, and the BCRA was a separate juridical entity from the Go. In the ruling, the Second Circuit court argued that the FSIA allowed "attachment of a foreign state's 'property in the United States...used for a commercial activity in the United States,'" and, in the opinion of the court, a government's payment of IMF debt could not be considered a "commercial activity." (Note: this case originates from EM's lawsuit against the GOA, filed in April 2003. In January 2004, the U.S. Treasury Department filed a statement of interest and the Federal Reserve Bank of New York filed an "amicus curiae brief" with U.S District Judge Griesa, backing the motion to prevent bondholders seeking to bar Argentina from paying other creditors. The Treasury and New York Federal Reserve argued that a broad interpretation of the "pari passu" clause, giving all creditors the same proportional right on GoA's sovereign payments (as previously ruled by a Belgian Court),would jeopardize debt restructuring efforts, payments to the IFIs, and the architecture of the world financial system. End Note). Press reports quote David Rivkin, lawyer for EM Ltd. (the investment vehicle of billionaire Kenneth Dart),saying that his client is considering whether to ask the full circuit court to reconsider the ruling or instead file an appeal to the U.S. Supreme Court. -------------- Economic Policy -------------- GoA sends draft terrorism finance bill to Congress, appoints Financial Intelligence Unit Director. -------------- -------------- ¶5. On December 20, President Kirchner sent the GoA's draft Counter Terrorism Finance (CTF) bill to Congress for review. The GoA took this action in order to comply with Financial Action Task Force (FATF-GAFI) requirements, and avoid sanctions (which would likely have been a public statement of noncompliance with international CTF norms). The bill is now before three Senate committees (Domestic Economics and Investment, Justice and Penal Issues, and Domestic Security and Narcotics),after which it will go to the open chamber for a vote. (Note: following Senate approval, the draft law will pass to the Chamber of Deputies. End Note). It is likely that the President will call for an extraordinary session of Congress in February to debate this and other pending legislation. ¶6. Separately, on December 27, the GoA officially appointed Rosa Falduto as the new President of Argentina's Financial Intelligence Unit ("Unidad de Investigacion Financiera" or "UIF" in Spanish), disregarding questions raised locally about her qualifications. Falduto is a relatively unknown accountant, who previously served as an advisor to a Congressional committee on money laundering and also worked at the Attorney General's Office. During the nomination process, a local NGO, "Centro de Investigacion y Prevencion de la Criminalidad Economica," objected to her appointment, citing her lack of technical experience and inadequate foreign language skills. (Note: In September 2006, Congress amended the composition of the UIF executive structure from a five member directorship with rotating presidency to a structure that has a permanent, politically appointed President and Vice President. End Note). The UIF plays a critical role in pursuing money laundering cases in Argentina, and will fill a similar capacity with regards to terrorism finance investigations and court cases. It is unclear what impact the GoA's decision to appoint a relative unknown as UIF Director will have on law enforcement efforts related to money laundering and terrorism finance, but some local observers have expressed concern that it will result in a weakened UIF. -------------- Economic Outlook -------------- CPI inflation ends year in single digits, at 9.8%. -------------- Q -------------- -------------- ¶7. The Consumer Price Index (CPI) increased 1% m-o-m in December, as expected by the market, bringing 2006 CPI inflation to 9.8% and achieving the GoA's goal of containing inflation to single digits. The GoA kept the CPI from exceeding 10% largely thanks to its pervasive price control agreements, particularly on meat and dairy products. The highest price increases for 2006 were for education (+19.9%),clothing (+14.6%),housing (+10.8%),and food and beverages (+10.5%). Local analysts argue that the GoA will use the single-digit inflation as a key reference during future wage negotiations. ¶8. Price increases in December were driven by a 1.8% m-o-m increase in the sub-index tracking the prices of food and beverages and by a 2% increase in the sub-index tracking the prices of entertainment (a seasonal increase due to the Austral summer holidays). Price increases for remaining goods and services were relatively moderate. BCRA consensus survey forecasts for 2007 CPI inflation are 10%. Current account surplus narrows to $1.7 billion, but net capital inflows increase to $1.1 billion in Q3 2006. -------------- -------------- ¶9. The GoA announced balance of payments results for the third quarter of 2006, showing a current account surplus of over $1.7 billion. This was above the market forecast of $1.4 billion, but lower than the $2 billion surplus in the third quarter of 2005. The $277 million decrease in the current account surplus (compared to Q3 2005) was largely driven by higher imports and remittances of dividends. The merchandise trade surplus in Q3 reached $3.3 billion, compared to the Q3 2005 trade surplus of $3.8 billion. The BCRA consensus survey forecasts the current account surplus at $6.5 billion for full-year 2006 and $4.7 billion for 2007, compared to a current account surplus of $5.4 billion in 2005. ¶10. The capital account showed net capital inflows of $1.1 billion, versus net capital inflows of $556 million in Q3 2005. Inflows were mainly from the non-financial private sector (FDI and commercial financing, totaling $914 million) and the non-financial public sector and BCRA (totaling $247 million),which were minimally offset by banking sector outflows of just $15 million. Net outflows to IFIs in Q3 reached $131 million, as a result of disbursements of $1.1 billion and amortizations of over $1.2 billion. Official Reserves increased $2.5 billion during Q3 of 2006 to $28.0 billion. Tax revenues increase 25% in December, bringing full-year revenues to ARP 150 billion. -------------- -------------- ¶11. December federal tax revenue increased 25% y-o-y to ARP 14.1 billion (approximately $4.55 billion),above expectations of ARP 13.2 billion, bringing full-year revenues to a record of ARP 150 billion (up 26% y-o-y),or approximately $48 billion. This strong yearly performance is mainly explained by strong collections of VAT (+28% y-o-y),income taxes (+20% y-o-y),labor taxes (also referred to as pension taxes) (+42% y-o-y),and export and import taxes (+20% and +32% y-o-y, respectively). During a January 2 press conference, Alberto Abad, the head of Argentina's tax authority ("AFIP," or "Administracion Federal de Ingresos Publicos," equivalent to the U.S. IRS),stated that the record setting revenue collection, representing 23.2% of GDP, reflects the strong economic growth rate, strong export growth, and improvement in tax compliance. He noted that VAT, labor, and income tax revenues explain 69% of the growth in total collections. ¶12. To see more Buenos Aires reporting, visit our classified website at: http://www.state.sgov.gov/p/wha/buenosaires WAYNE