Identifier
Created
Classification
Origin
08BUENOSAIRES1011
2008-07-24 20:49:00
CONFIDENTIAL
Embassy Buenos Aires
Cable title:  

MID-YEAR STATUS REPORT ON BILAT ECONOMIC ISSUES:

Tags:  EFIN ECON ETRD PREL AR 
pdf how-to read a cable
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C O N F I D E N T I A L SECTION 01 OF 05 BUENOS AIRES 001011 

SIPDIS

E.O. 12958: DECL: 07/23/2028
TAGS: EFIN ECON ETRD PREL AR
SUBJECT: MID-YEAR STATUS REPORT ON BILAT ECONOMIC ISSUES:
PARIS CLUB, HOLDOUTS, EXIM TOLLING AGREEMENT, ADVOCACY CASES

REF: A. BUENOS AIRES 991

B. BUENOS AIRES 976

C. LANDBERG/STILWELL 07/17/08 EMAIL

D. BUENOS AIRES 984

Classified By: Ambassador E.A. Wayne for Reasons 1.4 (b,d)

Summary
-------
C O N F I D E N T I A L SECTION 01 OF 05 BUENOS AIRES 001011

SIPDIS

E.O. 12958: DECL: 07/23/2028
TAGS: EFIN ECON ETRD PREL AR
SUBJECT: MID-YEAR STATUS REPORT ON BILAT ECONOMIC ISSUES:
PARIS CLUB, HOLDOUTS, EXIM TOLLING AGREEMENT, ADVOCACY CASES

REF: A. BUENOS AIRES 991

B. BUENOS AIRES 976

C. LANDBERG/STILWELL 07/17/08 EMAIL

D. BUENOS AIRES 984

Classified By: Ambassador E.A. Wayne for Reasons 1.4 (b,d)

Summary
--------------

1. (C) This cable provides status of bilateral economic
issues: Paris Club, holdouts, ExImBank tolling agreement,
Post advocacy and ICSID cases, as well as updates on GoA/IMF
relations and GoA finances. New Economy Mnister Carlos
Fernandez supported his predecessor's Paris Club proposal to
make debt payments going forward and reschedule all arrears,
but President Cristina Fernandez de Kirchner (CFK) rejected
that plan in favor of restructuring all PC debt, including
principal outstanding. The Economy Ministry is preparing a
draft Presidential decree to sign ExImBank's tolling
agreement. Ministry officials consider counterproductive
some U.S. holdout bondholders' aggressive actions to force
the GoA to compensate them, but are also meeting with other
holdout groups pursuing a low-key approach to reach a deal,
including new financing for Argentina. The Ministry appears
to be making some progress in resolving two advocacy cases
(Bowne and TIG Insurance),but continues to insist that U.S.
companies must "execute" ICSID arbitral awards through
Argentine courts. Post continues to work separately to
resolve a case involving UNISYS. The GoA wants to avoid
criticism of the manipulation of inflation statistics in IMF
Article IV Consultations, making it unlikely these will take
place in 2008. A close Ministry source states that President
CFK overruled her cabinet in choosing to oppose the IMF
reform in May. Ministry officials emphasize that the GoA
will easily meet 2008 financing needs and downplay market
concerns over the GoA's ability to make debt payments during
the period 2009-2011. Given lack of access to international
markets and increasing financing costs, however, Argentina
will find it difficult to pay Paris Club arrears and settle
with holdouts during this period. End Summary.

Finance Secretariat Views on Key Bilat Issues

--------------

2. (C) This cable summarizes conversations over the last
month with new GoA Finance Secretary Hernan Lorenzino and
Finance Under Secretary Juan Carlos Barboza at the Ministry
of Economy (MECON),providing status updates on Paris Club,
holdout bondholders, the proposed tolling agreement with
Eximbank, Post advocacy for U.S. companies, and ICSID cases,
as well as on GoA relations with the IMF and GoA finances.
Secretary Lorenzino, promoted in early May from his position
as Financial Attache in Washington, has stated to EconOffs
that the new team at MECON wants to address issues that
undermine Argentina's image: mainly Paris Club, holdouts, and
INDEC. However, he is realistic in appraising his chances,
recognizing that little progress is possible on these issues
while the President and GoA are focused on the dispute with
farmers over export taxes, and its aftermath (see Ref A for
latest). He also tacitly acknowledges new Economy Minister
Carlos Fernandez's limited ability to influence the
Kirchners.


3. (C) For the time being, Lorenzino will serve
simultaneously as Finance Secretary and as Financial Attache
in Washington, D.C. As such, he has the lead on non-trade
related bilateral economic issues with the USG. (Lorenzino
informed both Post and U.S. Treasury officials that he will
be the point person for most international issues within
MECON, since EconMin Carlos Fernandez is more focused on
handling domestic issues.) U/S Barboza, Post's most reliable
contact in MECON, resigned as of July 18 to take a position
in the Argentine Central Bank leading the department that
manages official reserves. His departure is a major loss to
a Ministry that has already lost much of its top financial
talent.

Paris Club: Pick Up Where Previous Minister Left Off
-------------- --------------

4. (C) Lorenzino has informed EconOffs multiple times that
Minister Fernandez decided not to start from scratch, and
instead supported the Paris Club negotiating proposal
developed in April by former Economy Minister Martin Lousteau
and Finance Secretariat staff. However, Finance
UnderSecretary Juan Carlos Barboza (PROTECT) explained to

BUENOS AIR 00001011 002 OF 005


EconOffs during the July 10 Embassy reception for visiting
A/S Tom Shannon and Treasury DAS Brian O'Neill that President
Cristina Fernandez de Kirchner (CFK) recently rejected the
Lousteau proposal.


5. (C) Barboza confirms details reported in the press about
Lousteau's proposal: 1) it calls for restructuring all
arrears, with three years grace and payment over five years
(eight years total); 2) it envisions immediately resuming
payments on the roughly $1 billion principal still
outstanding; 3) the GoA will not accept an IMF role of any
kind. Barboza admits that FinSec staff developed the
proposal in full knowledge that the Paris Club members were
sure to reject it as insufficient. Nevertheless, Barboza and
others saw it as a starting point for negotiations. However,
according to Barboza, CFK rejected it because it provided
insufficient debt relief, and she instructed that the
proposal call for restructuring of all PC debt, including all
principal outstanding, rather than only arrears. Barboza is
aware that the Finance team is preparing another option that
has the GoA resuming payments on debt coming due as of
January 2009 and restructuring arrears accumulated through

2008. (As of April 2008, the GoA's total debt stock,
including late interest, to 17 PC creditors equaled $7.92
billion, of which $5.36 arrears, $1.35 outstanding principal,
and $1.21 late interest.)


6. (C) Lorenzino told Econoff during the July 10 Shannon
reception that MECON has given CFK various options to
consider, but that the Kirchners were still entirely focused
on the farm strike. He commented that he did not see much
chance of advancement in internal GoA discussions on Paris
Club (or any other financial sector issue) until the
Agricultural crisis was resolved. He reiterated earlier
comments to Econoffs that he and the Minister appreciate the
frank and open dialogue they have with Treasury officials,
but for now prefer to keep PC discussions very low key.
(Lorenzino informed Econoff prior to the Shannon/O'Neill
visit that MECON preferred not to include Paris Club on the
agenda of the July 10-11 bilateral consultations, nor were
they eager to discuss it during the Minister's planned July
11 bilateral with A/S Shannon, DAS O'Neill, and Ambassador
Wayne. Indeed, it did not come up -- see Ref B for readout.)


7. (C) Lorenzino has said in the past that MECON's strategy
is to develop informal contacts with the Treasuries of the
main PC members, so that when the GoA does present a proposal
to the PC Secretariat there will already be an informal
consensus built with the major players. (This, however, goes
against what prior Finance Secretary Hugo Secondini promised
Paris Club Chairman Musca during the spring IMF/World Ban
meetings. Secondini reportedly promised that the GoA would
only negotiate with the Secretariat.) Lorenzino says he will
be in charge of all PC-related discussions with the U.S. and
Japan. However, Lorenzino informed both Post and Treasury in
June that current Argentine Ambassador to Germany, Guillermo
Nielson, who as Finance Secretary in 2005 managed Argentina's
sovereign debt exchange, will handle daily talks with EU
members of the Paris Club. (According to Barboza, Nielson
has already met with French and German counterparts, but
received no support for the GoA's proposal of a three-year
grace period.)

EXIM Tolling Agreement Moving Forward, Slowly
--------------

8. Lorenzino told Econoff June 30 that the Economy Ministry
is preparing a draft Presidential decree to authorize the
Economy Minister to sign a tolling agreement with the U.S.
Export Import Bank. (The purpose of this agreement would be
to stop the clock on the statute of limitations on the GoA's
debts to EXIM, to allow time for the GoA to resolve its
bilateral debt to EXIM in the context of broader Paris Club
negotiations. This would preclude the need for EXIM to
consider suing Argentina in U.S. court for payment.)
Lorenzino confirmed that he has spoken with Oswaldo
Guglielmino, Argentina's Treasury Attorney (Procurador del
Tesoro, an independent GoA official with the rank-equivalent
of Minister),who fully supports the initiative.


9. (C) In subsequent conversations with Lorenzino's legal
advisor, Matias Isasa (and also with U/S Barboza),Econoffs
learned that FinSec and Guglielmino's staffs are still
working to determine whether the Minister has unilateral
authority to sign such an agreement, which would be faster

BUENOS AIR 00001011 003 OF 005


than going through the President's office. There are
apparently "other entities" interested in signing similar
agreements, so it would be much easier to complete all of
them if the Minister were authorized to sign them. (Comment:
Despite this effort, Isasa suspects that most plausible
option is the Presidential decree. Regardless, this issue is
also likely frozen until the dust settles on the recently
resolved farm strike.)

Holdouts -- ATFA Antics "Counterproductive"
--------------

10. (C) Lorenzino and other GoA officials are highly critical
of the actions of the American Task Force Argentina (ATFA),
the main U.S.-based holdout bondholder lobbying group
(representing bondholders that did not participate in the
2005 debt exchange). ATFA is publicly critical of the
Kirchner government's treatment of bondholders in the 2005
exchange (in which the GoA achieved an acceptance rate of
only 76% of bondholders in exchange for $82 billion in
defaulted bonds; the participants accepted a
take-it-or-leave-it offer of about 34 cents per dollar of
debt, not covering an additional $18 billion of accrued
interest between the 2001 default and 2005 exchange).
Lorenzino called ATFA's high-profile publicity campaign in
the U.S. and with the U.S. Congress, as well as its
occasional satirical cartoons about the Kirchners, "highly
counterproductive," as the Kirchners have earned a reputation
of responding aggressively to counter critics.


11. (C) Lorenzino cautiously acknowledged to Econoff that he
has met with representatives of U.S. hedge fund Gramercy,
which is pursuing a low-key approach to convince the GoA to
strike a deal with holdout bondholders that would include new
financing for Argentina. Gramercy representatives informed
Econoff May 31 that the fund is working with Barclays and
JPMorgan (as the underwriters) to put together an offer
covering the majority of untendered debt. The offer would
attempt to replicate the 2005 arrangement, with the
additional sweetener of bringing in new financing of around
$2.5 billion. Since the GoA would be swapping untendered
debt for new instruments there would be no immediate fiscal
impact and the GoA could downplay the reopening of the
exchange and sell it as a way of bringing in new financing.
According to Gramercy, GoA interlocutors have stated their
preference that the new financing come in the form of credits
for energy sector projects in Patagonia. (Comment: Gramercy
is pursuing the opposite tactic of ATFA by maintaining quiet
talks and selling the offer as helpful to the GoA. However,
given the Kirchners purported aversion to reopening the debt
exchange, Post considers it unlikely that this low key method
will end with greater success. Also, the GoA's narrow focus
on recovering domestic popularity and the political
initiative following the bruising and economically damaging
farm crisis appears to preclude any GoA action on this for
some time.)


12. (C) Also in late May, ATFA reps told Econoff of rumors
that the GoA has considered pursuing a special deal with
German and Italian holdouts, since the German and Italian
governments have been so vocal in condemning Argentina's
failure to resolve the situation. The ATFA rep further noted
that GoA officials appear to believe that they do not have to
worry about the U.S., since the USG has not pushed hard on
the holdout issue. (Comment: the Embassy has raised this
issue in most relevant bilateral meetings over the last two
years.) The ATFA rep claimed that German Chancellor Merkel
has taken a particularly hard line on the holdout issue with
the GoA. (Note: AmEmb Berlin followed up on this comment
(Ref C),meeting June 19 with Joachim Steffens, Head of
Division for International Investments and Finance and Debt
Rescheduling at Germany's Economic Ministry. Steffens stated
that Germany -- Argentina's largest creditor -- had taken a
principled line on the bond issue. He said that Germany's
position is that if Argentina is prepared for a settlement
with the Paris Club, then they also have to reach a
settlement with bond holders.)

Advocacy cases: Nearing Closure on Bowne, TIG
-------------- -

13. (C) Relatively good news is that the Finance Secretariat
has made some progress over the last year in pushing forward
compensation proposals for U.S. companies Bowne of New Jersey
and TIG Insurance. MECON has prepared a special decree for
the President to authorize payment of the $1.4 million owed

BUENOS AIR 00001011 004 OF 005


to Bowne for publicity work it provided during the 2005 debt
exchange. (Bowne printed the prospectus for the exchange,
but costs quadrupled when the Italian government demanded a
separate, translated prospectus for each of the many
thousands of Italian bondholders.) U/S Barboza also has
informed Econoffs that MECON also included payment to TIG in
the 2008 budget, although Econoffs have not been able to
confirm this with the Ministry's Secretariat of Hacienda
(Treasury),which controls the budget. (TIG has offered a
settlement of close to $10 million of a dispute pending since
the early 1990s.) Post continues to work with the Finance
Secretariat to determine the timeline for the resolution of
both longstanding disputes.

CMS Energy and ICSID cases
--------------

14. (C) Lorenzino told Econoff June 10 that Bank of America
had called him offering to sell the GoA the claim it had just
purchased from CMS Energy. He said he declined to discuss a
deal because the "appropriate" means to handle the issue was
for the claimholder (originally CMS and now BoA) to "execute"
the ICSID arbitral panel ruling through Argentine courts.
Lorenzino acknowledged USG disagreement with GoA insistence
on using local courts for this purpose, but claimed that
there was lengthy Argentine jurisprudence backing this
position. Lorenzino termed it a formality, arguing that the
Argentine Supreme Court was the appropriate body to
"recognize the validity of the award." He said the Supreme
Court would only determine that the award meets the criteria
of the bilateral treaty and would not get into the details of
the decision. (Note: Post has reported separately via
classified email to State WHA, EB and Legal and Treasury on
Bank of America's attempt to negotiate a deal with the GoA
that would combine a discounted payment on the CMS ICSID
award with the transfer of a 23% stake in Argentina's TGN
natural gas transmission system.)


15. (C) Post also continues to work on a separate claim
involving Unisys, totaling approximately $55 million for
Unisys' development of information systems for the Argentine
judicial branch. Unisys suspended its ICSID claim in August
2005 in favor of pursuing low-key negotiations with the GoA.
In April 2007, UNISYS accepted a settlement offer of $8
million. However, not only has the judicial branch
(represented by the Council of Magistrates) not paid the
award, but in April 2008 it filed a countersuit against
Unisys for a similar amount. Post has followed up with both
the Ministry of Justice and the Council of Magistrates,
urging resolution of the case, particularly given that Unisys
has been especially accommodating in foregoing the ICSID
route in favor of direct negotiations.

IMF Article IV Assessment Delayed to 4th Qtr
--------------

16. (C) During a June 12 meeting with Treasury DAS Brian
O'Neill in Washington, Lorenzino stated that he had discussed
with the IMF the possibility of conducting Article IV
consultations in the fourth quarter of 2008. In subsequent
discussions with Econoff, Lorenzino highlighted the
sensitivity of this issue in Argentina and emphasized the
difficulty of moving forward with Article IV as long as
questions remain over the credibility of INDEC's CPI reports.
(national statistics agency INDEC is widely considered to
have been manipulating inflation numbers since February 2007,
with the official annual inflation rate currently in the 8-9%
range, while private estimates place it around 25%.)


17. (C) Lorenzino states that the GoA does not want the
Article IV to be a judgment on INDEC, which would cause
embarrassment for the GoA. He notes that the GoA is
implementing a new inflation measurement methodology, and
MECON wants to test it over several months before inviting
the Fund to begin the review. He acknowledged that the IMF
has formally requested information on the new methodology.
(Comment: so far, the new methodology does not appear to have
resolved INDEC's credibility issue. As long as this
situation persists, Post believes it will be difficult for
the GoA and IMF to agree to begin the process. Since
reestablishing the credibility of INDEC is not politically
feasible as long the gap between "official" and true
inflation remains in the 10-20% range, Post believes it
ambitious to expect the Article IV to take place this year.)

Vote on IMF reform -- "Incredible Stupidity"

BUENOS AIR 00001011 005 OF 005


--------------

18. (C) In a rare moment of indiscretion, U/S Barboza
(PROTECT) told Econoff that the GoA's decision in early May
to be one of only three IMF member countries to vote against
the IMF's quota and voice reform was an example of
"incredible stupidity." He commented that MECON had sent a
proposal to the President recommending approval of the
reform, and he understood that the Argentine Central Bank had
made a similar recommendation. However, the President had
overruled these recommendations. Barboza complained that the
action only succeeded in reducing further Argentina's already
limited credibility with the IMF and other IMF members.
(Comment: Central Bank President Martin Redrado told
Treasury DAS Brian O'Neill July 11 that this vote followed
shortly after former Economy Minister Lousteau abruptly
resigned -- on April 24 -- and during the transition to new
Minister Fernandez. He termed it the equivalent of a
bureaucratic snafu. See Ref D for readout of Redrado/O'Neill
meeting.) (Additional Comment: Barboza, a true professional
and the institutional memory in the Finance Secretariat, had
clearly become increasingly frustrated at MECON, partly
explaining his move to the Central Bank. )

Financing Program and Mini-Debt Swap
--------------

19. (C) Lorenzino and Barboza have clarified to Econoffs on
various occasions over the last month that MECON does not
expect problems in meeting its financing needs in 2008.
Lorenzino stated this publicly in a July 2 speech, arguing
that the GoA can auto-finance itself (via direct placements
to public agencies) without tapping either international or
domestic markets. However, FinSec officials acknowledge that
financing needs increase sharply for years 2009-2011, to the
range of $10-11 billion per year, which will challenge the
GoA's capacity to meet its debt obligations. Nevertheless,
Lorenzino dismisses concerns in the market that the GoA risks
another default in coming years. (Most local economists
expect the GoA to be able to meet its financing needs during
2009-2011 through issuing debt to public agencies, local
banks and pension funds, and sales to Venezuela; however,
they acknowledge downside risks of a deteriorating fiscal
balance if growth slows more rapidly than expected, or the
GoA increases spending above current levels, or international
commodity prices fall sharply.)


20. (C) Lorenzino notes that MECON still considers
refinancing debt coming due during 2009 - 2011 as a viable
option, despite U.S. holdout bondholders' attempts to block
such a debt swap in New York Courts. (Holdouts have filed a
lawsuit in the U.S. District Court for the Southern District
of New York in an attempt to attach GoA Global bonds that
back the Argentine Guaranteed Loans that would comprise the
majority portion of a mini-debt exchange. Most observers
believe the lawsuit has effectively frozen the GoA's plan to
conduct a swap of the guaranteed loans to smooth out the
2009-2011 debt amortization schedule.) Lorenzino argues that
the lawsuit is not the main impediment; rather the current
market -- with expected yields on GoA issuances currently at
12 - 14% -- makes a debt swap covering up to $33 billion in
GoA debt untenable for the moment.


21. (C) Comment: Post generally agrees that the GoA will
find the means to meet its financing needs during the
difficult 2009-2011 period, after which financing levels
mostly drop down to more manageable levels. However, given
the GoA's current lack of access to international markets,
and high costs of raising funds through domestic issuances or
via private placements with Venezuela, it will become
increasingly unlikely the GoA will be willing and able to
access adequate additional funds to begin payments to both
Paris Club and Holdout creditors during this period. The
only viable alternative may be to use Central Bank reserves,
although that route would create numerous legislative and
legal complications, including by possibly generating new
legal claims by private international debt holders.
WAYNE