FOREIGN BANKERS PESSIMISTIC ABOUT THE FUTURE IN

C O N F I D E N T I A L SECTION 01 OF 04 BUENOS AIRES 001048

SIPDIS

E.O. 12958: DECL: 07/29/2028
TAGS: EFIN ECON ETRD PREL AR
SUBJECT: FOREIGN BANKERS PESSIMISTIC ABOUT THE FUTURE IN
ARGENTINA; ARGENTINE CONTACTS PREDICT DIFFICULT 2009 IF GOA
FAILS TO CHANGE TACTICS

REF: BUENOS AIRES 991

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

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

1. (C) Foreign financial sector representatives gave visiting
Treasury DAS Brian O'Neill a pessimistic assessment of the
state of the Argentine economy and prospects for improvements
in GoA economic policies during a July 11 meeting. They
agreed on the likelihood of a sharp economic deceleration
going forward, noting that Argentina is affected by turmoil
in the global economy, the country is worn out by the farm
crisis, and the GoA has made major strategic errors during

2008. Although they concluded that the country would avoid a
crisis as long as it maintains trade and fiscal surpluses,
they agreed that the interventionist Kirchner economic policy
model of using stimulative macro policies to boost domestic
consumption and offsetting micro controls and subsidies
policies to staunch inflationary pressure on prices is spent.
Furthermore, given high inflation and rising poverty, the
bankers thought President Cristina Fernandez de Kirchner
would not be able to recover her previous popularity levels.
Both foreign and domestic financial sector players are
increasingly nervous, because they know that banks are always
among the first to be scapegoated by the GoA when the economy
sours. In a separate conversation July 29, the Presidents of
the Stock Market and Argentine Securities Commission and a
successful Argentine businessman told Ambassador that though
the second half of 2008 would probably be fine, 2009 would be
a very difficult year, as Argentina will have limited access
to markets to meet its financial needs. A basic requirement
to pull out of the current problems is to restore credibility
of statistical figures, and that will be hard to do, they
argued. End Summary.


2. (C) Treasury Deputy Assistant Secretary Brian O'Neill met
July 11 with representatives of the major foreign financial
institutions operating in Argentina. Top Executives from
Citi, Prudential, American Express, HSBC, Santander, and
Deutsche Bank participated. Separately on July 29, the
Ambassador had a two hour discussion with the President of
the Buenos Aires Stock Exchange, the President of Argentina's
SEC equivalent, and the CEO of Pampa Energy on similar topics.

Citibank: Banks cautious due to high uncertainty and
unpredictability
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3. (C) Citibank-Argentina President Juan Jose Bruchou started
off with a gloomy assessment of the impact of the uncertainty
of the last few months and the likelihood of a strong
economic deceleration going forward. After many great years
for the economy and financial sector, the months March
through July have been difficult, with spiking inflation in
February and March and the farm crisis beginning mid-March
causing a mini-run on the peso. Peso deposits plunged 6-8%
during March-June, with May the worst month. Banking sector
liquidity fell sharply as people sought to buy dollars,
convert peso deposits to dollars, convert long-term deposits
to short-term, and get hard currency out of Argentina
altogether. The Argentine Central Bank's quick action to
begin selling dollars in the spot and futures markets
stabilized markets and stopped the run on the peso, but at a
steep cost.


4. (C) The BCRA's actions exacerbated the liquidity crunch
(by taking pesos out of the market),and despite attempts to
inject liquidity through bond purchases, the result was much
higher inter-bank and consumer credit interest rates and the
peso appreciating to its current level of almost 3
pesos/dollar. Bruchou noted that despite some recovery in
consumer credit, credit to the private sector has stagnated.
Inflation is still well above 20%, and while it has
stabilized with the deceleration of the economy, he expects
it to stay at this level due to indications that the GoA
intends to increase spending to boost growth and rebuild
CFK's political popularity. Due to high inflation, the farm
strike, and the appreciated peso, Bruchou predicted that real
growth would drop to 2-3% in 2009. He lamented that the high
level of uncertainty and unpredictability of GoA policies had
created an extremely negative climate for doing business.
Despite the financial sector's strong performance until now,
he said, "our inability to read the medium to long term, and

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the government's unwillingness to correct (its errant
policies) has left banks moving cautiously."

Prudential: "We think change is logical; the Kirchners think
differently"
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5. (C) Prudential Financial President Martin Gauto chimed in
to point out that, when President Cristina Fernandez de
Kirchner (CFK) took office in December 2007, the main
economic concerns were high inflation, inadequate energy
supply (and resulting shortages),and questions about the
sustainability of the fiscal surplus. Now, he argued, these
specific concerns are superseded by the broader themes of
great uncertainty and unfriendly business environment, which
permeate throughout the economy and have brought private
sector investment to a full stop. A large part of the
uncertainty, in his opinion, is the realization that former
President Nestor Kirchner is still in full control of the
government, and when faced with problems (e.g. the farm
crisis, a slowing economy),he "always doubles the bet."


6. (C) Gauto emphasized the fundamental disconnect between
the thought process and priorities of the private sector (and
most other observers) and the current administration. "We
all think that change is logical; the Kirchners think
differently." If asked the question about what needs to be
fixed or resolved, Gauto added, "the Kirchners think:
'there's nothing that needs resolving.'" When DAS O'Neill
pointed to the need to rebuild credibility at Argentine
statistical agency INDEC, Guato said this was a perfect
example of what he was explaining: "Nestor Kirchner thinks,
'what is there to fix?'"

AMEX: We "can only speak to Redrado, and he has no power"
-------------- --------------

7. (C) American Express President Jose Maria Zas commented
that due to high inflation and recent high interest rates,
AMEX has seen a rapid increase in credit card delinquency
rates. He echoed others' comments that the previous four
years have been a tremendous growth phase, but it is
impossible to predict what will happen over the next six
months. He noted increasing signs of rapid economic
deceleration, highlighting as an example that tourism, which
has enjoyed double its historical growth rate since the 2002
crisis, is now faltering (due to increasing costs, the
appreciating peso, and the GoA's interference in the
operations of primary domestic airline Aerolineas
Argentinas). He accused the GoA of being totally isolated
from the business sector, so does not understand the extent
of the problems. Zas commented that the ONLY Argentine
official the private sector can speak to about these concerns
is BCRA President Redrado, "who has no power." All others
present agreed with this comment, with Citi's Bruchou stating
that, with Nestor Kirchner running everything, there is no
one else in the GoA worth talking to. The Deutsche Bank rep
was even more candid, stating that the GoA simply does not
think it needs to hear from the private sector.

HSBC: Political crisis is affecting expectations
-------------- --------------

8. (C) HSBC President Antonio Losada argued that the
political crisis related to the farm strikes has strongly
affected economic expectations for both the general public
and private sector. Consequently, both have become more
cautious, contributing to the economic slowdown. As long as
the twin surpluses persist, he said, the country will stay in
decent shape, but this depends heavily on exports from the
agricultural sector. (At the time of the meeting, the farm
strike was ongoing and ag exports had slowed significantly;
that changed July 18 when the GoA repealed the March 11
decree to increase export taxes. See Ref A.) Losada added
to previous comments that, in addition to the lack of
high-level interlocutors, the GoA lacks technical expertise
in the key economic ministries, so there are few capable of
even recommending good policies.


9. (C) Losada also commented that debt issues were going to
become more problematic going forward, with the GoA's
financing needs doubling from the 2008 level to $10-11
billion per year in 2009 through 2011. With very limited
access to international finance (due to holdout bondholder
lawsuits),high interest rates, a global liquidity crunch,
and decelerating Argentine and world economies, Losada noted

BUENOS AIR 00001048 003 OF 004


that the GoA would find it harder than in recent years to
come up with needed gap financing. Nevertheless, he thought
the GoA would succeed in finding local funding sources, and
commented that increasing fears in the market about another
GoA debt default are mostly due to the perception that the
GoA lacks the willingness to pay, but not the ability to pay.

Santander: Hard to reverse CFK's fall in popularity
-------------- --------------

10. (C) Santander Rio Chief Economist Gabriel Ribisich noted
how unbelievable it was that CFK's popularity had plunged so
quickly, with her "negative image" topping 50% after just six
months in office. He predicted this would be hard to reverse
even with a resolution of the farm crisis, given that
inflation is still in the 25-28% range and poverty, which had
dropped towards 20%, was now back in the range of 30%.

Deutsche Bank: "Kirchner Model" is done
--------------

11. (C) Deutsche Bank Managing Director Gustavo Canonero
built on Ribisich's comments, laying out the difficult
situation facing Cristina. First, Argentina is affected by
turmoil in the global economy (financial crisis, decelerating
growth, increasing inflation, high commodity prices).
Second, the country is worn out by the ongoing political
crisis, the Kirchner economic policy model is spent, and the
GoA has made major strategic errors during 2008. He
commented that the Kirchners have yet to realize that the
playing field has shifted. Their model of using stimulative
macro policies to boost domestic consumption and offsetting
micro controls and extensive subsidies to try to staunch
price increases has only worked as long as it has, he
alleged, due to the "miracle of high soy prices." Citi's
Bruchou agreed with this general theme, arguing that the
"Kirchner Model" worked as long as there was a large output
gap, as existed after the 2001/02 crisis, but now the country
needed investment.


12. (C) Canonero said the Kirchners' actions over the next
few months would determine the fate of the Argentine economy.
He commented that the dilemma that the BCRA faces is that,
while inflation is falling due to the appreciated peso,
higher rates, and the decelerating economy, this also leads
to lower revenues, the loss of industrial competitiveness,
and pressure on the trade surplus as the demand for imports
grows. So the question is, how the GoA will react? He
thought that all signs point to the GoA's continuation of
its pro-cyclic efforts to pump up consumer-led growth by
increasing subsidies, salaries, and pensions. He argued that
Nestor Kirchner believes he needs at least six percent growth
to sustain the model, and is therefore opposed to any attempt
to cool the economy.


13. (C) Therefore, Canonero argued, the BCRA's current
policies will soon be at odds with Nestor Kirchner's goal of
re-igniting growth. Canonero thought the tipping point going
forward will be whether the Kirchners try to recuperate what
they had before the farm strike. "Kirchner does not
understand the new reality," Canonero insisted, "and it will
probably take three/four months more for it to sink in...for
now he still thinks Argentina can return to its high growth
rate after the farm strikes end." On the contrary, Canonero
said he expected a sharp deterioration in growth "within the
next six to twelve months." Nevertheless, he argued that
this "will force the GoA to change policies, so that is the
positive side."

Local Perspective: Have to fix INDEC and change tactics
-------------- --------------

14. (C) In a two-hour conversation on July 29 with the
Ambassador, the President of the Buenos Aires Stock Exchange
Adelmo Gabby, the President of the National Securities
Commission Eduardo Hecker, and the CEO of Pampa Energy
Marcelo Mindlin gave a slightly updated version of the points
of view discussed above. They said the new Cabinet Chief
Sergio Massa was very open to working with the business and
financial sectors, but it is likely that he will have less
influence than his predecessor (Alberto Fernandez) to bring
about change. They thought it likely that the economy would
continue to produce sufficient tax revenue to meet government
needs this year, but foresaw a crunch in 2009 when new
financing demands will be added to the problems currently
evident in the economy.

BUENOS AIR 00001048 004 OF 004




15. (C) At that point, unless there have been policy changes
the price Argentina will have to pay for money
internationally and the crowding out effect on local markets
will be significant constraints. Key to addressing this is
returning credibility to national statistics agency INDEC and
implementing a serious anti-inflation policy. They argued
that the statistics questions will not be easily fixed, but
is essential to so many other important economic and
political decisions, including gaining unfettered access to
international financing.


16. (C) Paris Club debt is another essential issue to address
in this context. Unfortunately, they said, it is far from
clear that the Kirchners are ready to address these issues
forthrightly or effectively. A first good step, they argued,
would be to start using dialogue rather than confrontation to
tackle problems before the nation. If the Kirchners do not
change tactics, they could well face massive defeat in the
2009 elections, they concluded.

Comment
--------------

17. (C) Foreign bankers are obviously not the only ones
worried. Local bankers are equally pessimistic about the
current situation facing the country, and voice similar
concerns to those listed above during informal conversations
with DAS O'Neill and Emboffs during Ambassador's July 10
reception for visiting WHA A/S Tom Shannon. Both foreign and
Argentine financial executives know they have done extremely
well over the last five years. However, they also know that
there is a long Argentine tradition, honored by both the
Argentine public and government, of scapegoating bankers when
the economy sours. Therefore, they anticipate that the
Kirchners will turn their ire on the banking sector following
resolution of the farm strikes, if only to bully banks into
lowering interest rates.


18. (U) Treasury DAS Brian O'Neill did not clear this cable.
WAYNE