ARGENTINA: PRESIDENT KIRCHNER ANNOUNCES THAT GOA

C O N F I D E N T I A L BUENOS AIRES 001224

SIPDIS

TREASURY FOR O"NEILL,TRAN, MALLOY

E.O. 12958: DECL: 09/02/2028
TAGS: EFIN ECON PREL AR
SUBJECT: ARGENTINA: PRESIDENT KIRCHNER ANNOUNCES THAT GOA
WILL PAY PARIS CLUB

REF: BUENOS AIRES 1160

Classified By: Amassador E.A. Wayne. Reasons 1.4 (B,D)

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Summary
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1. (C) President Kirchner (CFK) announced today that
Argentina would pay $6.7 billion in Paris Club (PC) debt out
of central bank reserves. It remains unclear whether the GoA
intends to repay its PC debt in full or simply pay down
arrears (the most recent Paris Club Secretariat data shows
Argentina's arrears to the PC at $6.57 billion, with an
additional $1.35 billion in outstanding principal). Economy
Minister Fernandez told Ambassador, however, that the GoA
recognizes that it will need to reconcile the numbers with
its official creditors. The GoA announcement follows a
number of private discussions with CFK, with her Chief
Minister, and with other in the GoA over the importance of
resolving the PC issues, and post had received feedback
suggesting that some consideration of action was in the
works. Nevertheless, the GoA decision to unilaterally pay
down PC debt came as a surprise. Most of our previous
discussions with GoA officials had focused on possible GoA
efforts to make a voluntary settlement offer to creditors
through the Paris Club Secretariat.


2. (C) While market values of untendered "holdout" debt are
up on the CFK announcement, market sentiment here, as
evidenced by senior economists' comments at a lunch with
Federal Reserve Governor Kroszner, remains mixed. Some
criticized it as a poor move from a cash flow perspective
(since the GoA could have negotiated a gradual payment
agreement with creditors),a move that would facilitate white
elephant infrastructure projects funded by export credit
agencies like the French-supported "bullet train," and a sign
of GoA desperation. Others suggested hopefully that it could
mark a first step by the GoA in addressing macroeconomic
disequilibria. Economy Minister Fernandez told the
Ambassador that the move was aimed at sending positive
signals to foreign investors as well as to Paris Club
members. In our view, the move represents a salutary effort
by the GoA to try something new in its economic policy
strategy. To encourage this new approach, we support a
statement by the USG welcoming the move. Foreign Minister
Taiana spoke to the Ambassador soon after the announcement
and expressed the GoA's hope that the USG would issue such a
supportive statement out of Washington. End Summary.

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CFK Enlivens Industry Day with a Bombshell
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3. (U) In a surprise mid-day announcement in a speech
recognizing Argentina Industry Day, President Cristina
Fernandez de Kirchner (CFK) said that she had signed a decree
authorizing the use of central bank (BCRA) "freely available"
reserves to repay Argentina's $6.706 billion of debt with the
Paris Club (PC). "This is an important step of state policy,
which is to cut our debt....this payment reaffirms
Argentina's willingness to pay its international
commitments." It is not clear whether the GoA intends to
repay PC debt in full or simply to pay down arrears.
According to the most recent Paris Club Secretariat data (as
of April 2008),Argentina's arrears to the PC, including late
interest, amounted to $6.57 billion, with an additional $1.35
billion in outstanding principal.


4. (C) In the aftermath of early August market turmoil linked
to an expensive private bond issue to Venezuela and rating
agency downgrades of Argentine debt, GoA officials have
received a steady stream of advice over the past few weeks
that now is the time to seriously address PC arrears and so
begin the process of regularizing Argentina's relationships
with international capital markets. Ambassador had raised PC
with Council of Americas President Susan Segal August 26, and
Segal discussed PC with CFK later that day. On August 27,
Ambassador and Assistant Secretary Shannon urged a GoA PC
initiative in a meeting with Chief of Cabinet Sergio Massa
and earlier Shannon raised it with Foreign Minister Taiana.
Citibank Country Manager Juan Bruchou had delivered much the
same message to Massa earlier that week. PC was also a topic
of discussion in an August 29 meeting between Econoff and
Finance Secretary Lorenzino and in September 1 meetings by
Ambassador and Federal Reserve Governor Randy Kroszner with
BCRA President Martin Redrado. (Comment: Neither Redrado

nor Lorenzino even hinted that this announcement was in the
offing.)


5. (C) In a September 2 telcon, Finance Secretary Lorenzino
advised U.S. Treasury desk officer that the decision to fully
pay down PC arrears had been made in meetings between the
Office of the President and the Economy Ministry over the
August 30-31 weekend.

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Ministers Hope for U.S. Support:"Beautiful Surprise"
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6. (C) In a telecom with the Ambassador a few hours after
CFK's speech, Taiana characterized the announcement as
"positive news" that deserved a positive response. He
expressed his hope that the Departments of State and/or
Treasury could make positive comments on CFK's decision to
pay down PC debt. (As of this writing, we understand that
the State Department will make such a statement.)


7. (C) Ambassador also spoke to Economy Minister Carlos
Fernandez hours after the president's announcement. He
characterized it as a "beautiful surprise" for those
following Argentine foreign debt issues, and said that GoA
officials believed that it would send positive signals to
Argentina's international partners, including the USG.
Fernandez indicated that the GoA had arrived at the $6.706
billion number for Argentina's Paris Club debt through
individual consultations with creditor governments. He
hasted to add, however, that the GoA recognizes that it will
need to reconcile this number with other estimates. On the
legal question of using BCRA reserves to pay the GoA's debt
to bilateral creditors (para 9),Fernandez said that lawyers
at the President's office were developing a strategy that
would ensure that the operation was legally defensible in
Argentina.

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Economists Divided on Impact
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8. (C) Following the announcement, during a lunch hosted by
the Ambassador in honor of visiting Federal Reserve Governor
Randy Kroszner, a number of senior Argentine economists
offered their views on the announcement.

-- Javier Gonzalez Fraga, former central bank governor,
called the announcement a net negative. The GoA's use of
BCRA reserves will be seen by markets -- and especially by
bond holdouts -- as "cheating." He also called it a poor GoA
move from a cash flow perspective, since a gradual repayment
schedule could have been negotiated with the Paris Club
Secretariat. He added, however, that the payoff represented
"a return to the markets" by the GoA, which he characterized
as positive.

-- Javier Kulesz, a Union Bank of Switzerland economist,
called the GoA announcement a net plus that markets could
interpret as a signal that the GoA is "changing course" in
order to address macroeconomic disequilibria, including high
domestic inflation and a diminishing primary fiscal surplus.
To convince markets that the GoA had indeed turned a new
leaf, he continued, the GoA would need to supplement the
announcement with additional market-friendly news in the
weeks to come.

-- Ricardo Arriazu, former IMF Director and private
consultant, argued that the announcement was a mistake
because, by using reserves rather than a better managed
fiscal surplus, the near-term consequence will be a decline
in the equilibrium exchange rate, "once again cheating
holders of domestic currency assets."

-- Federico Sturzenegger, President of Buenos Aires' Banco
Ciudad, was ambivalent. Technically, he said the move to pay
off the debt was positive because the discount rate on the
obligation was so high. Nonetheless, he suggested that
markets may interpret the GoA move in a negative light, as an
admission that Argentina is desperate to regularize its
standing with international capital markets because it needs
significant new credits to remain solvent. He called
Argentina's longstanding pariah status in international
capital markets a blessing in disguise, because it prevented
Argentina from repeating its past borrowing excesses.

-- Daniel Artana, chief economist of macroeconomic think tank

FIEL, called the GoA announcement net neutral, with capital
markets unlikely to respond markedly to a GoA paydown of only
$7 billion of some $150-odd billion in total GoA debt. He
called Spain the big loser here, having earlier cut a side
deal with the GoA to reschedule payment some $800 million of
(what Spain argued was) non-Paris Club sovereign arrears over
eight years. Artana saw an inflow of export credit agency
financing that that will likely result from a Paris Club
settlement as offering the GoA additional opportunities to
"poorly manage" new public infrastructure spending on white
elephant projects like the controversial French-supported
"bullet train" project.

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Using Reserves: Legal Questions, Holdout Impact
-------------- --


9. (SBU) There are legal restrictions in place which limit
the ability of BCRA to use its "freely disposable" reserves
to pay down PC arrears. While such BCRA reserves can legally
be used to pay debts to international financial institutions
(a paydown of $9 billion to the IMF was made in December
2005),the GoA must borrow from the BCRA, subject to ceilings
on borrowing as both a percentage of base money supply and as
a percentage of GoA revenue inflows for the prior 12 months,
in order to use reserves to pay debts to bilateral creditors.



10. (C) Former BCRA governor Fraga estimated current BCRA
reserves at the $43 billion level ($48 billion less $5
billion in BIS borrowings). In response to a question, he
said it is not at all clear that the BCRA has adequate free
reserves to pay down some $7 billion in PC arrears without
breaching the above-noted ceilings. Economists attending the
lunch agreed that any change to these ceilings would require
approval from Congress, but that, in any case, the GoA would
craft some workable legal mechanism to ensure the reserves
could be used. They also agreed that bond holdouts, who have
unsuccessfully argued in U.S. courts that BCRA reserves
should be attachable assets, will take any paydown of PC
arrears as a cue to redouble their attachment efforts. Fraga
noted that the BCRA is skilled in engaging in financial
operations in a way that makes it difficult for claimants to
attach assets, and others noted that the GoA had won previous
legal challenges from the holdouts on this matter.

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Comment
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11. (C) Following a number of private discussions with CFK,
with her Chief of Cabinet Sergio Massa and with others in the
GoA over the importance of resolving the PC issues (see para
3),we had received an inkling that some kind of action was
in the works. Nevertheless, the GoA decision to pay off most
or all of its PC debt (perhaps just outstanding arrears) came
as a huge -- and pleasant -- surprise. Most of our previous
discussions with GoA officials had focused on possible GoA
efforts to make a voluntary settlement offer to creditors
through the Paris Club Secretariat. The sudden announcement
harkens back to ex-President Nestor Kirchner's (NK's)
December 2005 decision to follow Brazil's example and use
BCRA reserves to pay down some $9 billion in IMF debt. Given
NK's preeminent role in GoA economic decision making, it
appears likely that he played a key role in this decision.
Given that it may have been decided just days before, we also
expect that there are a number of questions related to the
pay-back that the GoA has not yet worked out, or perhaps even
thought about yet.
WAYNE