ARGENTINE CENTRAL BANK PRESIDENT PROPOSES REGIONAL

C O N F I D E N T I A L SECTION 01 OF 03 BUENOS AIRES 001274

SIPDIS

E.O. 12958: DECL: 09/11/2028
TAGS: EFIN ECON ETRD PREL AR
SUBJECT: ARGENTINE CENTRAL BANK PRESIDENT PROPOSES REGIONAL
COORDINATION OF MONETARY POLICIES IN MEETING WITH FED
GOVERNOR KROSZNER

REF: A. BUENOS AIRES 1270

B. BUENOS AIRES 1263

C. BUENOS AIRES 1236

D. BUENOS AIRES 1224

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

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Summary
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1. (C) U.S. Federal Reserve Bank Governor Randall Kroszner
pointed to signs that slowing growth and higher inflation in
advanced economies are beginning to impact emerging markets
during his keynote speech at the Argentine Central Bank's
(BCRA) annual monetary and banking conference. He argued
that the popular idea that the U.S. and world economies have
"decoupled" is incorrect. Other conference participants
presented similar themes, with the general consensus that
current global economic difficulties have a ways to go. In a
side meeting, BCRA President Martin Redrado asked for
Kroszner's support for greater central bank coordination in
the region -- using an expanded version of the NAFTA
framework -- in order to improve monetary authorities'
responses to global challenges. On Argentina's economy,
Redrado noted his worry about high inflation and lack of
investment, but claimed the BCRA's monetary policy was
appropriate and pointed to positive signs that the GoA is
tightening fiscal policy. (Separate meetings with
economists, industrialists, and bankers reported Ref A.) End
Summary.

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Kroszner: Decoupling Theory Incorrect
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2. (SBU) Federal Reserve Bank Governor Kroszner visited
Argentina September 1-2 at the invitation of BCRA President
Martin Redrado, in order to speak at the BCRA's annual
monetary and banking conference. The conference, titled
"Financial Turbulence: Impact on Developed and Emerging
Economies," featured central bankers, economists, and private
bankers from around the world. Kroszner gave a keynote
presentation, early on September 1, entitled, "The United
States in the International Financial System: A Separate
Reality? Resolving Two Puzzles in the International
Accounts."


3. (SBU) In his speech, Governor Kroszner argued that the
idea that the U.S. and world economies have "decoupled" has
been proven incorrect. Due to close trade and financial
linkages, "concerns about potential spillovers from slower
U.S. growth and weaknesses in the financial system" are
weighing on advanced economies, and there are growing
indications of reduced growth prospects and higher inflation
in many emerging market economies. He also argued for
reducing trade barriers to agricultural products to allow
global food suppliers to adjust more efficiently and rapidly
to price signals to meet growing world demand.


4. (SBU) Most other presenters at the BCRA conference
supported Kroszner's argument that emerging markets will soon
feel the effects of the broad slowdown in developing
economies. Another common theme was that while the U.S.
economy had showed resilience due to strong export growth,
this effect would likely diminish during the second half of
2008, as the economies of its major trading partners
continued to deteriorate -- particularly those in Europe.
The broad consensus among speakers was that the global
economic downturn -- characterized by financial turmoil and
uncertainty, decelerating growth, and higher inflation -- is
still developing and has a ways to go.


5. (C) Kroszner's visit coincided with Argentine President
Cristina Fernandez de Kirchner's (CFK) surprise September 2
announcement that the GoA would pay off all Paris Club debt
using BCRA reserves (see Refs B, C, D, for readout on that
decision and local and international reaction). The
announcement eclipsed the BCRA's conference in local and
foreign media, and became a central theme of Governor
Kroszner's subsequent meetings. During Kroszner's September
1 meeting with BCRA President Redrado, the Ambassador
mentioned that he understood that Cabinet Chief Sergio Massa

BUENOS AIR 00001274 002 OF 003


was interested in Paris Club repayment. However, this did
not elicit any reaction from the Central Bank Chief, and
Redrado also gave absolutely no indication that he was aware
that the next morning the President would publicly instruct
her Economy Minister to use BCRA reserves to pay Paris Club
members. (Comment: Post's BCRA contacts confirm media
reports that Redrado found out about the decision at most
hours before CFK's 11:30 a.m. speech.)

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BCRA's Redrado Raises Concerns, Highlights Positives
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6. (C) During Governor Kroszner and Ambassador Wayne's
evening meeting with BCRA President Redrado on September 1,
Redrado lobbied Governor Kroszner on the idea of expanding
the NAFTA Central Bank coordinating mechanism to include the
central banks of major South American countries (specifically
Argentina, Brazil, Chile). He said he had mentioned this
idea to Mexican Central Bank Governor Guillermo Ortiz during
the recent meeting of the Bank for International Settlements'
consultative group for the Americas, and said Ortiz supported
the idea.


7. (C) Redrado argued that expanding the existing NAFTA
mechanism would improve coordination of regional monetary
policies and enable the region's monetary authorities to
respond more effectively to global and local economic
challenges. He also noted that it would help improve the
quality of the current analytical framework in the South
American Central Banks. While acknowledging that some of
this was occurring through the Centre for Latin American
Monetary Studies (CEMLA),he urged Kroszner to consider the
idea. Governor Kroszner agreed to consult on the suggestion
within the Fed upon his return to Washington.


8. (C) Turning to the Argentine economy, Redrado claimed that
the crisis generated by spiking inflation and the four-month
(March - July) agricultural conflict had given the BCRA an
opportunity to reduce peso liquidity in the market by selling
dollars. This had resulted in a stronger currency. With
capacity utilization high, he argued that peso depreciation
now would just result in higher inflation rather than
enhancing domestic industry's ability to compete globally.
He joked that GoA officials obviously had not learned from
history books the folly of taxing farmers, and the resulting
farm crisis had recalled memories of the 2001 financial
meltdown. Redrado informed Kroszner and the Ambassador that
8% of deposits flowed out of the financial system in May, as
Argentines sought safety in dollars. Redrado claimed that
the BCRA's intervention stemmed this outflow ("the buck
literally stopped here"). Redrado argued that this panicky
response to local economic uncertainty showed, once again,
that Argentina is not ready for a floating exchange rate
regime.


9. (C) The BCRA reacted to the crisis by selling 3.5 billion
in dollars, extracting 10.5 billion pesos from the market.
As a result, Redrado claimed, money growth had slowed
recently, with public and private M2 (cash in circulation
plus checking and savings accounts) now growing at a 14%
annual pace, and private M2 recently increasing at only about
a 13% y-o-y pace (compared to private M2's 28% increase in
2007 and the year-to-date average M2 increase of 22%).
Nevertheless, Redrado pointed out that he has said
consistently since 2006 that GoA fiscal policy is
inconsistent with the BCRA's gradual efforts to tighten
monetary aggregates to limit price inflation. Although
interest rates are significantly higher now, and the peso
stronger ("not an anti-inflation tool, but it helps"),
Redrado commented that this can not fully counteract the
effects of the 50% nominal growth in GoA expenditures in

2007.


10. (C) Fortunately, he noted, there are signs in the last
month that the GoA is more aware of the need to tackle
inflation. He highlighted two positive signals: 1) while the
GoA helped negotiate 22-23% salary increases in March, the
President has since forcefully opposed calls for further wage
hikes; and 2) fiscal policy has tightened in the last few
months, with expenditures now growing at a 30% y-o-y pace.
(Note: well-known Argentine economist Miguel Bein argues that
if the GoA maintains this relative fiscal tightening it could

BUENOS AIR 00001274 003 OF 003


end the year with a primary fiscal surplus of 3.7% --
significantly higher than the GoA's 3.15% estimate for the
primary surplus that was included in the 2008 budget.)


11. (C) One of the most damaging results of high inflation,
in his opinion, is its adverse impact on investment --
crucial to expanding capacity and maintaining the expansion
(now in its six year). He noted that businesses were
responding to the high inflation rate by maintaining
incredibly short-term business planning horizons of
six-months or less, and were focused on self-preservation
(cutting back investment and protecting their balance
sheets). The result has been anemic domestic investment that
is nowhere near needed levels.


12. (C) Redrado emphasized that the importance of the BCRA's
ongoing seminar was to show that high inflation and
decelerating growth are currently common problems around the
world. This was his attempt to convince GoA officials
(specifically the Kirchners) that they can accept these
trends without having to acknowledge them as the results of
their policy failures. He saw this acceptance as the first
step towards convincing the Kirchners to make policy
adjustments. Kroszner agreed, commenting that contraction in
U.S. and Europe is affecting China, India, and most other
emerging economies, and it is important to get the message
out that it is not necessarily the fault of governments when
their economies sour or of Central Banks when they are forced
to make unpopular decisions. Unfortunately, Redrado
lamented, Argentine public discussion of these issues
generally ignored global forces, making the BCRA a lightning
rod for criticism.


13. (U) FRB Governor Randall Kroszner did not clear this
cable.
WAYNE