GOA PUSHES FORWARD ON PARIS CLUB REPAYMENT,

C O N F I D E N T I A L SECTION 01 OF 03 BUENOS AIRES 001286 SIPDIS PARIS PLEASE PASS TO PARIS CLUB DELEGATION E.O. 12958: DECL: 09/14/2028 TAGS: EFIN ECON ETRD PREL AR SUBJECT: GOA PUSHES FORWARD ON PARIS CLUB REPAYMENT, DESPITE SOME INDICATIONS OF BACKTRACKING 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) -------------- Summary -------------- ¶1. (C) Amid media rumors of internal debate over President Cristina Fernandez de Kirchner's pledge to pay the Paris Club, GoA officials continue to move the proposal forward. Central Bank President Martin Redrado and Finance Secretary Hernan Lorenzino confirm that CFK has approved a plan to begin technical level discussions with PC creditors. They plan to hold bilat talks with creditors on the margins of both the UNGA in September and IMF/World Bank meetings in October. Although CFK initially stated the GoA would pay all outstanding PC debt, Lorenzino confirms the GoA will pay only arrears. Redrado and Lorenzino are also working to repair the main flaws of the original announcement: 1) the $6.7 billion figure cited was incorrect; 2) Argentine law may prohibit using reserves to pay bilat debt, and likely requires amendment by Congress; and 3) GoA use of BCRA reserves to pay bilateral debt could jeopardize BCRA court cases against holdout bondholders. Congressional approval of this initiative could delay final agreement with PC creditors. Nevertheless, the political will to move forward appears intact -- despite the market's indifferent reaction and the ad hoc handling of the initiative -- and the GoA may still be able to complete payment in 2008. End Summary. -------------- -------------- Amid Rumors of Backtracking, GoA officials Push Paris Club Payment Plan forward -------------- -------------- ¶2. (C) Two weeks have passed since Argentine President Cristina Fernandez de Kirchner (CFK) declared on September 2 that the GoA would pay its entire debt owed to Paris Club (PC) creditors (an amount she quoted at $6.7 billion) using the Argentine Central Bank's (BCRA) "freely disposable" reserves. It has since become clear to both GoA officials and the Argentine media that this will be a longer and more difficult process than the President seems to have anticipated. ¶3. (C) It also appears that the GoA may need to walk back certain aspects of CFK's speech and the original decree. Neither appears to have been written in consultation with the GoA and BCRA officials that have the best understanding of both the Paris Club and the Argentine laws that regulate the BCRA and the use of official reserves for debt payments. In fact, senior BCRA officials tell Post that BCRA President Martin Redrado learned of the initiative just hours before the President spoke, and Economy Ministry officials that have the lead for the GoA on Paris Club issues were also out of the loop. ¶4. (C) Local press reports over the last week indicate that there is increasing dissension within the GoA over the prudence of spending such a huge percentage (14-17%) of BCRA reserves to pay back PC debt, particularly given increasing global financial uncertainty. Several reports have even alleged that ex-President Nestor Kirchner leads the group within the administration that is pushing for backtracking on CFK's promise. (Comment: GoA officials' second thoughts may also be a response to the market's tepid reaction to the initiative -- more on this below -- and to market analysts' criticisms of the flaws in the proposal, as originally presented; see Ref C.) ¶5. (C) Nevertheless, GoA and BCRA officials assure Post that they are making progress on implementing the President's initiative. On September 11, BCRA President Martin Redrado told the Ambassador that the BCRA and Finance Secretariat (FinSec -- under the Ministry of Economy) are working to execute the plan. Redrado commented that using reserves "was not an option that (he) would have recommended, but she's the boss," adding that CFK had approved the BCRA and FinSec's BUENOS AIR 00001286 002 OF 003 recommended plan for taking her decision forward. To begin, they will hold technical level talks with all 17 PC creditors. If necessary, based on the results of these talks, the GoA will raise the discussions to the ministerial level. Finance Secretary Hernan Lorenzino confirmed this to EconOff September 12, stating that the GoA plans to begin holding informal discussions on the margins of the upcoming UNGA meeting in New York, and will continue them during the mid-October IMF/World Bank meetings in Washington. -------------- Correcting Flaws in the Original Proposal -------------- ¶6. (C) GoA and financial sector representatives close to the government agree that the announcement was handled poorly. Aside from the clear lack of advance consultation with informed BCRA and GoA officials, the main concerns are: 1) the $6.7 billion figure CFK quoted was incorrect, even by internal GoA calculations; 2) the speech and accompanying decree both announce the payment of all debt, including outstanding principal -- which makes little financial sense; 3) the resulting decree did not take into account existing legislation regulating the use of reserves; and 4) the initiative has the potential to undermine the BCRA argument in ongoing lawsuits in New York courts with "holdout" bondholders that, as an independent central bank its reserves are not subject to creditor seizure. ¶7. (C) Reconciliation. Paris Club Chairman's Xavier Musca's September 3 statement of congratulations to the GoA drew heavy press attention, mainly due to Musca's assertion that the PC calculates total debt owed at about $7.9 billion. (The PC's April 2008 data call for Argentina resulted in a total debt stock of $7.92bn, including $5.36bn arrears, $1.21bn in late interest, and $1.35bn in outstanding principal.) This amount stood in stark contrast with CFK's announced figure of $6.7 billion. (Although the actual September 2 decree -- published September 3 -- does not cite a specific amount.) Unknown to the press or public, however, is that the GoA's own internal number (including arrears, interest, punitive fees, and principal) is almost $7 billion. The Economy Ministry's Director of the Debt office, Norberto Lopez Isnardi (PROTECT),told EconOffs that the $6.7 billion figure comes from a report that the FinSec prepared 3-4 months ago. (Comment: this is further evidence that the decision was taken within a small circle without consulting technical-level officials.) FinSec Lorenzino and Debt Office Director Lopez have both had direct contact with the PC's Secretary General, Thomas Courbe, who clarified that the $7.9 billion figure is based on what creditors say is owed them. Neither Lorenzino nor Lopez can account for the difference, and say that the GoA understands a reconciliation of debt amounts is needed. They realize that this will take time to deal with the Treasuries of 17 creditor countries, involving more than 200 individual credits, but hope to complete the process before the end of the year. ¶8. (C) Paying Arrears Only. BCRA President Redrado told the Ambassador that it did not make financial sense for the GoA to pay principal outstanding. FinSec Lorenzino reiterated this to EconOff September 15, and confirmed local press reports that the GoA is considering options that include only the repayment of arrears. The decree states that the GoA will pay back the entire amount, including principal outstanding. However, it does not state that the payment should be made in one lump sum. Since nearly the entire debt to PC creditors will be in arrears after November 2008, whether to pay the full amount or just arrears may be a moot issue. ¶9. (C) Amending Argentine Law. Both Debt Office Director Lopez and the BCRA's Senior Manager of Foreign Exchange Reserves, Juan Carlos Barboza (STRICTLY PROTECT BOTH), privately informed EconOffs that the GoA should amend the original decree and get Congressional approval to use BCRA reserves to pay bilateral debt. Current applicable law allows the use of "freely available reserves" to pay GoA/BCRA debts owed to international financial institutions (IFI). ("Freely available reserves" are defined as excess reserves after backing 100% of the monetary base; they currently total roughly $15 billion.) Lopez and Barboza both dispute that BUENOS AIR 00001286 003 OF 003 the Paris Club would qualify as an IFI. Lorenzino acknowledged to EconOff September 15 that the GoA and BCRA are analyzing whether the original decree needs amendment and/or requires Congressional approval. Redrado has also told us several times in the past that a new law or amendment to current law would be needed, in his view. (This issue is explained in more detail septel.) ¶10. (C) Holdout Lawsuits. There is great concern within the BCRA that CFK's announcement may have jeopardized the BCRA's legal battle with holdout bondholders (those that refused to participate in the 2005 debt exchange),who are seeking to attach roughly $105 million in BCRA reserves held at the New York Federal Reserve Bank. Although these funds remain frozen, on orders of the U.S. District Court of the Southern District of NY, to date the BCRA has been successful in distinguishing between the GoA and the legally independent Central Bank. However, Barboza (PROTECT) believes the PC announcement has greatly weakened the BCRA's case, making it all the more important to amend the decree and get Congressional authorization. Private sector analysts agree, and argue for amending the decree to say that the GoA will "purchase" the BCRA reserves. (This issue is explained in more detail septel.) -------------- Market Indifference and Observers' Concerns -------------- ¶11. (C) Country risk and credit default swap spreads have actually widened since the announcement. While this has largely been a response to external developments, the absolute lack of a positive jump in Argentine asset prices after such a momentous announcement shows that, at minimum, the CFK administration appears to have miscalculated its impact. Indeed, many analysts, particularly among Wall Street firms, argue that markets are much more concerned about the GoA's manipulation of inflation statistics than payment to official creditors. Others comment that resolving holdouts could have more of a positive impact, as it would help open Argentina's access to international capital markets. ¶12. (C) Another area of common criticism relates to CFK's decision making process. In a September 12 interview, ex-Economy Minister Martin Lousteau comments on his surprise at CFK's decision to pay the full amount using reserves, stating that he had been unable to convince her even to put forward a proposal to pay PC debts over a period of six years (even with the understanding that the IMF would not be involved). Given the understanding in the private sector that more reasonable payment options were available, many observers are concerned that the President would perform such a 180 degree turn without consulting knowledgeable staff. They contend that if the main motivating factor was to avoid any possibility of submitting to IMF oversight, this does not bode well for the direction of GoA economic policy. -------------- -------------- Conclusion: While Sloppy, Proposal Still Workable -------------- -------------- ¶13. (C) The negative reaction of markets and informed observers to this announcement speaks to the ad hoc and sloppy way the CFK administration presented this initiative. However, the GoA should be able to correct the above-identified flaws in the original announcement. Congressional approval of a new law or amendment to existing law would likely delay the GoA's ability to reach a final agreement with PC creditors. Nevertheless, the political will to move forward on this appears intact and the GoA may still be able to complete Paris Club payments by the end of ¶2008. End Comment. WAYNE