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)

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Summary
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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.

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Amid Rumors of Backtracking, GoA officials Push Paris Club
Payment Plan forward
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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.

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Correcting Flaws in the Original Proposal
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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.)

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Market Indifference and Observers' Concerns
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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.

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Conclusion: While Sloppy, Proposal Still Workable
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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