ARGENTINA PERSPECTIVES

C O N F I D E N T I A L BUENOS AIRES 000129

SIPDIS

SIPDIS

E.O. 12958: DECL: 02/04/2018
TAGS: PREL PGOV ECON EINV EPET KPAO KCOR MARR VZ AR
SUBJECT: ARGENTINA PERSPECTIVES

Classified By: Ambassador E. Anthony Wayne for reasons (B) and (D).




1. (SBU) Summary: As part of outreach efforts during recent

friction in U.S.-Argentine relations, Ambassador held

one-on-one discussions with key players on the Argentine

scene. In each, he explained the U.S. perspective on discord

over the Miami court case and on bilateral relations.

Interlocutors expressed strong support for the U.S. position

and offered to help quietly. Almost to a person, they said

the GoA's overreaction reflected a limited understanding of

the U.S. and things international, the very small circle of

decision-makers for key issues, and the penchant for the

Kirchners to respond aggressively to perceived challenges and

make up afterwards. Interlocutors anticipated the GoA's

reconciliation efforts with the USG, noting the Kirchner

regime's need for U.S. and international investment/financing

and the fact that, while anti-Americanism plays well in

Argentina, serious conflict with the United States does not.




2. (SBU) Interlocutors were also fairly united in their

views on the challenges facing the government: controlling

inflation and wages and dealing with public security concerns

related to rampant street crime. Many noted that the new

government has yet to break out of the short-term framework

for policy-making which characterized Nestor Kirchner's

government and suggested that Cristina Fernandez de Kirchner

(CFK) had yet to demonstrate that she will govern in a manner

distinct from that of her husband. End Summary.




3. (SBU) The following are highlights of individual

conversations over the past three weeks. Topics covered

include GOA decision-making style, economic policy making,

inflation, salary negotiations, investment policy, public

security challenges, anti-Americanism, corruption, oil and

energy policy, and regional security concerns.



Bank President

--------------




4. (SBU) Clarisa Lifsic is President of the Banco

Hipotecario, Argentina's second largest bank in terms of net

worth. She has an MBA from MIT and represents private

shareholders in this formerly state-owned mortgage bank.

Private shareholders control the majority of seats on the

board, but various public entities still control over 50% of

Hipotecario's stock following its ""de-nationalization"" in


1997. While the bank used to specialize in mortgages, it is

now a full service bank and has been expanding rapidly in

recent years.




5. (C) She sees the main challenge to the Argentine economy

and the banking system as getting inflation under control.

The GoA's interventionist anti-inflation policy, including

freezes in public utility tariffs and ""voluntary"" price

stabilization agreements on a sizeable basket of consumer

goods, has just hidden a very serious problem.




6. (C) The government has displayed little understanding of

how to expand credit markets for medium- or long-term loans.

Just before the elections, the government got banks to pledge

to issue small enterprise and mortgage loans at less than the

cost of money at that time. The banks signed because the

head of the Banking Association (see para. 12) assured them

that the government just wanted the headlines and would never

check to see if the loans were issued. The government has no

long-term vision or plan about generating a mortgage market,

for example. You don't do that by telling banks they have to

make loans at a loss, she said. You create policy structures

and make funds available in the way Mexico did to begin

expanding home mortgages.




7. (C) The appointed government members of the Banco

Hipotecario Board of Directors have been weak. The last two

were friends of former Finance Minister Felisa Miceli's

siblings. One was an architect, who knew nothing about

banking, and the other was an accountant, but he still asked

where the mortgages were kept on his initial tour of the

bank. Much time had to be spent educating them both on

basics and keeping them informed of what issues and topics

meant. Similarly, the lack of coordination and clear lines

of responsibility within the government mean that a great

deal of time has to be spent going individually to each actor

in the government who might influence the bank's policy to

brief them on new policies or strategic decisions by the

bank.

It is a very time-consuming process.




8. (C) One of the great failings of GOA policy has been its

very short-term focus. There has been hope that CFK may

change that. She asked a number of individual economists and

economic players to write longer term strategy papers for

her. She has also told at least one person that she intends

to create a committee charged with developing a longer term

economic vision for Argentina. So far, however, there have

not been any clear signs of more focus on the longer term.

There is also no clear sign so far that the government will

implement the ""social pact"" between labor, business and the

government which CFK discussed in her electoral campaign.



International Banker and Financier

--------------




9. (SBU) Guillermo ""Willy"" Stanley is a board member of

Macro Bansud, one of Argentina's largest banks, former

President of Citibank Argentina, and Director of D&G, a

consulting and investment firm that owns Havanna, a very

successful Argentine cookie and coffee bar company. Stanley

noted that his companies have been prospering with

Argentina's economic growth. Havanna sales have grown 7%

over the past year. It now has 30 stores in other parts of

Latin America and hopes to open a store in the United States.

Macro Bansud's deposit base has been growing steadily in

recent years, loans are booming, and the bank has been able

to borrow significant amounts at excellent rates in Europe

over the past year.




10. (C) Inflation is the biggest challenge facing the

government. The inept price control policies of Commerce

Secretary Guillermo Moreno have made the problem much more



SIPDIS

serious than it needed to be. By destroying the credibility

of the national statistics agency, INDEC, and by using

offensive pressure tactics to try to control prices, the

government has raised inflationary expectations for most

economic actors. Rather than what easily could have been

inflation hovering around 13%, now most sectors have

(self-fulfilling) expectations that inflation will be 20-25%.

This has repercussions across the economic spectrum as

recent union claims for wage increases demonstrate.




11. (C) The government's repeated focus on the short-term is

also taking its toll. There had been hope that CFK would

bring about a change in her husband's focus on the immediate,

but decisions are still being made by the same small group

and with no evident shift from the near-term political

motivation for most decisions.



Banking Association President

--------------




12. (SBU) Jorge Brito is president of Banco Macro,

Argentina's largest bank by several measures, and president

of the association of Argentine-owned private banks, ADEBA.

Macro has over 7,000 employees and 440 branches operating in

many provinces. It has enjoyed over 20 consecutive

profitable quarters.




13. (C) In Brito's view, Argentina's economy is well placed

to weather the current international turmoil, but the

domestic banking sector will still be squeezed by the higher

cost of international capital, as money retreats from

perceived risk. The government needs to start letting prices

rise on energy and key services and start to give more

signals to encourage investment. The key in the near term

will be where salary negotiations end up. If they end up

granting higher than 20% raises, for example, that will

seriously fuel inflationary expectations and produce

dangerous effects throughout the economy. If the final set

of raises average less than 20%, the effects will probably be

manageable. The government needs to adopt a new set of

policies for tackling inflation. The price limits and other

controls were supposed to be in place only for the short

term, but clearly, after more than a year in practice, they

are not working.




14. (C) Brito observed that the banking sector is growing

well, with Banco Macro having a 40% growth in loans last year

for example. But the key to continued domestic economic grow

is job creation, and much of that will only come if new

domestic investment, especially by SMEs, is affordable. The

government has started again to urge private banks to make

loans at low interest rates, but how, he asked rhetorically,

can a bank make a five year loan at 7% if it has to give 10%

to get 60 day deposits? Only if the government finds a way

to offer a guarantee or something like a rate subsidy, can

private banks lower rates. So far, he said, the government

has not come up with workable ideas or mechanisms.




15. (C) Brito noted that Argentina still suffers from having

a large part of the money flow in the economy taking place in

the informal system. Only about 65% of the money flows in

the formal system. The rest is off the books, and many

entrepreneurs are fighting hard to keep it that way, as it

allows them to save about 25% that would otherwise go into

retirement and health benefit payments. The rural economy

also has much of its transactions taking place through

informal, untaxed transactions, he said. Brito added that he

and his association looked forward to working further with

the USG on better controls for money laundering and against

terrorist finance.



Political Pollster and Professor

--------------




16. (SBU) Manuel Mora Y Araujo is currently Professor in the

Masters in Journalism program at the Di Tella University and

in the Masters in Political Science program at CEMA

University. He is also the Director of the International

Center of Public Opinion of Torcuato Di Tella Institute and

director of the local polling firm IPSOS, among many other

activities.




17. (SBU) He argues that the government will be judged by

how well it handles the problems of inflation and public

security. People are deciding how happy they are depending

on how much money they have to spend in their pockets, what

they can buy with it, and how safe they feel carrying their

money around. CFK's poll numbers have improved since her

inauguration, in part because people feel they are doing well

in their personal lives and give her the benefit of the doubt

at the moment.




18. (C) CFK's overreaction to the U.S. court case and Nestor

Kirchner's ill-fated trip to Colombia as ""guarantor"" of a

hostage release doesn't weigh heavily, because most of the

Argentine public do not care that much about foreign affairs.

Plus, in the case of the United States, playing the

anti-American card pays off initially. Governments have to

be careful, however, as the population doesn't like being in

conflict with the United States - a strange (but, from our

perspective, salutary) counterpoint to the anti-Americanism.

Thus, in this case as in many past ones, the best U.S.

response to an anti-American outburst by an Argentine

government is not to fuel the fire but just to keep calmly

explaining the U.S. point of view.




19. (C) CFK intellectually knows the value of having a

long-term vision and implementing it, but she is short-term

in her political outlook and practice, he said. She and her

husband share that outlook, but she is still more interested

in exploring new concepts and new countries than her husband.

That might be an advantage.




20. (C) It is far from clear that CFK will implement the

""social pact"" that she talked about between labor, capital,

and government over how to keep the economy growing without

disruption for the years ahead, according to Mora Y Araujo.

We have not heard much of the concept from CFK and getting

something like that done will take a great deal of political

effort and capital - no signs of plans to do that so far.




21. (SBU) Di Tella University's 50th Anniversary: Many

events are planned for this year. The university would like

to coordinate on some joint work with the Embassy on bringing

in speakers and working with U.S. universities, for example.



German Ambassador

--------------




22. (C) Regarding the Paris Club debt, German Ambassador

Wolf Rolf Schumacher said that until the crisis with the USG,

the Germans were getting strong messages that the new GoA

wanted to move pretty rapidly on solving the debt, but since

early December the GoA has gone silent. The Germans think

this is because the GoA knows that the USG will be an

obstacle unless relations improve. They expect the GOA to

move ahead if relations with the U.S. improve.




23. (C) Many German companies are doing quite well selling

into this market, but most are not making big new

investments. Volkswagen is an exception. Its local CEO (and

former Austrian Chancellor) Victor Klima has gone out of his

way to court CFK, using his connections in Europe with good

results. Siemens has found the Argentines eager to purchase

its turbines. As far as the Embassy can tell, all of the

energy deals are on the up and up. However, corruption is

widespread. One German CEO went into see Planning Minister

De Vido to complain that one of his deputies had solicited a

bribe and the CEO had refused. De Vido reportedly took no

interest in getting the name of the offending official but

instead recommended the CEO film and record the next bribe

solicitation.




24. (SBU) Germany's Max Planck Institute has decided to

build its own regional center in Buenos Aires adjoining the

new GoA science center. This will be only the second

overseas institute location for Germany, and Buenos Aires was

chosen because of the consistently high quality of students

and researchers who travel from Argentina for training and

scholarships at the Institute in Germany.




25. (C) The German Ambassador noted that it had been a big

challenge to get Chancellor Merkel to agree to meet with CFK

several months ago during CFK's visit to Germany, given the

reputation of the Kirchner government in Germany. But Merkel

agreed to do so in part because of signs that CFK might bring

about some changes. However, so far there are no real

changes evident. Decisions are still made by the same small

group. The clash with the United States, he opined, shows

that advice from outside that group (e.g., from the Foreign

Minister) is not sought or heeded. The focus is still on the

short-term and political, rather than on medium- and

longer-term goals. Relations with other countries are still

not highly valued, even if CFK has a personal interest in

travel and in meeting other leaders. It is not an impressive

start.



Defense Businessman, Publisher, Ex-Montonero

--------------




26. (C) Mario Montoto is involved in defense and security

industries, publishes a monthly magazine on defense and

international affairs issues called DEF, and is an ex-advisor

to the head of the Montonero guerrillas. He is now very

pro-U.S. and does business with Israel. Montoto says the

crisis with the USG is rooted in the limited perspectives of

the key decision-makers. For example, the Vatican is

refusing to accept the GoA nominee for ambassador, former

Justice Minister Irribarne, because he is a divorced and

remarried Catholic. The key decision-makers did not consider

that a 2000-year-old institution that has opposition to

divorce for Catholics like Irribarne as one of its key

principles might have a problem with this nominee. In the

case of the Miami arrests, it took the key GoA figures a

while to figure out that these were not orchestrated by the

USG. Montoto said he had raised this ""mistake"" with the head

of Argentine intelligence, Justice Minister Anibal Fernandez

and others, arguing that the GoA action was an embarrassment

and runs against Argentina's strategic interests. He said

Anibal Fernandez quietly whispered in his ear that he agrees.






27. (C) Montoto said he is working hard to raise

consciousness in Argentina and the region about the dangerous

arms build-up by Venezuela which he believes emboldens Chavez

to make bellicose statements against neighbors like Colombia.

He said this build-up also spurs similar purchases by

Brazil. Meanwhile, Argentina's military is severely

under-funded. This means that the United States is

strategically more important than ever to Argentina, and the

GoA should reinforce its defense dialogue and cooperation

with the U.S., not limit it. He said he argues with GoA

officials about this. He also said he had a very frank talk

with former President Nestor Kirchner recently where he

warned the ex-president about the inapplicability of Chavez'

model for Argentina and about being careful not to become

captive to Chavez. NK listened but did not concede the

points, Montoto said.




28. (C) On public security, Montoto said he believes

Argentines in greater Buenos Aires are going to judge their

government on how well it controls crime and returns peace to

the neighborhoods. This is the reason that Buenos Aires

province governor Daniel Scioli, whom Montoto advises, has

just rolled out a big effort to get more police on the

streets: he wants to show his voters that he is acting boldly

on this serious problem. Montoto said he just worked out the

broad outlines of an agreement between the State of Rio de

Janeiro and the Province of Buenos Aires to share experiences

and expertise on public security. Montoto said he has told

Scioli that he believes Buenos Aires may face the same

serious problems as Rio in a couple of years if firm action

is not taken now. Of course, the other part of the solution

is job creation, and that is why Scioli is also taking a

number of steps to promote SME creation and to attract

investment, including from the United State.



Fund Manager, Entrepreneur, and Real Estate Magnate

-------------- --------------




29. (SBU) Eduardo Elsztain is the founder of Dolphin Fund

Management (with several very large U.S. partners),President

of IRSA Inversiones y Representationes (real estate),and

Cresud (livestock),among many other activities. He is an

active civic leader and active in the NGO Endeavor which

promotes young entrepreneurs.




30. (C) Elsztain argues that the key to understanding

Argentine economic developments is to realize that it's the

concrete that matters (e.g., real estate, not financial

instruments). Right now, the key factor is salaries - how

will the government negotiate new salary caps with the

unions. Argentina is well-placed to weather current economic

problems in the world. ""I would rather have a populist

government with a good fiscal policy and reserves, than a

liberal government with a big deficit."" But, it will be very

important what policy signals the government sends to

investors. This government is on the right side of the

""private property"" debate compared to Chavez, but it is not

yet clear that it will come up with the right set of

policies. If it does, plenty of capital will flow here.

Essential to sustain such capital flows will be the justice

system and sanctity of contracts. Elsztain noted that his

investments in Brazil are currently valued three times higher

than similar investments in Argentina in good part because

people have more faith in the enforceability of contractual

agreements in Brazil. Still, investments in solid things

such as real estate and gold are good, and he will pursue

some additional mining investments in Argentina, for example.

(The strength of the Brazilian Real is also a factor in

Brazilian values, he noted.)




31. (SBU) Elsztain said he had just donated a computer

center for kids in the city of Buenos Aires with Mayor

Mauricio Macri earlier in the week, and Macri had asked him

to work on creating 90 more. Elsztain said he thought there

was room to work with the U.S. Embassy on this project.



Oil Man and Entrepreneur

--------------




32. (C) Jorge Estrada is a Colombian-Argentine-American who

started his career as a successful oilman and has

subsequently branched out successfully in many other areas.

In his view, inflation is the key issue facing the new

government, with the real figure probably somewhere around

18%. The government has been sending all the wrong signals

to the oil and gas sector. At present, for example, wealthy

households pay less for gas than do the poorest, who are

compelled to pay world prices to buy bottled gas for their

homes. While the government has been able to raise a lot of

money through its export taxes, the result is that the price

market does not work effectively, and production and

investment are distorted in agriculture as well as oil and

gas. The government should move to new taxing and pricing

schemes, he opined; it could still collect more taxes via

income taxes rather than using the export taxes. Right now,

the Argentine economy is well-placed to support such economic

reforms. Demand for Argentina's commodities is high, and

will remain so for a couple of years.




33. (C) At present, it is not yet clear that the government

is ready to introduce significant reforms. Nestor Kirchner

seems to still call many of the shots, and the government

seems to function in the same way as it did when he was

president. There is still no evident long-term vision. GOA

reactions to events are often based on domestic political

calculations, and there is little appreciation of other

countries. All of this was evident in the reaction to the

court case in Miami. As for the suitcase money itself, it

was probably coming in for some under-the-table deal, he

commented, but not likely for CFK's own campaign. She had

plenty of campaign money flowing in from various sources in

country, including the government.




34. (C) As for overall corruption, it seems as bad or worse

than under Menem. In the oil area, two old friends of Nestor

Kirchner have won many of the concessions offered publicly:

the bidding rules were designed so they would win. Also,

Nestor Kirchner has been a master at using state revenue to

build alliances with governors and mayors. Kirchner has used

his combative style (characteristically followed by a

subsequent embrace) to build a set of alliances founded on

mutual interests and fear. With Argentine supermarket owner

Coto, for example, he first criticized him harshly, almost

forced him to go broke, and then saved his business. Coto is

now an ally.

WAYNE


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