ARGENTINA: GOA STRUGGLES TO RESPOND TO

C O N F I D E N T I A L BUENOS AIRES 001374

SIPDIS

E.O. 12958: DECL: 10/07/2028
TAGS: ECON EFIN ETRD EINV AR
SUBJECT: ARGENTINA: GOA STRUGGLES TO RESPOND TO
INTERNATIONAL FINANCIAL CRISIS

REF: A. BUENOS AIRES 1320

B. BUENOS AIRES 1312

C. BUENOS AIRES 1286

D. BUENOS AIRES 1160

E. BUENOS AIRES 1116

F. BUENOS AIRES 790 AND PRIOR

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

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Summary
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1. (SBU) A "Coordinating Table" chaired by Chief of Cabinet
Sergio Massa and including senior Economy Ministry, Central
Bank, and financial sector regulatory officials is to meet
today, October 7, to organize GoA-wide management of
currency, trade, budget, and debt policies in response to the
international financial crisis. The most visible GoA
reaction to date to the crisis has been a roughly 5%
devaluation of the Peso since September 1 to 3.19, a drop
that Political Economy Secretary Martin Abeles calls a
defined GoA policy to ensure the peso does not lose
competitiveness in relation to trading partner currencies,
especially the Brazilian Real, which has dropped almost 22%
against the US dollar and 17% against the Argentine Peso in
recent weeks. With a different emphasis, Central Bank
President Martin Redrado, in public comments on October 7,
highlighted the GoA's managed currency float as a key element
of an "integrated" GoA stabilization strategy that has
allowed for a moderate Peso devaluation while currency values
in "neighboring countries" (read Brazil) have weakened
considerably more in recent weeks.


2. (C) Beyond the devaluation, Industries Secretary Fernando
Fraguio has been tasked to review current GoA WTO tariff
bindings to determine whether adjustments can/should be made
to protect domestic industries that could be threatened by a
depreciated Real. Faced with declining commodity prices and
export tariff revenues, the GoA will continue to approve
public utility rate adjustments to limit the budget drain of
GoA energy and transportation sector subsidies. The GoA will
also selectively slow or defer non-politically sensitive
capital infrastructure projects to maintain the primary
fiscal surplus in the 3.3 - 3.4% range. On inflation, Chief
of Cabinet Sergio Massa (protect),told Ambassador that his
initiative to launch a round of meetings of business leaders
with INDEC authorities to discuss CPI methodologies is part
of an effort to restore the credibility of official inflation
data and wrest control of INDEC from Internal Commerce
Secretary Guillermo Moreno. Finally, the GoA will press
ahead on the "re-financing" of bond holdout debt and
guaranteed loans in order to bring in new cash to finance
2009 debt maturities. GoA efforts to ensure pragmatic,
albeit protectionist, economic policy flexibility have been
welcomed by local economists amid current market
uncertainties. These CFK administration initiatives deepen
and expand on a number of ad hoc budget and debt policy
reforms initiated over the past three months. End Summary.

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Global Crisis Prompts GoA to Deepen Earlier Reforms
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3. (SBU) Over the three months period from July ) September
2008, the GoA began to adopt selective "orthodox" budget and
macroeconomic reform measures to confront growing market
concerns and country risk premiums associated with a squeeze
on the primary fiscal surplus (BsAs 1260) and looming
sovereign debt maturity concentrations (BsAs 1286). These
measures included limited electricity and transportation
tariff increases designed to staunch the budget drain of GoA
subsidies. They also included surprise GoA announcements
that, almost seven years after the nation's December 2001
economic crisis and default, Argentina will pay down its
Paris Club arrears (BsAs 1312) and that, almost three years
after the GoA,s December 2005 take-it-or-leave-it debt
restructuring, Argentine will consider bank offers to deal
with bond holdouts (BsAs 1320).


4. (SBU) Market responses to these earlier GoA measures were
less enthusiastic than the CFK administration had hoped for.
Reasons included economists' concerns that tariff hikes were
insufficient to control burgeoning subsidies; concern at
President Cristina Fernandez de Kirchner's (CFK's) continued
support of embattled Argentine statistics agency INDEC;
further declines in global agricultural commodity prices (at
$338/ton as of October 6, soy prices are now down roughly 45%
from their July high of $600/ton); and the downgrade of
Argentine risk by Standard & Poor's and Moody's. Over the
past week, embassy contacts and local media are reporting
that the CFK administration, increasingly concerned over
potential contagion and fallout of the international
financial crisis, is now moving to substantially deepen and
expand on these earlier budget and debt policy reforms.

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Coordinated GoA Response to Global Crisis
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5. (SBU) Economy Ministry Secretary for Political Economy
Martin Abeles confirmed to EconCouns October 6 that, on
October 3, CFK instructed Chief of Cabinet Sergio Massa to
launch a "Coordinating Table" to monitor the international
financial crisis, impact on Argentine currency and on
equities and debt markets, as well as to ensure a unified GoA
regulatory and fiscal policy response. This Table is
scheduled to hold its first meeting today, October 7.
According to Abeles, CFK and her husband Nestor Kirchner are
particularly concerned by the impact of the crisis on the
economies of major trading partners, including Brazil, and
recent tendencies among these trading partners towards
"beggar-thy-neighbor" currency devaluations that could
imperil the competitiveness of Argentine industry. In
October 7 comments to an American Chamber of Commerce
conference, Central Bank President Martin Redrado also noted
critically an emerging market legacy of beggar-thy-neighbor
policies.


6. (SBU) The Coordinating Table is to meet regularly until
global market conditions stabilize. In addition to Massa,
members include Minister of Economy Carlos Fernandez,
Secretary of Finance Hernan Lorenzino, Secretary of the
Treasury Juan Carlos Pezoa, BCRA President Martin Redrado,
Director of Argentina,s tax and customs authority (AFIP)
Claudio Moroni, National Bank President Mercedes Marco del
Pont, Director of GoA Social Security entity (ANSES) Amado
Boudou, head of the National Securities Commission (CNV)
Eduardo Hecker, Superintendent of private pension funds
(SAFJP) Carlos Weitz and Superintendent of Insurance (SSN)
Miguel Angel Baelo.

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Specific GoA Response
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7. (SBU) According to Secretary Abeles, the GoA's response to
international market volatility and recession will focus on
the coordinated management of currency value, trade policy,
budget adjustment and debt policy:


8. (SBU) Managed Peso Devaluation: After trading in the
3.10 to 3.18 range since the beginning of the sub-prime
crisis in July 2007, in early July 2008 the Argentine central
bank moved to appreciate the peso via reserve sales and
futures market intervention to a high of 3.01 in order to
stem speculative pressures. Since September 1, however, the
central bank has allowed the peso to depreciate back to 3.21,
a roughly 5% drop from its 2008 peak. Abeles confirmed that
this is a defined GoA policy to ensure that the peso does not
"unduly lose competitiveness" in relation to other trading
currencies, especially versus the Brazilian real which has
dropped 18% against the dollar and almost 14% against the
peso since September 1. (Before this drop, the Brazilian real
had appreciated roughly 60% against the Argentine Peso since
July 2003.)


9. (SBU) Separately and with a focus on stability rather
than competitiveness, in October 7 remarks to the American
Chamber of Commerce, Central Bank President Martin Redrado
highlighted Argentina's managed currency float and limited
devaluation as a key element of an "integrated" GoA approach
to coping with current global financial and equity market
volatility. He called this managed float "the only possible
scheme for a country like Argentina with a history of
macroeconomic volatility" that has allowed Argentina to
maintain relative currency stability at the same time
currency values in "neighboring countries" (read Brazil and
Mexico) have fluctuated 40% in just the past few days.


10. (C) Argentina's 5% devaluation vis the US Dollar comes
despite recent statements by CFK to the powerful Argentine
Industrial Union on the need to maintain a strong peso as an
anti-inflationary anchor. Abeles argued that CFK's strong
peso comments were less geared to inflation orthodoxy and
more to reminding Argentine industrialists that their
persistent calls for a weaker peso to maintain
competitiveness conflicts with their equally insistent
demands for the GoA to reign in domestic inflation that
independent analysts currently peg at the 18% level.
Separately, Chief of Cabinet Sergio Massa (protect),in an
October 6 conversation with Ambassador, noted that his
initiative to launch a round of meetings of business leaders
with INDEC authorities to discuss CPI methodologies is part
of an effort to restore the credibility of official inflation
data and wrest control of INDEC from "others" (read Internal
Commerce Secretary Guillermo Moreno). He apparently hopes
that the organized debates, which will include employers and
union economists, will expose flaws in INDEC's system and
make fixes easier. Embassy contacts argue that, to boost the
credibility of INDEC's CPI index, the GoA should not only
discuss methodology, but also reassure the market about the
quality and accuracy of the sample data that feeds the index.


11. (SBU) Trade Policy Management: The GoA has long used
non-tariff barriers to limit the rate of growth of imports
from China (BsAs 790) and from Mercosur partner Brazil (BsAs
1116). Abeles confirmed that Economy Ministry Industries
Secretary Fernando Fraguio has been tasked to review current
GoA WTO tariff bindings to determine whether adjustments
can/should be made to protect domestic industries that could
be threatened by a depreciated Real making Brazilian exports
more competitive in Argentine markets. (Brazil is
Argentina's top trading partner; Argentina has run a 65-month
old bilateral merchandise trade deficit with Brazil. In the
first eight months of 2008, this trade deficit grew 20% y-o-y
to US$ 3.4 billion, in stark contrast to Argentina's
agricultural commodity-driven global trade surplus, which
totaled nearly US$ 11.1 billion in 2007 and US$ 5.1 billion
in the first half of 2008. In 2007, Argentina sent 19% of
its merchandise exports to Brazil and received 32% of its
imports from Brazil. The enormous growth in Argentine
imports of Brazilian manufactured goods speaks volumes about
the relative lack of competitiveness of Argentina's
manufacturing sector.)


12. (SBU) Budget Management: The GoA will continue its
policy of approving select public utility tariff adjustments
to limit the growth of subsidies (which currently total
roughly 3% of GDP),particularly in the energy and
transportation sectors. The focus, Abeles confirmed, will be
on tilting such increases to large wholesale users to limit
the (immediate) impact on consumers and, as importantly, on
the GoA's current CPI measure which remains heavily weighted
to the primary consumption basket of low-income earners. In
addition, Abeles said, the GoA will selectively slow or defer
non-politically sensitive capital infrastructure projects to
maintain the primary fiscal surplus in the 3.3-3.4% range
(vs. the 3.15% surplus in the 2008 budget and the 3.27%
projected in the 2009 budget.)


13. (C) Debt Management: The GoA will press ahead on the
joint "refinancing" of bond holdout debt and guaranteed loans
(BsAs 1320) that would bring in new cash to finance 2009 debt
maturities (current estimates are in the range of US$2 to
$2.5 billion depending on bond "holdout" participation). IDB
President Luis Alberto Moreno (protect),in an October 7
meeting with Ambassador, reported that Economy Minister
Carlos Fernandez had confirmed to him earlier market reports
that a significant 50% of bond holdouts were ready to tender
their debt in the re-financing program. Separately,
Secretary Abeles could not confirm persistent market rumors
that Finance Secretariat officials are considering
negotiating a longer term payment of US $7-odd billion in
Paris Club arrears to conserve free reserves during this
period of market instability.

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Comment
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14. (SBU) At her New York UNGA-margin Council of the Americas
lunch in September, CFK responded with calculated irony when
asked whether Argentina had developed an economic contingency
"Plan B" in response to rapidly declining commodity prices
and gathering international market storm clouds. "You (i.e.,
developed economies) seem to be the ones who need a Plan B,"
she said. Yet faced with declining real GDP growth rates,
continued pressure on fiscal accounts, and falling commodity
prices, the CFK administration appears to be pulling together
just such a Plan B to adjust economic policies to current
realities. This is welcome pragmatism.

WAYNE