Argentina: Cash-Strapped GoA to Nationalize Private Pension

UNCLAS BUENOS AIRES 001442 SIPDIS SENSITIVE E.O. 12958: N/A TAGS: EFIN ECON EINV PGOV AR SUBJECT: Argentina: Cash-Strapped GoA to Nationalize Private Pension System -------------- Summary -------------- ¶1. (SBU) The GoA will announce formally October 21 its plans to submit a bill to Congress to "rescue" future retirees by nationalizing Argentina's private pension system. Argentina's social security system was partially privatized in 1994, with workers given the right to choose between affiliating with a "pay-as-you-go" public pension system and a "fully funded" private pension system. Over nine million workers, some 39% of the active labor force, have opted for the private pension fund system, which controls assets of roughly US$ 30 billion and is Argentina's main institutional investor. Nationalizing the private pension system would allow the GoA to: 1) tap billions in private pension fund cash; 2) roll over additional billions in interest and principal payments on GoA securities held in private pension fund portfolios; and 3) absorb an estimated US$ 4 billion (approx. 1% of GDP) in 2009 worker social security contributions into current, spendable tax revenue. ¶2. (SBU) The nationalization initiative reportedly originated with Chief of Cabinet Sergio Massa - who previously ran the public social security administration - in response to a request for new revenue ideas by former president Nestor Kirchner. A number of local economists criticized the GoA action, calling it an asset grab and clear evidence that is unable to meet upcoming 2009 financial obligations with current resources in light of a deteriorating global economic environment, profligate spending plans linked to upcoming interim legislative elections, and spiking 2009/2010 sovereign debt maturities. Local equity markets reacted negatively to the rumored move on Monday, bucking an international rally to drop 3.3%, and Argentina's country risk premium widened to over 1,400 basis points. Opposition leaders are accusing the government of grabbing new money to fund its current patronage system at the expense of future retirees. In counterpoint, union leaders supporting the Kirchner administration praised the move. Local analysts are split over whether obtaining Congressional support for the nationalization will be difficult. Some argue that the initiative will appeal to the ruling coalition in Congress who support populist measures; others expect an outcry from those invested in the private system will lead to a fight in Congress. A number of local analysts are portraying this nationalization as yet another improvised, top-down decision to address immediate financial needs with little thought given to possible social and legal considerations or to its impact on Argentina's domestic financial markets. End Summary. -------------- GoA to Nationalize Private Pension Funds -------------- ¶3. (U) President Christina Fernandez de Kirchner (CFK) is planning to announce October 21 that her administration will submit a bill to Congress to nationalize Argentina's private pension system. A formal rollout detailing the proposed nationalization is scheduled for the evening of October 21. ¶4. (U) State-owned news agency Telam reported that the GoA had decided to "reform" the social security system because, according to Amado Boudou, head of public social security system ANSES, the current financial crisis had demonstrated that the private pension system is "conceptually flawed." Given recent significant losses in the market value of private pension fund portfolios due to the global financial crisis, Boudou said, the GoA would "have to rescue in one way or another the future retirees that contribute to the system." Another senior GoA official is reported saying: "Just as the United States rescued the banks, we are going out to rescue the people." Media reports that Boudou spent the afternoon of October 20 with Chief of Cabinet Sergio Massa and Legal and Technical Secretary to the President Carlos Zannini drafting the initiative and the legislative proposal. -------------- -------------- Private Pensions: 14-Year Old Fully Funded System -------------- -------------- ¶5. (U) Argentina's social security system was partially privatized in 1994, with workers given the right to choose between affiliating with a "pay-as-you-go" public pension system and a "fully funded" private pension system. As of August 2008, 9.5 million workers (39% of the Country's working age population) had elected to belong to the private pension fund system. Of this 9.5 million, only 3.6 million are active contributors, compared to roughly 5 million active contributors in the state system. ¶6. (U) Receiving annual inflows of approximately ARP 13 billion (US$ 4 billion) in worker contributions, the private pension system is Argentina's main institutional investor. As of September 30, 2008, private pension fund system assets totaled ARP 94.4 billion (US$ 30 billion, 9.4% of GDP). A full 60% of these assets are invested in federal government securities, which, according to news reports, have lost up to 40% of their value in the past year. The private system is currently managed by ten independent fund administrators, known as AFJPs. The top four funds that control roughly 60% of the local private pension fund market are: Consolidar, run by Spanish-owned BBVA Banco Frances; Maxima, run by HSBC Bank; Met AFJP, run by U.S.-owned MetLife; and Origenes, run by the Dutch-owned ING Group. ¶7. (SBU) In what many now see as an interim step towards full nationalization, in 2007 the GoA gave private pension fund members the option to transfer out of their AFJPs and to return to a state-run defined payment system. The vast majority of AFJP members chose not to convert to the public system. At that time, the GoA also determined that new entries into the workforce were to default to the state plan if they did not specifically elect AFJP membership. -------------- -- AFJP Nationalization - Financial Relief for GoA -------------- -- ¶8. (SBU) The nationalization initiative reportedly originated with Chief of Cabinet Sergio Massa - who previously ran the public social security administration - in response to a request for new revenue ideas by former president Nestor Kirchner. According to local analysts, nationalizing the private pension system would allow the GoA to tap between US$ 2.5 and 4 billion that AFJPs currently hold as cash and time deposits in the banking system. It would also allow the GoA to roll over the US$3 billion the GoA would have had to pay AFJPs in 2009 in interest and principal payments on GoA securities held in AFJP portfolios. In addition, AFJP nationalization into a pay-as-you-go system implies that workers' social security contributions of an estimated US$ 4 billion (approx. 1% of GDP) in 2009 would be accounted as tax revenue, allowing the GoA to spend additional funds ahead of October 2009 mid-term congressional elections. -------------- Economists, Pundits Negative -------------- ¶9. (SBU) A large number of local economists criticized the GoA action, calling it an asset grab and clear evidence that the GoA sees itself unable to meet upcoming 2009 financial obligations with current resources in light of a deteriorating global economic environment, robust spending plans linked to upcoming interim legislative elections, and spiking 2009/2010 sovereign debt maturities. Aldo Abram of think-tank Exante called the GoA move "another swindling of future retirees." Alberto Bernal, head of macroeconomic strategy at Bulltick Capital Markets, argued "Argentina is moving back 20 years in terms of capital market development via this decision." Juan Llach, former Secretary of Economic Programming in 1994 (when the private pension system was created),called the nationalization a negative development. "It would be quite bad if (any GoA action) impeded the ability of AFJPs to save, since they are an important part of the little market demand for GoA securities today." And constitutionalist Gregorio Badeni directly questioned GoA motives: "The AFJP system was implemented precisely to guard against the state appropriating (private) resources, because this is what it has traditionally done. But evidently, the GoA needs fresh money that it can't get from other sources." -------------- - Markets Drop on Pension Nationalization Rumors -------------- - ¶10. (SBU) Markets echoed negative economist sentiments on Monday. As rumors of the scope and impact on the domestic financial system swirled, Argentina's Buenos Aires Stock Exchange Merval equity index lost 3.3% (and 7.1% for a more restrictive Argentine-only index), countering a global rally that was led by +/- 4% jump in major U.S. indices and an 8.3% gain in Brazil's Bovespa. Argentine financial sector stocks were particularly hard hit: Grupo Financiero Galicia, which owns the country's biggest bank, dropped 15%; Banco Macro dropped 13.4%, and Banco Frances lost 9.8%. Argentine bonds fell an average 1.7% (with the GoA sovereign Peso Discount Bond dropping 12%) and Argentina's J.P. Morgan Emerging Market Bonds Index country risk premium widened to more than 1,400 basis points. (Note: On October 21 as of mid-day trading, the market continued its downward descent, the Merval equity index dropping 12%, the JPMorgan country risk widening almost 200 basis points to 1,593 basis points, benchmark bonds such as the ARP Discount, ARP Par and Boden 2012 falling 16%, 7%, 9%, respectively.) -------------- --- Opposition Condemns Nationalization, AFJPs Quiet -------------- --- ¶11. (SBU) Opposition leaders panned the government's nationalization plans, accusing the government of exploiting domestic angst over recent international market volatility. They charged that the GoA was seeking to obtain a massive pool of new money to fund its current patronage system at the expense of future retirees. Radical party Chairman Gerardo Morales called it "an outright and desperate grab for pensioners' savings" by the GoA. PRO congressman Esteban Bullrich called it "a violation of private property." Elisa Carrio, Civic Coalition opposition leader, said "the measure is not to improve the pension system but to raid retirement funds and raise funds." ¶12. (U) Representatives of the 10 individual AFJPs and the head of the AFJP union (and former Under Secretary of Finance) Sebastian Palla all maintained a studied silence October 20 in the face of growing speculation on details of the GoA's nationalization initiative. Local media reports that these representatives were seeking audiences with Chief of Cabinet Massa and confirmed privately that they had been neither consulted nor given any early notice of the GoA's plans. -------------- Union Leaders Euphoric -------------- ¶13. (SBU) Left-wing union leaders supporting the Kirchner administration were uniformly upbeat and described the nationalization as all but a done deal. Hugo Moyano, leader of the General Confederation of Labor (CGT - Teamsters),called the move positive for Argentina's union workers and said the nationalization "will expose the great swindle that was the creation of the AFJPs." Leonardo Fabre, Secretary General of APOPS, the union associated with state-run social security system ANSES, said "God willing, the president will announce tomorrow a return to the state-run system. The private system does not work. It loses money. You can't have a system in which people lose their retirement benefits." The only union sour notes are coming from representatives of the 10,500 private pension funds employees who are worried their jobs would be lost in a nationalization exercise. -------------- Prospects for Congressional Approval -------------- ¶14. (SBU) Local analysts are split over whether the GoA will encounter difficulty in obtaining Congressional support for the nationalization of the AFJPs. Some argue that a nationalization of the AFJPs would likely be supported by the 61% of the working population who currently belong to the public pension system, and so will appeal to the ruling coalition in Congress, who tend to support populist measures. Other analysts argue that the popular outcry from those invested in the private system will lead to a fight in Congress. The Kirchners' coalition in Congress, while weakened after the Senate's earlier vote against variable agricultural export tariffs, still commands simple majorities in both legislative chambers. ¶15. (SBU) The abrupt and vague nature of the nationalization plan may well spark enough public concern that even ruling party-aligned deputies and senators will show caution. The push-back may come not over "nationalization" in principle but over details, including what entity controls contributions and funds, whether the resources are held in trust or are made available to the government, and what sort of payouts are guaranteed under a new system. If public criticism grows, then Senate approval may be harder to obtain, just as it was over the government's ill-fated legislation raising export tariffs on agricultural commodities. As Senators are more easily recognizable in their provinces (three Senators per province) than the numerous congressional deputies, they may be less inclined to vote for legislation that does not have their constituencies' support. -------------- Comment -------------- ¶16. (SBU) A senior industrialist close to former President Nestor Kirchner told us Kirchner recently confided to him that "I need to control all the money" to address economic pressures linked to the global financial crisis. This private pension fund nationalization will flow considerable new cash resources to GoA coffers -- an estimated extra US$ 4 billion a year (1% of GDP) in worker contributions. The counterpoint deterioration in long-term debt dynamics linked to expanded retirement payment obligations is a problem future governments will have to address. These new monies certainly will be welcomed by the Kirchner administration given domestic spending imperatives tied to upcoming mid-term October 2009 elections. Signs of an expansionist offensive are already apparent. On October 20, the GoA announced it will restore natural gas subsidies for residential users. Three days earlier, Planning Minister De Vido announced the GoA would launch a large infrastructure program to offset the negative impact on the economy of the global financial crisis. ¶17. (SBU) A number of local analysts say they view this private pension fund nationalization initiative as a page out of a now-standard CFK administration playbook: an improvised, top-down decision to address immediate needs (in this case financial),with the details to be worked out later and the longer term consequences (in this case the potential social and legal implications and the impact on Argentina's domestic financial markets) given little thought. Septel will analyze these potential consequences, which will likely be significant: for the past 14 years, private pension fund investments have been an important source of liquidity in domestic financial markets, and their nationalization will substantially reduce the size of Argentina's capital market by eliminating its main institutional investor. WAYNE