ARGENTINA: POST RESPONSE TO INFORMATION GATHERING

C O N F I D E N T I A L BUENOS AIRES 001497

SIPDIS

E.O. 12958: DECL: 10/29/2018
TAGS: EFIN ECON PREL PGOV AR
SUBJECT: ARGENTINA: POST RESPONSE TO INFORMATION GATHERING
REQUEST FOR NOVEMBER 15 SUMMIT ON FINANCIAL MARKETS AND THE
WORLD ECONOMY

REF: A. STATE 114420

B. BUENOS AIRES 1495

C. BUENOS AIRES 1493

D. BUENOS AIRES 1491

E. BUENOS AIRES 1490

F. BUENOS AIRES 1489

G. BUENOS AIRES 1477

H. BUENOS AIRES 1475

I. BUENOS AIRES 1466

J. BUENOS AIRES 1458


K. BUENOS AIRES 1456

L. BUENOS AIRES 1443

M. BUENOS AIRES 1442

N. BUENOS AIRES 1427

O. BUENOS AIRES 1417

P. BUENOS AIRES 1415

Classified By: Ambassador E.A. Wayne for Reasons 1.4 (b,d)


1. (C) Post provides the following response to Ref A request
for information on Argentina in advance of the November 15
G-20 meeting in Washington. Relevant financial and political
reporting from October provided reftels.


I. Key Objectives and Priorities/Desired Outcomes of the
Summit: President Cristina Kirchner de Fernandez will likely
use the summit as a platform to justify recent expanded GoA
interventions in Argentine markets, using developed nations'
recapitalization of their financial markets to validate the
GoA's current initiative to nationalize its private pension
system. Kirchner may also rationalize her declaration of an
"administered trade" policy (expedited anti-dumping
investigations and expanded non-tariff barriers) as a
mechanism to counter substantial devaluations by key trade
partners (e.g., China, Brazil) and so preserve Argentine
industrial production and job creation. Argentine government
officials say that the GoA is seeking to coordinate positions
with Brazil, to be discussed further during the November 8-9
Mercosur summit in Sao Paulo.

II. Key Concerns: Argentina is concerned about: 1)
decelerating GDP growth and its impact on employment and on
GoA spending in the run-up to the 2009 mid-term elections; 2)
greater difficulty in arranging financing to cover debt
maturity spikes in 2009-2011; and 3) a declining trade
surplus due to agricultural commodity price drops and seeing
Argentina placed at a possible competitive disadvantage due
to significant depreciations of key trading partner
currencies, e.g., Brazil.

III. Impact of the Financial Market Crisis on the Financial
Sector: The direct impact on the Argentine financial sector
has been limited due to the relatively low level of private
credit (only 13% of GDP) and GoA's isolation from
international capital markets. No Argentine financial
institutions have failed and credit rating agencies' outlook
for the sector is stable. Nevertheless, in the face of
slowing domestic growth, high domestic inflation, rising
interest rates, and the proposed nationalization of private
pension funds, Argentine banks are taking precautionary
measures, including reducing lending. The difficult
environment is likely to expose banks to higher credit risks
and to pressure their profitability. In response to the
October 21 pension nationalization announcement, and heavily
influenced by the deteriorating global environment, local
equity and bond markets plunged, Argentina's country risk
premium spiked to almost 2,000 basis points, capital outflows
have increased sharply, and there is increasing pressure on
the peso to depreciate further.

IV. Actions Taken to Address the Financial Crisis: The GoA's
initial response was to form an inter-Ministry "Coordination
Council" and announce an "administered trade" policy,
consolidating domestic protections via expanded reference
price lists, expedited anti-dumping rulings and enhanced
non-automatic licensing measures. Other measures include
increasing electricity and transportation tariffs to cut the
burden of government subsidies; allowing a 10% devaluation of
the Argentine peso since mid-September, and attempting to
normalize relations with Paris Club creditors and private
bondholders (these latter two are currently on hold, pending
improvement in the international financial context). The GoA
also proposed the nationalization of the private pension
system, ostensibly to protect pensioners from market
volatility, but also to gain access to the systems' $30
billion in assets and $4-5 billion in annual worker
contributions so as to reduce perceived default risks and
obviate the need for cuts in government spending prior to the
October 2009 mid-term elections. This move set off the
negative reaction cited in section III above.


V. Current economic situation/near-term outlook: 2008 GDP


growth estimates have dropped from 7% to 4-6%, while 2009
estimates have dropped from 6% to 1-2%, with a number of
economists predicting recession. Estimated actual annual
inflation has dropped from around 25% to around 18%
currently. Capital outflows have accelerated over the last
month, increasing pressure on the Argentine Central Bank to
maintain a stable exchange rate. The peso has depreciated
over 10% since August, and further depreciation is expected.


2. (SBU) Embassy Points of Contact: Primary: Douglas Climan,
Economic Counselor, ClimanDP@State.Gov, 54-11-5777-4609.
Back-up: Chris Landberg, Deputy EconCouns,
LandbergCA@State.Gov, 54-11-5777-4589.
WAYNE