ENGAGING ECONOMY MINISTER LOUSTEAU ON PARIS CLUB,

C O N F I D E N T I A L SECTION 01 OF 03 BUENOS AIRES 000463 SIPDIS SIPDIS FROM AMBASSADOR WAYNE FOR TREASURY SECRETARY PAULSON PLEASE ALSO PASS TO A/S LOWERY AND DAS O'NEILL E.O. 12958: DECL: 04/09/2018 TAGS: EFIN ECON ETRD PREL AR SUBJECT: ENGAGING ECONOMY MINISTER LOUSTEAU ON PARIS CLUB, HOLDOUTS, AND ICSID CLAIMS Classified By: Ambassador E.A. Wayne for Reasons 1.4 (b,d) Summary -------------- ¶1. (C) Treasury Secretary Paulson's April 11 meeting with Economy Minister Martin Lousteau offers an opportunity to engage the senior GoA official charged by President Kirchner with resolving Argentina's pariah status in international capital markets. Lousteau is in a fight for his political life. He faces heavy criticism in the press and frequent calls for his resignation. The President has reaffirmed her support, but he remains weak and vulnerable. While his influence over broad economic policy is limited, Lousteau is clearly interested in pursuing creative solutions to controversial debt issues. One could say he needs a win, but his weak domestic position could also make him risk-averse. Post argues for pressing hard for the GoA to develop a credible plan for paying Paris Club arrears, recognize its obligations to pay ICSID awards, and normalize relations with "holdout" bondholders. End Summary. Setting the Stage: Lousteau is as Good as it Gets -------------- -------------- ¶2. (C) The April 11 meeting with Economy Minister Lousteau offers an opportunity to demonstrate to both Lousteau and other reform-minded officials in the GoA and Central Bank that there is high-level U.S. interest in helping Argentina to resolve the debt issues that preclude its reinsertion into global capital markets. In addition to pressing the GoA to get serious on Paris Club, Holdouts, and ICSID cases, Post recommends acknowledging Argentina's impressive recovery from its 2001/2002 crisis, which exceeded ALL expectations: five straight years of over 8.5% real growth, twin surpluses (fiscal and trade),and substantial reductions in povery and unemployment levels. Lousteau Battling to Save Job -------------- ¶3. (C) Minister Lousteau is fighting for his political life. Many Argentines blame him for the GoA's March 11 decree to increase export taxes on Argentina's major agricultural export crops. Lousteau's announcement of the tax hike precipitated a 20-day agricultural sector strike, a massive disruption of domestic commerce and exports, and food shortages in urban areas. It rapidly devolved into a country-wide challenge to the Kirchners' entire economic model of taxing the most productive sectors of the economy to transfer resources to less efficient industry, subsidize urban consumers and fund inefficient social safety net programs. Many observers consider it the worst crisis of the Kirchner era (since 2003),and it is not over, as the strike was only suspended for 30 days pending further negotiations. ¶4. (C) While the public associates Lousteau's Economy Ministry with the GoA policy decision to raise export taxes, it almost certainly originated with President Cristina Fernandez de Kirchner, her husband Nestor Kirchner, and powerful Chief of Cabinet Alberto Fernandez. President Kirchner and the Chief of Cabinet have both publicly affirmed their support for Lousteau, but the fallout from the strike has left him weakened and vulnerable. He has been forced to deny rumors of his pending dismissal and there is considerable media play on possible replacements. ¶5. (C) Complicating Lousteau's position in government is his difficult relationship with Internal Trade Secretary Guillermo Moreno, who is responsible for a complex price control bureaucracy and is also orchestrating the GoA's manipulation of official inflation statistics. Although Moreno is technically Lousteau's subordinate, he is known to report directly to former President Nestor Kirchner and also to powerful Planning Minister Julio De Vido. Lousteau's predecessor, Miguel Peirano, was forced to resign in October 2007, after losing a battle with Moreno over control of the Argentine statistics agency, INDEC. ¶6. (C) Lousteau has had no greater success in wresting control over INDEC from Moreno, which is a crucial first step for the GoA to regain credibility for its economic policy. Moreno regularly implements policy changes without consulting Lousteau, who on several occasions has learned of them from the press. Most recently, Lousteau and Moreno were caught on camera yelling at each other, reportedly because Lousteau was upset at Moreno's unvetted order to ban beef exports (to maintain adequate local supplies and keep domestic prices BUENOS AIR 00000463 002 OF 003 down) while Lousteau was in the middle of sensitive GoA negotiations with farmers to suspend the agricultural strike. ¶7. (C) In light of Moreno's autonomy and clear indications that former President Nestor Kirchner remains in charge of economic decision-making, we question how much influence Lousteau wields in this government. That said, Lousteau clearly appreciates the opportunity costs of Argentina's pariah status in international capital markets and genuinely appears interested in seeking creative solutions to the economic issues that have bedeviled the bilateral relationship for years: Paris Club and holdout bondholders. Paris Club -- Time for GoA to Get Serious -------------- ¶8. (C) The GoA has yet to present a formal proposal to clear its over $4 billion Paris Club arrears, and three separate Economy Ministers over two administrations have basically repeated the same refrain: rejection of an IMF role in a Paris Club deal, while also insisting on generous rescheduling terms. Ambassador alerted Lousteau on April 9 that Treasury officials are expecting him to make serious and realistic proposals during the April 11 meeting. Econoffs have also encouraged staff-level Economy Ministry officials to consider the Paulson/Lousteau bilat as the first step in the development of a serious GoA proposal for submission to the Paris Club Secretariat. ¶9. (C) Ministry staffers respond that they are developing possible options, and at least at the staff level there is an understanding that the most plausible solution is a voluntary repayment plan. The contentious areas relate to the length of the payback period, whether the Paris Club will agree to stop the clock on interest charges, and how soon key export credit agencies will return to accepting sovereign exposure in Argentina. ¶10. (C) Post is aware that on the Ministry's list of options (but not necessarily at the top) is the unilateral payment of all arrears to the U.S. (outside of the Paris Club context), since the U.S. appears to have more legal and policy restrictions than most other Paris Club member countries. Economy Ministry staff say the arguments against are: 1) uncertainty over whether the U.S. would accept the payment; 2) uncertainty over whether this would actually facilitate a more flexible arrangement with other creditors; and 3) the loss of a potentially powerful advocate. (Comments: Apparently Ministry officials do not have with most European creditors -- except for Spain -- the same open and helpful dialogue they have with the U.S. Post has not encouraged this unilateral payback option, and has emphasized that any solution must be handled through the Paris Club.) The Economy Ministry is closely reviewing the Paris Club's debt restructuring deal with Angola, which did not include an IMF agreement as a prerequisite. Holdouts -- Emphasize Increasing Pressure -------------- ¶11. (C) Economy Ministry officials agree privately that the GoA should eventually find it in its own interest to normalize relations with the private sector bondholders ("holdouts") who that did not participate in the 2005 debt exchange. Holdout lawsuits have closed down the GoA's options for issuing debt under international law. Given high fiscal surpluses since 2003, and the surplus of international liquidity, the GoA has been able to meet its financing needs by issuing bonds under domestic law, and staging private placements with public agencies (such as the Social Security Administration) and to the Government of Venezuela. ¶12. (C) Eventually, however, the GoA will want to tap international capital markets, requiring some kind of accommodation with the bondholders. At the moment this is a non-starter with President Kirchner, as she has frankly told us on several occasions. Therefore, Post has emphasized in all meetings with the GoA that while this is not an issue the GoA is ready to deal with in the short term, it is of great interest in Washington, as U.S. citizen holdouts are steadily increasing pressure on the USG and Congress, and also through the courts. ICSID -- GoA Should Meet Its Obligations -------------- ¶13. (C) The GoA continues to stonewall on the settlement of numerous ICSID international arbitration claims by BUENOS AIR 00000463 003 OF 003 multinational firms, including many energy sector players who argue that the GoA's "pesification" and later freezing of dollar-based tariffs in the aftermath of the 2001/2 economic crisis effectively expropriated their assets. While the face value of U.S. company ICSID claims alone totals over $4 billion, many U.S. companies have suspended -- but not withdrawn -- their ICSID suits in order to win GoA concessions on new business opportunities. One ICSID claim filed by U.S. energy major CMS is the first post-crisis case to completely finish tortuous 5-year ICSID arbitration and appeal process. The GoA, however, has declined to pay the $150-odd million award to CMS, claiming that CMS must now attempt to collect through Argentine courts. CMS is considering whether to seek more direct USG advocacy on its behalf, citing GoA obligations to the USG under our Bilateral Investment Treaty, and has already tried once in New York courts to seize Argentine assets. Post has emphasized to GoA counterparts that the USG is under increasing pressure from U.S. ICSID claimants to encourage the GoA to meet its final ICSID judgment obligations. WAYNE