UNCLAS BUENOS AIRES 000797

SENSITIVE
SIPDIS

E.O. 12958: N/A
TAGS: PGOV EFIN EAGR PHUM EAID AR
SUBJECT: ARGENTINA ANNOUNCES SOCIAL INVESTMENTS FROM
PROCEEDS OF AGRICULTURAL EXPORT TAX INCREASE

REF: BUENOS AIRES 0766 AND PREVIOUS


1. (SBU) Summary: The GOA announced June 9 that it will
direct the marginal proceeds from its March 11 increase in
soy export taxes to health (60%), housing (20%) and rural
roads (20%). Argentine President Cristina Fernandez de
Kirchner (CFK) followed the announcement with a 25-minute
speech arguing that the effective increase in duties on soy
exports, which triggered the ongoing crisis with the
agricultural sector, was intended to protect Argentina's food
security and to redistribute income. Agricultural leaders
were unmoved, noting their grievances remain unaddressed as
the president made no concession toward them. The public was
also unimpressed, if initial polls are correct. The social
investments are clearly intended to woo public support away
from the agricultural sector, but financial analysts are
worried about the fiscal impact of the announced spending.
Also on June 9, a lower-level federal judge found the export
taxes unconstitutional, and on June 10 the Supreme Court
agreed to take up a provincial complaint on the export taxes.
End summary.

More Government Spending for the Poor
--------------


2. (SBU) With considerable fanfare, CFK assembled much of her
cabinet and allied governors, along with business and labor
leaders, at Casa Rosada late on June 9. The GOA announced
that it will direct proceeds from its March 11 increase in
agricultural export taxes to health (60%), housing (20%) and
rural roads (20%). CFK followed the announcement with a
25-minute speech calling on Argentines to help her combat
poverty by showing solidarity with the poor and
redistributing income. She argued that the March 11 tax
increase, which triggered the ongoing crisis with the
agricultural sector, was intended to protect Argentina's food
security and to redistribute income. She implicitly faulted
Argentine farmers for diverting a growing share of farmland
to soy production, noting that Argentines do not eat soy but,
due to the economic recovery of the last five years, are
requiring greater amounts of beef, meat and wheat.

3. (SBU) Despite the recovery of the Kirchner years, CFK
noted there were still too many Argentines without work,
food, housing, health and education. She said it was
"impossible to address poverty without redistributing
income," and that she therefore felt obliged to "touch" upon
the "extraordinary windfall" of a few in order to help the
many. CFK denied accusations that the export tax increase
was the result of the GOA's insatiable appetite ("fiscal
voracity") or its desire to avoid sharing revenues
("co-participation") with provincial governments. She
claimed that over 90% of the GOA's capital spending was
executed by local governments, and so would the newly
announced social investments. CFK concluded with an abstract
apology to anyone who might feel offended by anything she
said, presumably during the conflict with the rural sector.

Reaction from Farmers and the Opposition
--------------


4. (SBU) "Nothing much has changed: the fight continues," as
leading editorialist Joaquin Morales Sola noted in a page one
June 10 headline in "La Nacion." Agricultural sector leaders
continued to allege the tax increases were confiscatory and
arbitrary. They were unmoved by CFK's speech, noting their
grievances remain unaddressed as the president made no
concession toward them. The GOA had boycotted earlier that
same day a summons from Public Ombudsman Eduardo Mondino to
meet with farmers at the negotiating table. Road blocks
manned by farmers or truckers continued around the country,
and the press continued to report scattered shortages of some
food items in supermarkets. Farming sector leaders said they
hoped negotiations would resume, and press reports indicated
Planning Minister Julio De Vido might replace Cabinet Chief
Alberto Fernandez as the GOA's lead negotiator.


5. (SBU) Opposition leaders such as the Civic Coalition's
(CC) Elisa Carrio and the Radical Party's (UCR) Gerardo
Morales criticized CFK for resorting to populist demagoguery
and usurping the banner of combating poverty. Carrio said,
"You don't fight poverty by combating production but by
lowering inflation." Morales also said "the best way to
combat poverty is to rein in the inflation" which
disproportionately hurts the working class and poor. An
"Ibarometro" poll poll published June 11 in "Clarin" found
that 48% of the public did not believe the announced social
investment projects would be carried out, and 60% of the
public did not consider CFK's apology "sincere."


The Courts Start to Weigh In
--------------


6. (SBU) Also on June 9, lower-level federal judge Liliana
Heiland ruled in favor of a farmer seeking judicial relief
from the export taxes. According to Heiland, the tax
increase was unconstitutional since it had not been approved
by Congress. Heiland's ruling follows several similar
decisions by other judges, but none of these decisions sets a
legally binding precedent. Observers note the GOA may appeal
the decisions or simply ignore them. On June 10, the Supreme
Court agreed to take up a complaint filed by the province of
San Luis alleging that export duties since 2001 had adversely
affected provincial governments by reducing federal income
tax revenues which, by law, must be shared with the
provinces. A Supreme Court justice told the Ambassador June
11 that the Court was required by the Constitution to take
the case as it was filed by a province against the federal
government. She indicated the Court will likely not have a
hearing for 60 days. (Note: The province of San Luis is
governed by Alberto Rodriguez-Saa, a dissident Peronist and
rival of the Kirchners.)

Impact in the Provinces
--------------


7. (SBU) The governor of a major province told the Ambassador
June 5 that the prolonged agricultural crisis was
devastating, with dire repercussions for everyone. He said
buyers and investors had fled, and businesses were holding
off on major decisions, cautiously holding back until the
situation clarified. He noted the impasse between the GOA
and farmers was damaging Argentina's reputation. "We need a
solution and soon," he concluded. Media reports are
increasingly focused on the growing discomfort or
self-distancing of key governors allied with the Kirchners,
particularly in heavily agricultural provinces, such as
Cordoba governor Juan Schiaretti, who is openly critical of
the CFK administration, and Entre Rios governor Sergio
Uribarri. Press reports also indicate that the highly
popular governor of Buenos Aires province, former vice
president Daniel Scioli, has taken a beating in the polls
because of his perceived reluctance to meet with farmers or
take up their cause.

Comment:
--------------


8. (SBU) The announced social investments are clearly
intended to woo public support away from the agricultural
sector and also enlist the support of governors by earmarking
the new revenues for provincial governments to spend on
hospitals, housing and roads. Influential "Clarin"
editorialist Eduardo van der Kooy wrote June 11 that CFK
bought herself some time with her June 9 announcement but did
not end the farm revolt nor change the public perception of
Kirchner intransigence and unwillingness to dialogue or
negotiate. In a June 11 editorial, the "Buenos Aires Herald"
noted the GOA's social plan "looked more like improvisation
than a detailed blueprint against poverty," but CFK had
stolen the moral high ground by earmarking grain export
duties to the fight against poverty. The editorial also
termed the GOA's strategy of holding down food prices by
impeding exports as "self-defeating because food will never
be cheap if farm production is discouraged." Pundits also
observed that, despite the GOA's claim that the new social
spending would be executed by provincial governments, the
Kirchners and Planning Minister Julio De Vido would
ultimately use the apportionment of funds to keep political
control of governors.


9. (SBU) In the absence of hard data in the GOA's proposal,
financial analysts are worried about the fiscal impact of the
announced spending, particularly if soy prices should
decline. By some estimates, at current soy prices the GOA
stands to collect an additional $1.45 billion annually from
the sliding scale of taxes on soy exports alone. New
government spending on this scale could add marginally to
inflationary pressures and could also complicate the GOA's
ability to meet higher debt service requirements in 2009-11.
Other analysts worry that the government will next turn to
other sectors, like the banks, to tax "excess" profits.
Clearly, this drama is not over.
WAYNE