UNCLAS BUENOS AIRES 000168

SIPDIS
SENSITIVE

E.O. 12958: N/A
TAGS: EFIN ECON EINV PREL KSUM PGOV AR
SUBJECT: Argentina: Finance Secretary on GoA Crisis Response and
G-20 Positions

Ref: (A) 08 Buenos Aires 1520
(B) 08 Buenos Aires 1495

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Summary
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1. (SBU) GoA Finance Secretary Hernan Lorenzino told a visiting
Senate staffdel February 16 that Argentina's lack of access to
international capital markets has insulated it from the impact of
the global financial crisis, with Argentina thus far avoiding much
of the "social fallout" evident in more developed economies.
Lorenzino remains optimistic that the overall impact of the crisis
on Argentina will be limited, arguing that Argentina has built up a
"cushion" of economic productivity that will allow it to recover
quickly from declines in domestic consumption and in international
demand for Argentine products. In the near term, the GoA will focus
its crisis response on fiscal pump-priming (including via recently
announced public works programs and by programs to encourage car and
home appliance purchases), on protecting domestic manufacturing
competitiveness (especially in the face of newly competitive
Brazilian imports), and on preserving domestic employment by
"intervening as an arbiter" in union/company labor disputes. He
called the GoA's debt burden "manageable," with resources available
to cover medium-term maturities without seeking additional
international financing. Secretary Lorenzino's upbeat assessment of
Argentina's relative insulation from the impact of the global
financial crisis stands in contrast to assessments by independent
economists, many of whom project zero or negative 2009 GDP growth
and the prospect of significant increases in Argentine unemployment
and poverty levels in the coming months.


2. (SBU) On the upcoming mid-March G-20 Finance Ministers' meeting,
Lorenzino called a key Argentine priority working to "re-focus" the
IMF on providing minimal-conditionality short-term liquidity lines
to allow emerging markets to confront exogenous crises. Argentina
has no/no intent to "formalize" any like-minded G-20 sub-group on
IMF reforms, he said. "Our goal now is to see emerging markets as a

group gain significantly greater representation." Lorenzino called
Argentina's position on broad global financial architecture reform
generally in line with those of the majority of G-20 members. He
highlighted the need for relevant G-20 committees to focus on (1)
rating agency reform/oversight; (2) the need to systematically
address the "scourge" of tax havens; (3) the need for broad
international oversight on the ability of multinational bank
headquarters to make "liquidity decisions" on behalf of local bank
affiliates that impact emerging market economies; and (4) the need
to better regulate the non-transparent credit-default swap market.
On multilateral development bank reform, Lorenzino argued that the
World Bank has adequate resources to fulfill its development
mandate, but that the Inter-American Development Bank needs
additional resources. End Summary.


3. (SBU) On February 17, Economy Ministry Secretary of Finance
Hernan Lorenzino met with Jessica Lewis, Senior Foreign Policy
Advisor to Senate Majority Leader Harry Reid; Caroline Tess,
Professional Staff Member, Senate Select Committee on Intelligence;
Lieutenant Colonel Richard Root, Office of Congressional Legislative
Liaison; and EconCouns to review the GoA's response to the
international financial crisis and, in the run-up to the April 2
second G-20 summit in London, to discuss the role the Economy
Ministry is playing in G-20 subcommittees on IMF and MDB reform.

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Crisis Impact Ameliorated by Argentine Isolation
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4. (SBU) Notwithstanding the severity of the global financial
crisis, Lorenzino called its impact to date on Argentina less
pronounced than that of other recent crises, including the '94
Tequila crisis, the '98 Russia/Asia financial crisis, the '99 Brazil
devaluation, and the market turmoil that followed the 2001 9/11
attacks. "Our isolation (from international capital markets) has
helped us," Lorenzino said, insofar as the crisis' initial
transmission to emerging markets was largely through financial
sector channels. Credit markets have never worked in Argentina, he
argued, with less than 30% of the population holding bank accounts
and mortgage markets underdeveloped and limited. "This is not a
virtue of our financial system by any means," he added, "but merely
the reality." As a consequence, Argentina has not experienced the
"social fallout" the crisis has had in more developed economies,
including via union and anti-immigration demonstrations, Lorenzino
argued. The central bank has succeeded in maintaining a gradualist
approach to the peso's devaluation and the local financial system is
in "good shape," with no Argentine banks at risk of failing, he
noted. Although decelerating inflation will impact consumption tax
receipts, Lorenzino said, the recent increase in public utility
tariffs (via cutbacks in GoA subsidies) will allow the GoA to

maintain a fiscal balance.


5. (SBU) While fourth quarter 2008 GDP numbers showed a substantial
decline and first quarter 2009 GDP performance will be
"complicated", Lorenzino said he remains optimistic that the
medium-term impact of the crisis will be limited. (Note: According
to official GoA statistics, Q4 GDP grew 4.9% y-o-y. In sharp
contrast, private analysts estimated that Q4 GDP contracted about
1-1.5% y-o-y.) He argued that the past five years of strong GDP
growth have built up a "cushion" of economic productivity that will
allow the economy to recover quickly from declines in domestic
consumption and in international demand for Argentine products. He
called the GoA's debt burden is "manageable," with resources to pay
medium-term maturities without access to additional international
financing. On Argentina's fiscal balance, Lorenzino said that years
of maintaining a positive primary fiscal surplus have given the GoA
a base from which to "put pesos into people's pockets" via recently
announced public works programs and by programs to encourage car and
household appliance purchases.


6. (SBU) Beyond fiscal pump-priming to ameliorate the sharp drop in
consumer demand, the GoA is also focused on protecting domestic
manufacturing competitiveness. February 17-18 bilateral talks in
Brazil (in which Economy Minister Carlos Fernandez and Production
Minister Debora Giorgi are participating) are focused on limiting
any surge in Brazilian imports made very competitive by the
substantial crisis-linked depreciation of the Real vs. the Peso.
Finally, the GoA will work to preserve domestic employment by
"intervening as an arbiter" in union/company labor disputes to
ensure that formal sector employment levels are sustained.


7. (SBU) In response to Lewis' question on the regional impact of
the global financial crisis, Lorenzino called Argentina's biggest
concern the health and well-being of Brazil. If the economy of
Argentina's single largest trading partner founders, Lorenzino said,
Argentina will feel it. "Other countries in the region don't worry
me," Lorenzino said, including Chile, which he called better
prepared than most in terms of fiscal solvency but highly exposed to
the sharp drop in mineral commodity prices. In response to
Lorenzino's question on the notable lack of bi-partisan consensus in
the recent Congressional vote on the stabilization package, both
Lewis and Tess stressed the open dialogue between Democratic and
Republican Senators and Congressmen and the quality of debate which
helped improve the final stimulus/stabilization package.

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Argentina's G-20 Posture
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8. (SBU) Argentina is well aware of its relative size in the G-20,
Lorenzino said, and sees the upcoming mid-March Finance Ministers
meeting and April 2 Heads of StateG-20 Summit as "a great
opportunity for a small country like Argentina." Lorenzino note
that he personally is representing the GoA in the two G-20
sub-committees on IMF and MDB reforms. Argentina has no/no intent
to try and "formalize" any G-20 sub-group of like-minded players on
IMF reform, Lorenzino emphasized, but is pleased to see that "others
are moving towards Argentina's proposals for IMF reform at the first
November 2008 G-20 Crisis Summit in Washington. A key Argentine
priority at upcoming G-20 meetings will be to work towards consensus
on re-focusing the IMF to "creatively" provide
minimal-conditionality short term liquidity lines in order to better
allow emerging markets to confront exogenous crises.


9. (SBU) Lorenzino recalled that Argentina had, in the face of
overwhelming member nation support, voted against a 2007 proposal to
reform the IMF quota and voting share system. (In this April 2008
IMF vote, 175 member countries favored of the reform and only three
member nations - Argentina, Angola, and Palau - voted against it.)
"We didn't want this 'set-up' that resulted in Argentina losing both
IMF quota and voting share," he explained. "Our goal now is to see
emerging markets as a group gain significantly greater
representation." On the question of Fund resources, Lorenzino said
that Argentina favors giving the Fund more resources, but not
without a concomitant change in the way the Fund allocates its money
to member nations in need.


10. (SBU) The Argentine Central Bank, Lorenzino confirmed, is taking
the GoA lead on the other two G-20 working groups ("the working
groups most important to the G-7") on enhancing sound regulation and
strengthening transparency and on reinforcing international
co-operation and promoting integrity in financial markets. He
called Argentina's position in these committees in line with those
of the majority of G-20 members, albeit with some difference in
emphasis. Lorenzino highlighted Argentina's view on the need for
these committees to focus more on (1) rating agency
reform/oversight; (2) the need to systematically address the
"scourge" of tax havens; (3) the need for broad international

oversight on the ability of multinational bank headquarters to make
"liquidity decisions" that impact local bank affiliate emerging
market economies; and (4) the need to better regulate the
non-transparent credit default swap (CDS) market. Highly leveraged
"speculation" in the CDS market against Argentina, Lorenzino said,
had been damaging to Argentina's interests.

11.(SBU) On multilateral development bank reform, Lorenzino argued
that the World Bank has adequate resources to fulfill its
development mandate but needs to spend its funds more efficiently
(Argentina, too, he added, needs to become more efficient in its
execution of MDB projects.). In contrast, he said that the
Inter-American Development Bank does need additional resources to
make additional project funding availale to members.

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Comment
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12. (SBU) Secretary Lorenzino's upbeat assessment of Argentina's
relative insulation from the impact of the global financial crisis
stands in sharp contrast to assessments by independent economists,
many of whom of whom project zero or negative 2009 GDP growth and
the prospect of significant increases in Argentine unemployment and
poverty levels in the coming months. Lorenzino did, however,
acknowledge that sharp drop in fourth quarter GDP that official GoA
statistics deny.


13. (SBU) On IMF reform, Lorenzino's comments tracked with the 2008
position paper originally submitted by the GoA to the IMF's
International Monetary and Financial Committee on behalf of
Argentina, Bolivia, Chile, Paraguay, and Peru. This paper called
for the Fund to revisit its "excessive" focus on inflationary risks
and its standard recipe for more flexible exchange rates and full
capital account liberalization in emerging market economies.
Instead, the paper argues that the Fund should focus more on
promoting growth in developing countries and support income
redistribution policies aimed at boosting consumption. On specific
IMF reforms, the paper calls for the IMF to strengthen its policy
guidance oversight of developed country economies and to develop an
"early warning" system aimed at preventing the recurrence of
periodic financial crises. It calls for more emerging market
country input into IMF decision-making and the development of a
multilateral insurance scheme to better shield developing country
members from exogenous shocks. Further, the statement calls for a
streamlining of IMF conditionality and a review of access limits and
financing terms to bring them into line with developing members'
actual potential needs to borrow. The paper concludes that the
voice and representation of developing countries within the IMF
needs to be expanded beyond the "modest" steps taken in the recently
approved quota increase. This includes revisiting the size and
composition of the IMF Executive Board, which it characterizes as
under-representing developing countries.


14. This cable has been cleared by Staffdel Lewis.

Kelly