ARGENTINA: CENTRAL BANK PRESIDENT DEFENDS

C O N F I D E N T I A L BUENOS AIRES 000066

SIPDIS

E.O. 12958: DECL: 01/21/2029
TAGS: ECON EFIN AR
SUBJECT: ARGENTINA: CENTRAL BANK PRESIDENT DEFENDS
INSTITUTIONAL INDEPENDENCE

REF: A. '08 BUENOS AIRES 1491

B. '08 BUENOS AIRES 1389

C. '08 BUENOS AIRES 1398

Classified By: Amb. E.A. Wayne. Reasons 1.4 (B,D)

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Summary
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1. (C) Central Bank (BCRA) President Martin Redrado
emphasized his success maintaining relative market confidence
in the Argentine Peso in the face of four major financial
crises since August 2007. In a January 16 meeting with
Ambassador, he discounted market expectations of a large
depreciation this year, arguing that the fate of the Peso
depends on numerous factors, including Dollar and Euro
values, global interest rates, and commodity prices. Redrado
lamented that the GoA had left it to the BCRA to explain the
ramifications of the new and controversial capital
repatriation law to skeptical U.S. and Financial Action Task
Force (FATF) officials, but assured that the law's
implementing regulations will require domestic banks to
adhere to international anti-money laundering and
counter-terrorism finance requirements. Redrado disagreed
with market assessments that the GoA has undermined the
BCRA's independence, arguing that the market has
misinterpreted recent changes to the BCRAs charter to allow
increased GoA borrowing from the BCRA as well as the BCRA's
direct intervention in banks' currency trading operations to
limit dollar sales and bolster the peso, which most observers
believe is done on orders from GoA leadership. While the
reality appears to be that the BCRA policy is increasingly
influenced by the GoA, Post's financial sector contacts still
largely support Redrado and want him to stay in the job.
Ambassador also noted that Treasury will soon be ready to
sign an agreement with the BCRA and GoA on establishing a
technical assistance project in the area of terrorism
finance. Regarding the G-20 process, Redrado said he and his
team would do their best to assure a serious and productive
Argentine participation in preparations for the April
meetings. End Summary


2. (SBU) Ambassador met with Central Bank (BCRA) President
Martin Redrado and BCRA Deputy General Manager of Economy and
Finance Pedro Rabasa January 16 to review Argentina's
economic outlook, new capital repatriation law, and the
status of the Treasury OTA technical assistance project, and
Argentine thinking on the upcoming April G-20 meeting.

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Redrado: Managed Float Proves its Value
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3. (SBU) Redrado called himself well satisfied with BCRA
performance over the past two years in maintaining market
confidence in the Peso in the face of four notable crises:
August 2007 market turmoil at the start of the sub-prime
crisis; deposit outflows during the March ) July 2008 GoA
confrontation with the agricultural sector over the GoA's
efforts to impose higher and variable export tariffs; the
flight to quality following the September 2008 Lehman
Brothers bankruptcy; and the November 2008 deposit outflows
that followed the GoA's announcement of its intent to
nationalize private pension funds. The BCRA's ability to
navigate these extraordinary challenges, Redrado said,
demonstrates the effectiveness of its broad monetary policy
and its managed peso float. Despite media speculation,
constraints on BCRA actions don't come from the Casa Rosada
(Pink House ) seat of Executive power, equivalent to the
White House),Redrado emphasized, but rather from Argentina's
""mental dollarization"" which has required the BCRA to boost
domestic interest rates to staunch capital flight and retain
local currency deposits. ""We didn't invent the managed float
concept,"" Redrado concluded, ""but we have proven its
effectiveness.""


4. (SBU) Redrado discounted any pre-set value or margin for
devaluation of the peso in 2009 (Futures markets currently
put the peso's value at roughly 3.8 - 4.0 pesos/dollar at
year-end 2009.) Rather, the value of the Peso over the
coming year will be determined by a host of market variables,
including the Dollar/Euro cross-exchange rate, global
interest rates, and the price of soy. ""Tell me where these
variables will stand at year-end 2009 and then I'll project a
value of the peso for you,"" Redrado concluded.


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Ensuring FATF-Consistent Capital Repatriation Law
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5. (C) Redrado acknowledged that the BCRA had navigated a
""difficult operating environment"" in 2008, and said he
expected to confront more convulsions (""cimbronazos"") like
the market's skeptical response to the GoA's capital
repatriation law. ""But, what doesn't kill you makes you
stronger,"" Redrado joked. He lamented that few GoA officials
understand how to talk to markets and said that it was left
to his BCRA team to explain to Treasury Deputy Assistant
Secretary for Terrorist Financing and Financial Crimes Danny
Glazier that the new capital repatriation law would be
regulated and managed in ways consistent with FATF anti-money
laundering mandates. The BCRA is actively involved in
drafting the law's implementing regulations, he said, and the
BCRA has inserted ""know your customer"" language into (still
in draft) regulations that will ensure repatriated capital is
only flowed from international banks and to domestic banks
that fully comply with FATF suspicious transaction protocols.
(Comment: Though their body language, both central bank
officials indicated they did not expect this legislation to
prompt a large amount of capital to rush back into
Argentina.)

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BCRA Sustaining Private Bank Profits, Liquidity
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6. (SBU) The BCRA has successfully managed its reserve
positions, buying and selling dollars ""anti-cyclically"" to
moderate volatility in the peso, Redrado said. Beyond
managing the peso exchange rate and the inter-bank rate to
limit the withdrawal of deposits from spooked savers, the
BCRA has demonstrated to banks that it is truly a
lender-of-last-resort, using BCRA financial instruments to
inject needed liquidity into the private banking system.


7. (SBU) The BCRA has sustained good working relations with
Argentine private sector banks, Redrado said, demonstrating
the BCRA's concern for private banks' need to both attract a
stable deposit base and maintain bottom line profitability.
Implicitly acknowledging significant central bank
intervention in private bank foreign exchange trading during
the last three months of 2008, Redrado said that, while
private bank trading desks have an interest in ""generating
volatility"" in order to create profitable trading and
arbitrage opportunities, their corporate and consumer lending
colleagues benefit from the kind of BCRA-managed currency
stability that generates reliable deposit flows. As a
result, BCRA had ""talked to"" the likes of Citibank to
""explain8 the need for foreign exchange trading prudence.


8. (SBU) Post Comment: Beginning early November 2008 the BCRA
assigned monitors to oversee banks' currency trading desks
and various GoA regulatory agencies sent inspectors to both
banks and exchange houses, with the purpose of using moral
suasion and threats of tax audits to limit currency trading
and deposit withdrawals. This tactic succeeded in preventing
institutional depositors from dollarizing their accounts, and
the resulting stabilization of deposit levels appears to have
reassured retail depositors. While capital outflow
continues, it is contained, and the BCRA has not been forced
to continue large scale dollar sales to strengthen the peso
and prevent deposit outflows. Based on Post's financial
sector contacts, Redrado is correct in saying that bankers
generally support these measures, even if they do not say so
publicly. End Comment.

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2009 Budget: BCRA Charter Change ""Misunderstood""
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9. (SBU) Ambassador asked about provisions of the 2009
budget law (Ref B) that market analysts -- including Goldman
Sachs -- had reported as eroding central bank independence by
allowing an expanded share of central bank reserves to be
lent to the GoA Treasury. Redrado called this a
mis-interpretation and explained that the 2002 revision of
the BCRA charter limits general central bank short-term
lending to the Treasury to 12% of the monetary base and
limits lending to the Treasury for payment of IFI debt
obligations to 10% of the previous 12 months' tax revenues.
The 2009 budget law, he clarified, simply allows such funds

to be used to satisfy general GoA foreign currency
obligations rather than restricting their use to IFIs.


10. (SBU) The change maintains the original spirit of the
2002 BCRA charter, Redrado said. The original law was
drafted in a period where IFIs credits represented a more
significant percentage of government funding, he said. Under
the revised charter, BCRA funds can be used, he said, to
repay Boden 2012s that will mature in August 2009. In any
case, Redrado clarified, the change will be money-supply
neutral. (This exchange has no monetary effect because the
GoA will pay dollar-denominated bonds using dollars borrowed
from the central bank, but these transactions will not
increase the amount of pesos in circulation. If the central
bank subsequently purchases these dollars back using pesos,
it would need to sterilize the increase in the money supply
by issuing debt instruments to mop up the extra pesos.)

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2009 Challenges for BCRA
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11. (SBU) Redrado called his primary concern in the coming
year increasing unemployment and upcoming union salary
negotiations. (Recent media reports have projected 2009
inflation in the 15-18% range and have noted that GoA
officials hope to limit salary increases to the 12-13%
range.) He acknowledged that the GoA's 7.2% ""official""
measure of 2008 inflation had little street credibility and
that teamster union boss Hugo Moyano's statement that he
would develop salary demands using a ""housewives"" inflation
index augured for a new round of significant union salary
increases that would further stoke inflationary expectations.


12. (SBU) Another challenge to be addressed in 2009 will be
Argentine industry's need to access longer term financing.
Argentina needs some type of long term bank on the model of
Brazil's BNDES, Redrado said. He discounted using GoA
second-story bank BICE for this end (Ref C),but suggested
that the GoA was already addressing this issue by auctioning
subsidized social security (ANSES) funds to commercial banks
who promise to on-lend them longer term at competitive rates.
""Private banks will take the credit risk, while ANSES takes
the liquidity risk,"" Redrado said.

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Treasury OTA Technical Assistance Project
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13. (SBU) Ambassador noted that Treasury recently approved
funding for the technical assistance project focused on
terrorism financing with the central bank and GoA regulatory
agencies. The next step will be to coordinate with the
Central Bank and Justice Ministry on the Terms of Reference
and finalize the Work Plan. Redrado agreed that a signing
ceremony to highlight bilateral cooperation in this area
would be appropriate and send welcome signals of bilateral
cooperation to the incoming Obama administration.

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G-20 Preparation
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14. (SBU) Ambassador noted that this sources (U.S. and other
G-7) indicated that Argentina's tone and substance at the
first G-20 Summit in Washington had been quite distinct from
the other 19, and that there could be a missed opportunity
for Argentina if a more constructive approach was not evident
in preparation for the April G-20 Summit. Redrado said he
agreed fully on the need for a serious approach to this next
opportunity to play a role in reshaping global financial
practices and institutions. He said that he and his BCRA
team would focus on playing a constructive role in the
preparations process and in agreeing on documents with
specifics for the next Summit. That would provide the base
for more focused discussions among leaders, he suggested.

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Comment
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15. (C) Redrado repeated his standard defense of an Argentine
central bank management that few local market players regard
as truly independent. He acknowledged, however, that his
room for maneuver has been constrained by the Kirchner
administration's penchant for announcing new economic

initiatives with minimal consultation with the broader
economic team, including the BCRA. ""We are condemned by our
history and our reputation for improvisation,"" Redrado said.
In fact, GoA encroachment into the BCRA's area of authority
over the last six months has been extensive. In addition to
the 2009 budget bill's alteration of the BCRA charter to
allow use of reserves to pay bilateral debts, the GoA also
unilaterally announced in September 2008 its intention to use
official reserves to pay Paris Club debts. It is accepted
wisdom in the banking sector that the BCRA's direct
intervention in currency trading markets in support of the
peso is being conducted on direct orders from Nestor
Kirchner, who reportedly opposed allowing the peso to
depreciate. Despite his reduced independence, local bankers
say they respect Redrado's skill at navigating the complex
circumstances he faces. These same bankers frequently tell
us that Redrado is the only Argentine official who
understands their concerns and assert that the financial
sector would be much worse off without him in charge at the
central bank.
WAYNE