Argentina: Standoff between the President and the Central

C O N F I D E N T I A L BUENOS AIRES 000013

SIPDIS

E.O. 12958: DECL: 2020/01/11
TAGS: ECON EFIN PREL PGOV AR
SUBJECT: Argentina: Standoff between the President and the Central
Bank

CLASSIFIED BY: Tom Kelly, Charge; REASON: 1.4(B),(D)


1. (C) Summary: President Cristina Fernandez de Kirchner (CFK) set
off a major institutional crisis in Argentina with her January 8
dismissal of Central Bank (BCRA) Governor Martin Redrado. The GoA
has since been fighting frantically with the opposition-controlled
Congress, the courts, and media to control the narrative. The
economic and political consequences of this standoff are still
evolving as events unfold at a rapid pace, but seem likely to be
considerable. The markets have not yet panicked, but analysts
believe that the conflict between CFK and Redrado will soon take an
economic toll in addition to the political costs. In the interim,
the showdown has sparked yet another political crisis borne of the
Kirchners' autocratic instincts and the institutional shortcomings
of the Argentine political system. End Summary.



The Story So Far
--------------




2. (C) President Cristina Fernandez de Kirchner (CFK) on January 6
demanded the resignation of the Governor of the Argentine Central
Bank (BCRA) Martin Redrado for his failure to transfer US$6.569
billion in foreign currency reserves to the Treasury subject to her
direct control in accordance with her government's announcement
last month to unveil a "Bicentennial Fund." Redrado declined to
leave office, and CFK took measures to force his departure, issuing
a presidential decree on January 8 co-signed by all 14 cabinet
ministers. Kirchner supporters have denounced Redrado, while
political opposition leaders have called for him to hold fast and
not resign. Late on January 8, a federal district court judge
issued injunctions effectively blocking both Redrado's dismissal
and the transfer of BCRA assets pending further judicial review.
The GoA is appealing the injunctions, and the issue may go to the
Supreme Court. Should Redrado go, the most frequently mentioned
replacement for him is former BCRA Governor Mario Blejer (whom
Minister of Economy Boudou had announced as Redrado's successor),
who formerly held the position. The well-regarded Blejer has
publicly declined the offer under the current circumstances.



GoA Fires in All Directions
--------------




3. (C) The GoA has responded to the crisis by pushing several
themes in the press, including the idea that the BCRA's
recalcitrance reflects the inherent anti-democratic premise of a
central bank. This point of emphasis seems to have increased the
reluctance Blejer, with years of experience in the IMF and the
central banks of Israel, the UK, and Argentina, to head the BCRA.
Blejer reportedly stated that he is "extremely respectful" of BCRA
independence and autonomy as regulated by the BCRA Charter and that
"the BCRA already has a Governor, and that prohibits him from
considering the offer." Sebastian Vargas, a senior Barclays
analyst, believes that Blejer will not become Governor of a Central
Bank that does not focus on controlling inflation (currently,
according to most objective analysis, in the 17-20% range).
Another key element of the GoA narrative (as voiced by former
President Nestor Kirchner over the weekend) is that the BCRA crisis
is the work of a conspiracy by the media (led by Clarin),political
opportunists (led by VP Cobos),and the "neoliberal" business class
against the Kirchners' supposedly more progressive national
project. Finally, the GoA is manufacturing stories of support for
their actions, including a baseless assertion published in house
organ El Argentino that Ambassador Martinez supports the Kirchners'
new Bicentennial Fund.



Redrado: An Unlikely Rebel
--------------




4. (C) As BCRA Governor since 2004, Redrado has, until now, been a
staunch supporter of the Kirchners and their unorthodox economic
policies, including Nestor Kirchner's use in 2005 of $8 billion in
BCRA reserves to pay off the GoA's IMF loans and CFK's
nationalization in 2008 of US$20 billion in private pension funds.
However, Redrado has been increasingly marginalized in economic
policy making. The estrangement dates back to CFK's announcement
in September 2008, without consulting Redrado, that the GoA was

going to pay off all of its Paris Club debt with BCRA reserves
(nothing ever came of the announcement since it was immediately
followed by the global financial crisis). What may be behind his
reluctance to transfer BCRA reserves to the Treasury is both pique
at his increasingly marginalized status and fear over the legal
consequences once his tenure expires in September 2010 and,
especially, after a new government takes power at the end of next
year. It is not clear, however, if he would ultimately have stood
in the way of transfer of the BCRA reserves had he been fully
consulted. CFK announced the transfer and Fund creation on
December 14, immediately before the Argentine summer holidays.
Redrado and his staff had serious reservations that the transfer
would leave the Funds vulnerable to seizure by holdouts of the
outstanding $20 billion in defaulted debt from the 2001-2002
crisis.



Economic Consequences
--------------




5. (C) The economic consequences are still very unclear and the
markets have shown restraint, with few signs of panic. Reports
indicate that the BCRA has been intervening more robustly to defend
the peso, and this has maintained peso stability. What is now
clearly in question is the independence of the BCRA. Any possible
replacement, Vargas speculated, would be entirely dependent on the
Kirchners and would tailor policies to their political imperatives,
to the ultimate detriment of the Argentine economy. If the crisis
persists and the market reacts by upping the price on GoA bonds, it
could imperil GoA plans for a debt swap at the end of the month
with the remaining holdouts of defaulted Argentine bonds that could
give Argentina access to international credit markets after a
7-year absence, an opportunity that the Kirchners may regret
missing. Although Boudou indicated that Blejer was the leading
candidate to take Redrado's place and is apparently still
consulting with him, it is doubtful that anyone with enough stature
to effectively defend the BCRA's autonomy would be willing to take
the reins under the current circumstances.



Boudou's Position
--------------




6. (C) On January 8, Boudou called the Ambassador worried about
rumors that bond holdouts in the U.S. would seek and obtain a U.S.
federal court order to attach BCRA reserves on the grounds that the
BCRA's transfer of reserves to the GOA proved that BCRA reserves
were GOA assets. Boudou assured the Ambassador that he intended to
proceed with the planned debt swap for the remaining $20 billion of
defaulted Argentine bonds later this month. Press reports over the
weekend that Boudou incurred the displeasure of CFK for erroneously
advising that Redrado could be removed without any problem were
denied by the GoA.



Political Considerations: Another Crisis is Brewing
-------------- --------------




7. (C) Once again, the Kirchners' insular decision-making process
has transformed an economic policy dispute into a major political
crisis. CFK announced her December 14 decree creating the
Bicentennial Fund with BCRA reserves without consulting the BCRA or
Congress. Likewise, she announced her January 8 decree removing
Redrado without first getting the advice of Congress as required by
the BCRA Charter. Several of the protagonists, including Nestor
Kirchner, have nicknamed this crisis "126" as a possible sequel to
the four-month conflict with the agricultural sector in 2008 over
Decree 125, which increased export duties on agricultural exports.
That conflict culminated in the dramatic tie-breaking vote in the
Senate cast by Vice President Cobos against the GOA's proposal,
which made a hero of Cobos and marked the beginning of the
Kirchners' long slide toward unpopularity.




8. (C) This crisis could cut much more deeply, as the Executive
Branch seeks to usurp congressional authority over BCRA leadership

and reserves. Ever since the Kirchners lost their majorities in
both chambers of Congress in the June 28 mid-term elections, it has
been widely speculated that CFK would seek to marginalize the
legislative branch by resorting to "decrees of necessity and
urgency" (DNU). Judge Maria Sarmiento disrupted this calculus by
suspending CFK's December 14 and January DNUs, noting that DNUs
were for "exceptional" circumstances, and that the president had
failed to demonstrate in these cases the necessity or the urgency
for bypassing Congress. The GOA has appealed these court
decisions, but the Kirchners also attacked the judge and made some
moves that the Association of Magistrates has called unacceptable
pressure and intimidation tactics against a sitting judge.




9. (C) Ominously for the government, the opposition has seemed
unusually nimble in its response to CFK's questionable decrees
regarding the Central Bank. Different opposition parties filed
legal challenges within days of the first decree in December, and
Radical Party leaders Senators Sanz and Morales arrived at court
the day after the second decree to seek an injunction. These legal
challenges are what allowed the courts to put the brakes on the
GOA's power grab.




10. (C) The Kirchners and their associates are responding with the
same fury and paranoia that turned off the Argentine public during
the farm crisis of 2008. In attacking their opponents on this
issue, they have employed familiar rhetorical devices, including
assertions of a conspiracy led by their nemesis, estranged Vice
President Cobos, in cahoots with the powerful Clarin media group
and its CEO, Hector Magnetto. CFK has publicly called on Cobos to
learn his place as vice president, and sarcastically noted that
"those who raffled the reserves and bankrupted the country in the
recent past are today the Central Bank's greatest defenders." The
Central Bank, she said, is not the "unipersonal" fiefdom of Redrado
but rather governed by a "collegial body."



A Crisis that Could Have Easily Been Avoided

-------------- --------------




11. (C) A banker with ties to the GoA told CDA January 11 that
"this whole thing could have been avoided if the Kirchners had done
a few simple things." The most obvious is their failure to bring
the Bicentennial Fund to a vote in the regularly scheduled BCRA
board meeting. The Kirchners control a majority of the board and
would probably have won if the item were on the agenda.
Alternatively, they could have gone to Redrado, who has been
notably malleable and compliant with Kirchner initiatives during
his tenure, and persuaded him to play along with this one as well.
(It's worth noting that Redrado never refused to comply with the
December 14 decree -- he merely incurred the Kirchners' wrath by
seeking legal counsel on the implications for the remaining BCRA
reserves and his own potential legal liability.) Daniel Marx, who
runs the AGM consulting company, told Econoff that he spoke to
Redrado shortly after the GoA announced his departure. During
their conversation, Redrado told Marx that he was stunned by the
President's demand for his resignation; he was given no forewarning
that he would be required to step down. Redrado indicated that he
would have been willing to discuss his reservations on the
Bicentennial Fund with the Casa Rosada but was never given the
opportunity.




12. (C) Moreover, CFK acted precipitously when she could have
worked to build support for the initiative. In the case of the
2005 IMF payoff with BCRA funds, Nestor Kirchner was supported by a
majority in the congress and had strong public support (which may
explain, at least in part, Redrado's less accommodating position in
the current situation). CFK now faces a Congress controlled by the
opposition and little popular support, making it even more
incumbent on her to build support for the Bicentennial Fund. The
ostensible purpose of the Bicentennial Fund was to meet debt
payments coming due in 2010. However, since Congress had already
approved sufficient funds for this purpose in the 2010 budget, the
widespread suspicion is that the Kirchners were seeking to siphon
BCRA reserves in order to free up the budgeted funds for social
spending to guarantee the discipline of governors, mayors, labor
and social leaders and marshal their support for a Kirchner 2011

run at the presidency.




13. (C) While it's not clear yet how it will play out, the crisis
demonstrates once again the lack of respect for institutional
limits in Argentine political culture. Pundits have noted that,
mere days after the GoA lambasted AS Valenzuela for repeating
concerns expressed to him by representatives of U.S. companies
regarding Argentina's weak rule of law, the Kirchners proceeded to
prove the truth of the comments by flouting congressional
prerogatives as well as legally mandated safeguards intended to
keep governments from raiding BCRA coffers at will.
MARTINEZ