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Cablegate: Idb's Argentina Strategy

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R 212049Z MAR 07
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E.O. 12958: N/A
TAGS: EFIN ECON EINV AR
SUBJECT: IDB's ARGENTINA STRATEGY

REF: (A) Buenos Aires 540

(B) Buenos Aires 360
(C) Buenos Aires 311

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Summary
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1. (SBU) With $8 billion in approved credits, Argentina is the IDB's
single largest creditor. IDB Argentine Country Director Daniel
Oliveira told the Ambassador during a March 20 meeting that this
Argentine portfolio concentration will likely increase in the short
term given Argentina's temporarily restricted access to
international capital markets, the ready access some of the IDB's
sovereign borrowers now have to competitive funding in domestic and
global capital markets, and competition the IDB is facing from
alternative national and regional credit sources, including Brazil's
BNDES and the CAF. While Oliveira appreciated the regional
political dynamics that lead Venezuela to champion the creation of
the Banco del Sur, he questioned whether dispersing resources and
capitalizing yet another regional development bank is in the best
interest of Latin nations.

2. (SBU) The IDB remains concerned about the viability of
Argentina's heterodox and interventionalist economic policy mix.
Oliveira predicted that if, in the next few years, Argentina
modifies its macroeconomic and micro-pricing policies and settles
with Paris Club creditors and bond holdouts, it will regain access
to international capital markets and rely less on IDB credits.
Given this, the IDB is modifying its 2004-2008 country strategy for
Argentina to focus on assisting the GoA's Planning Ministry in
building its own in-house planning capacity; structuring over $6
billion in sector-specific lines of credit to allow a more capable
GoA more flexibility in IDB loan management; expanding support for
non-traditional science and technology lending; developing direct
lending relationships with individual provinces; and expanding
funding to the private sector. Notwithstanding approval to $1.8
billion in new loans to Argentina in 2007 and over $1.5 billion in
2006, the IDB is projecting a net neutral cash flow in the medium
term. End Summary

-------------------------
Argentina: Key IDB Client
-------------------------

3. (SBU) Following a March 7 meeting with Inter-American
Development Bank (IDB)US Executive Director Hector Morales (Ref A),
Ambassador met March 20 with IDB Argentina Country Director Daniel
Oliveira to review current Bank operations in Argentina. Oliveira
highlighted the growing importance of Argentina to the IDB: With
roughly $8 billion of the IDB's total of $36.3 billion in active
credits (including credits approved by the IDB Board but not yet
disbursed), Argentina is the Bank's single largest creditor. He
said this relative concentration would likely increase in the short
term given Argentina's currently restricted access to international
capital markets and the significant shift in borrowing dynamics of
the IDB's traditional client base: Mexico, he said, has prepaid
half of IDB outstandings by funding 30 year maturity paper in its
internal markets; Brazil can borrow independently in domestic and
international capital markets at competitive rates, and Chile has
limited its IDB borrowing to select "boutique credits." In the 3-5
year term, Oliveira expects the dollar value of total IDB exposure
to Argentina to decline slightly, as Argentina comes to terms with
Paris Club and bond holdout creditors and regains more flexible
access to international capital markets.

4. (SBU) Oliveira contrasted the IDB's active presence in Argentina
with the significant decline in World Bank exposure here over the
past four years. As a result, he said, while IDB credits have
remained steady as a percentage of overall Argentine public debt
(6.3% in 2006 vs. 6.1% in 2002), they have increased dramatically as
a percentage of GoA debt with international organizations (55.7% in
2006 vs. 27.6% in 2002). (Note: This significant increase speaks
both to a decline in World Bank outstandings and the GoA's 2005
paydown of over $9 billion in IMF obligations. End Note). He called
the IDB Argentina's single largest credit window, with Chavez's
Venezuela, which has facilitated the placement of $4.2 billion in
GoA sovereign debt since 2006, the second largest.

--------------------------------------------- ----
Competition from Other Regional Development Banks
--------------------------------------------- ----

5. (SBU) The IDB is re-inventing itself to adapt to changing market
dynamics faced by its core Latin borrowers, the ready direct access
some sovereign borrowers now have to competitive funding in domestic
and global capital markets, and to competition from other national
and regional development banks. Brazilian development bank Banco
Nacional de Desarrollo (BNDES)alone, he said, issued over $23
billion in credits in 2006 (including a $3 billion line of credit to
Argentina), more than the World Bank and IDB in Latin America
combined. Also the Andean Development Corporation (Corporacion
Andina de Fomento - CAF) approved a significant $5 billion in new
project credits in 2006. The CAF's single "A" rating (vs. the IDB's
"AAA" rating) and smaller capital base ($2.93 billion subscribed,
$1.6 billion paid-in vs. the IDB's $100 billion subscribed and $4.5
billion paid-in) means it has a significantly higher cost of funding
than the IDB. However, Oliveira pointed out that the CAF is much
faster and more flexible in its loan approvals than the IDB and its
lack of a sitting board gives its professional staff greater
autonomy in putting new credits on the books. (Note: At the March
17-20 Guatemala IDB annual meeting, local media reported that
Economy Minster Miceli said that the GoA was considering increasing
its capital contribution to CAF by $500 million in order to expand
the volume of CAF infrastructure financing it can access. End Note).


6. (SBU) Oliveira noted reports of Argentine, Brazilian and Bolivian
support for Venezuela's proposal to create a new regional
development bank, the Banco del Sur (Refs B,C). While he
appreciated the regional political dynamics that lead Venezuela to
champion this concept, Oliveira questioned whether capitalizing yet
another regional development bank was in the best interest of Latin
nations. He noted that Brazilian Finance Minster Palocci, in
recent remarks, had offered only lukewarm support for Brazil's
participation in the Banco del Sur, saying that Brazil should also
strengthen existing regional institutions CAF and the Fondo para el
Desarrolo de la Cuenca de la Plata (FONPLATA - members Brazil,
Argentina, Paraguay, Uruguay and Bolivia). Oliveira called FONPLATA
a dysfunctional organization with a small capital base (in the $450
million range) and no authority to borrow in international capital
markets to leverage member country capital contributions. FONPLATA
also has experienced legal problems at its Bolivian headquarters,
Oliveira said, that have forced it to hold recent board meetings in
Paraguay.

-------------------------------
The IDB's Strategy in Argentina
-------------------------------

7. (SBU) While Oliveira praised the GoA's determination to maintain
a healthy primary fiscal surplus, he noted that the IDB remains
concerned about the viability of Argentina's heterodox and
interventionist economic policy mix. Nevertheless, he predicted
that if (1) Argentina's macroeconomic and micro-pricing policies are
modified to allow a "soft landing" transition to more sustainable

levels of economic growth, and (2) Argentina comes to terms with
Paris Club creditors and bond holdouts, then the country will regain
ready access to international capital markets and traditional IDB
major infrastructure project credits will likely diminish in
relative importance.

8. (SBU) As a consequence, the IDB is re-examining its 2004-2008
country strategy for Argentina that initially envisioned $6-odd
billion in new project approvals during this period with a focus on
institutional strengthening, health, education, creation of a more
favorable investment climate, and poverty reduction. New
initiatives include:

-- Expanding the IDB's support of non-traditional science and
technology lending. Oliveira said that the Bank had recently
approved a $280 million technology modernization loan on these
lines. (Note: In September 2006, the U.S. voted against a $50
million IDB loan to Argentina for the development of a satellite
system, arguing that the financing of space programs an
inappropriate use of MDB resources. End Note);

-- Assisting the GoA's Planning Ministry to develop its own in-house
long term planning expertise. Oliveira noted a $2.5 million IDB
technical assistance project in the works with the Planning
Ministry, starting in the energy sector. To reward enhanced local
planning capacity and to speed the disbursement process, Oliveira
noted that the IDB is developing over $6 billion in sector-specific
lines of credit in education, health, roads, water and sanitation
projects that would allow the GoA more leeway in structuring loan
drawdowns once it has demonstrated adequate performance to the IDB
in that sector. Oliveira called the IDB's January 31 approval of a
$350 million first tranche of a potential $1.5 billion credit line
to finance lower and middle income housing development was the first
trial of this credit line concept.

-- Developing direct lending relationships with individual
provinces. While the federal government may regain significant
access to international capital markets, Oliveira said, it is
unlikely that any but the largest of Argentina's 24 provinces will
be able to do so. The IDB has already established direct credits in
the $50 - $100 million range to Salta, San Juan, Mendoza, Rio Negro,
Cordoba, Buenos Aires and Entre Rios provinces, as well as to the
City of Buenos Aires. These credits are not/not backed by a GoA
sovereign guarantee.

-- Expand funding to private sector: While the IDB is authorized to
allocate 10% of its country exposure to the private sector, at
present under 5% of the IDB's lending in Argentina is non-sovereign.
The Bank will more aggressively seek out direct lending
opportunities. Ambassador noted that U.S. banks (Ref B) are eager
to work with the IDB to help structure put together larger private
infrastructure development projects.

9. (SBU) So far in 2007, the IDB has approved three loans totaling
almost $1.8 billion to Argentina, following the approval of over
$1.5 billion in loans in 2006. Nevertheless, the IDB is projecting
a net repayment of $142 million in 2007 and only a slight $212
million net credit outflow to Argentina in 2008.

-------
Comment
-------

10. (SBU) A long time Brazilian civil servant and former Brazilian
Executive Director to the IDB, Oliveira is well schooled in
development bank policy and his arguments for a shift in the IDB's
approach to Argentina credits are well reasoned. He called the IDB
a "stabilizing factor" in a potentially volatile Argentine economic
cycle and asked for U.S. support for the Bank's efforts here. The
IDB has arguably been more effective than the World Bank in gaining
the GoA's confidence; some here argue that the World Bank has been
unfairly tainted in the GoA's eyes by its historical Bretton Woods
links to the IMF. Others argue that the World Bank has simply been
more appropriately rigorous in its application of standard lending
disciplines: Our IMF and World Bank contacts have been outspoken in
their criticism of the IDB's reluctance to push for greater GoA
transparency in MDB loan-linked government procurement. Oliveira
argues that IDB programs are adhering to the same standards flowed
by the World Bank.

WAYNE

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