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Cablegate: Argentina Economic and Financial Review, July 6 -

VZCZCXYZ0007
PP RUEHWEB

DE RUEHBU #1347/01 1941909
ZNR UUUUU ZZH
P 131909Z JUL 07
FM AMEMBASSY BUENOS AIRES
TO RUEHC/SECSTATE WASHDC PRIORITY 8629
INFO RUEHAC/AMEMBASSY ASUNCION PRIORITY 6344
RUEHBR/AMEMBASSY BRASILIA PRIORITY 6209
RUEHCV/AMEMBASSY CARACAS PRIORITY 1342
RUEHLP/AMEMBASSY LA PAZ JUL 4748
RUEHPE/AMEMBASSY LIMA PRIORITY 2105
RUEHMD/AMEMBASSY MADRID PRIORITY 1872
RUEHMU/AMEMBASSY MANAGUA PRIORITY 0138
RUEHME/AMEMBASSY MEXICO PRIORITY 1404
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RUEHSO/AMCONSUL SAO PAULO PRIORITY 3409
RUEAIIA/CIA WASHINGTON DC PRIORITY
RUEATRS/DEPT OF TREASURY WASHINGTON DC PRIORITY
RHEHAAA/NATIONAL SECURITY COUNCIL WASHINGTON DC PRIORITY
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UNCLAS BUENOS AIRES 001347

SIPDIS

SENSITIVE
SIPDIS

TREASURY FOR CLAY LOWERY, NANCY LEE, AJEWEL, WBLOCK, LTRAN
NSC FOR JOSE CARDENAS, ROD HUNTER
PASS FED BOARD OF GOVERNORS FOR RANDALL KROSZNER, PATRICE
ROBITAILLE
PASS EXIM BANK FOR MICHELE WILKINS
PASS OPIC FOR JOHN SIMON, GEORGE SCHULTZ, RUTH ANN NICASTRI
USDOC FOR 4322/ITA/MAC/OLAC/PEACHER

E.O. 12958: N/A
TAGS: EFIN ECON EINV AR
SUBJECT: ARGENTINA ECONOMIC AND FINANCIAL REVIEW, JULY 6 -
13, 2007

REF: BUENOS AIRES 1313

1. (U) Provided below is Embassy Buenos Aires' Economic and
Financial Review covering the period July 6 - 13, 2007. The
unclassified email version of this report includes tables and

SIPDIS
charts tracking Argentine economic developments. Contact
Econoff Chris Landberg at landbergca@state.gov to be included
on the email distribution list. This document is sensitive
but unclassified. It should not be disseminated outside of
USG channels or in any public forum without the written
concurrence of the originator. It should not be posted on
the internet.

----------
Highlights
----------

-- Central Bank (BCRA) tightens capital controls to avoid
peso appreciation
-- BCRA meets its monetary targets for sixteenth consecutive
quarter
-- GoA, unions, private sector agree to increase monthly
minimum wage 22.5%
-- GoA's intervention in private energy company MetroGas

-------------------
Banking and Finance
-------------------

BCRA tightens capital controls to avoid
peso appreciation
---------------------------------------
2. (SBU) On July 5, the Argentine Central Bank (BCRA) issued
a circular (A 4687) to tighten capital controls in order to
discourage capital inflows and avoid the peso from
appreciating. The measure, which generated much confusion in
the market due to its complexity, seeks to discourage the so
called "contado con liquidacion" (AKA "Blue Chip Swap")
transaction, which investors use to avoid capital controls
and arbitrage international and domestic exchange rate
differentials. The transaction generally begins when an
investor purchases an Argentine bond (denominated in either
pesos or dollars, but purchased with pesos at the local
exchange rate). The investor then transfers the bond to a
foreign market (e.g. the U.S. or Europe) through EuroClear or
some other securities settlement system, and then sells it
for dollars at the international exchange rate. The investor
then gradually transfers the proceeds back to Argentina in
denominations of less than $2 million -- circumventing the
30% unremunerated reserve requirement ("encaje") to which
capital inflows are subject as part of the GoA's capital
controls -- and then converts the dollars back to pesos at
the local exchange rate.

3. (SBU) The point of this trade is to arbitrage the lower
international peso exchange rates (caused largely by the
GoA's existing capital controls) against the higher domestic
exchange rate. However, the result is a steady inflow of
foreign currency, putting upward pressure on the peso. The
BCRA's new measure requires proof that the Argentine bond
used in such a transaction has been held for at least 20 days
in a foreign account. In theory, this delay should raise
exchange rate risks enough to discourage the arbitraging.
However, in practice the participating banks and brokers are
scrambling to determine how to demonstrate proof of the
incoming monies' origins. Post's market sources argued that

the impact of the measure will be short-term, since investors
will quickly find creative new ways to circumvent the
controls.

BCRA meets its monetary targets for sixteenth
consecutive quarter
---------------------------------------------

4. (SBU) The BCRA announced July 10 that it fulfilled its
monetary target for the second quarter of 2007, the sixteenth
consecutive quarter that it has met its targets. The 2007
BCRA Monetary Program targets M2, which is defined as cash in
circulation plus private and public sector sight-accounts
(savings and checking). According to preliminary BCRA data,
the average M2 level during the quarter was ARP 132.3
billion, ARP 3.1 billion below the upper limit of ARP 135.4
billion established in the 2007 Program, and ARP 3.4 billion
above the lower limit of ARP 128.5 billion. At the end of
June M2 was above the upper band, and the average M2 level
during the month was only ARP 1.0 billion below the upper
limit.

5. (SBU) According to local analysts, the BCRA achieved its
M2 target by shifting public sector funds from sight accounts
to time deposits (not counted in M2). However, the BCRA
appears to have attempted to disguise the actions it took to
meet the target. Its July 10 press release made no mention
of the transfer of public funds. Rather, it argued that time
deposits increased at a faster rate (31%) than sight deposits
(18%) in response to BCRA policy of increasing short term
repo rates, which led to an increase of time deposit yields.
However, the explanation is not consistent with market data,
which show falling time deposit rates over 2007.

6. (SBU) In its release, the BCRA highlighted that during the
first half of the year it sterilized 80% of the monetary
expansion generated by its purchases of foreign currency
inflows (technically part of its reserve-building strategy,
but in reality done to prevent the peso from appreciating).
The BCRA faces a difficult task in meeting its M2 targets for
the remainder of 2007, if it continues to accumulate reserves
at the current pace. The problem is that it is becoming
harder for the BCRA to sterilize its interventions without
raising interest rates on its main instruments -- Lebacs
(fixed-rate) and Nobacs (variable-rate). (Note: in the
BCRA's July 10 auction, it was able to rollover only 60% of
its maturities. The BCRA received bids for ARP 677 million
and accepted bids for ARP 626 millions, well below its
maturities for ARP 1.1 billion.)

----------------
Economic Outlook
----------------

GoA, unions, private sector agree to increase
monthly minimum wage 22.5%
---------------------------------------------
7. (SBU) The Salary Council -- made up of representatives of
the private sector, the unions and the Labor Ministry --
agreed July 10 to increase by 22.5% the monthly minimum wage
to ARP 980. The increase will be implemented in three steps:
from the current ARP 800 to ARP 900 in August, following by
an increase to ARP 960 in October, and a final hike to ARP
980 in December. The unions had originally sought a minimum
wage of ARP 1,040, while business sector was offering ARP
930. According to media reports, GoA intervention convinced

both sides to agree to the ARP 980 level. The wage increase
will benefit an estimated 420,000 individuals, roughly 3.8%
of all wage-earners (including informal sector employees).

8. (SBU) With this increase, the monthly minimum wage will be
close to the total monthly cost of the basic good basket --
necessary to maintain a household of two adults and three
children -- which "officially" (according to GoA statistical
agency INDEC) reached ARP 923 in June. However, according to
Consultora Equis (a local think-tank) the basic good basked
valued at ARP 923 in June is 10% undervalued and its "real"
cost is ARP 1,011. INDEC's undervaluation of the basic foods
basked is a result of its manipulation of CPI numbers, which
the GoA has carried out since the beginning of the year to
avoid showing real inflation. (Note: INDEC reported
inflation of 3.9% through the end of June, compared to
private sector estimates of 8-10%).

--------------
Energy Outlook
--------------

GoA's intervention in private energy
company MetroGas
-------------------------------------
9. (SBU) On July 6, the Economy Ministry's Secretary of
Internal Commerce Guillermo Moreno, Argentina's notorious
price control czar, instructed MetroGas' Director General
Roberto Brandt, to reverse his decision to cut natural gas
provision by 35% to MetroGas' industrial clients, including
those whose contracts with MetroGas only allowed for supply
interruptions under extreme circumstances ("contratos no
interrumpibles con ventanas"). Brandt requested a written
order from Moreno, as the 35% cuts were in line with earlier
written instructions from the Secretariat of Energy's crisis
committee, aimed at increasing natural gas deliveries to
residential consumers. Moreno responded by "intervening"
MetroGas (taking it under State control), justifying his
actions based on the GoA's "Mandatory Supply law" (Law 20680
or "ley de abastecimiento"). Moreno argued that this law
allowed him to intervene a company up to 180 days if it does
not supply enough of a product to meet market demand.

10. (SBU) Legal experts question the legality of the Supply
law, but also argue that the Secretary of Energy and natural
gas regulatory agency, ENARGAS, should have jurisdiction in
this area. Planning Minister Julio De Vido, who oversees the
Secretary of Energy and ENERGAS, lifted the intervention only

SIPDIS
a few hours after Moreno had announced it. MetroGas' stock
price, traded in both Buenos Aires and New York fell by
almost 10% following the intervention, but ended the day
(after Minister De Vido's announcement) down only 4.2%.

11. (SBU) While announcing the end of the intervention, the
Ministry of Planning also announced that MetroGas
shareholders had subsequently removed Brandt as Director
General and replaced him with the second-in-command of the
firm, Vito Camporreale. (Note: Consorcio Gas Argentino
Sociedad Anonima, in which British Gas Group holds almost a
55% stake, owns 70% of MetroGas, while Repsol-YPF owns the
remaining 30%. Brandt is said to have been appointed by
British Gas, whereas Camporreale is a Repsol man.)

12. (SBU) The Argentine press interpreted the MetroGas event,
as follows:

-- Evidence that the GoA does not have an agreed-upon
strategy to deal with the energy crisis. (Note: on one side
is Secretary of Energy Daniel Cameron, who supports dealing
with the crisis with higher user fees. President Kirchner
and Minister De Vido (and, therefore, Moreno, De Vido's
protege) strongly oppose this strategy. Local analysts
speculate that President Kirchner believes that having
Argentine ownership of energy sector firms (e.g., Repsol's
proposed sale of 25% of YPF to a local investor and 20% on
the Argentine stock market) will help the GoA limit the
impact of the energy crisis. End Note)

-- A struggle for power between the Secretariat of Energy and
the Secretariat of Internal Commerce. (Note: The Argentine
press has speculated that Energy Secretary Daniel Cameron is
a possible replacement for Planning Minister De Vido if/when
Cristina Fernandez de Kirchner is elected President in
October. End Note)

-- MetroGas Director Brandt's removal is evidence of
strengthening ties between the GoA and Spanish-owned Repsol
(Note: President Kirchner is rumored to have suggested
Enrique Eskenazi, President of Banco de Santa Cruz, as the
local party in the acquisition of 25% of YPF. End Note)

-- This could also be a means for the GOA to penalize British
Gas. (Note: British Gas has taken Argentina to
international arbitration under UNCITRAL rules, demanding
$200 million in damages related to the GoA's 2002 currency
devaluation. British Gas rejected a GoA proposal to
terminate the arbitration case in exchange for a
re-negotiation of fees. End Note)
WAYNE

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