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Cablegate: Council of the Americas Conference: Goa Charm

VZCZCXYZ0008
RR RUEHWEB

DE RUEHBU #1591/01 2261524
ZNR UUUUU ZZH
R 141524Z AUG 07
FM AMEMBASSY BUENOS AIRES
TO RUEHC/SECSTATE WASHDC 8911
INFO RUEATRS/DEPT OF TREASURY WASHINGTON DC
RUCPDOC/USDOC WASHINGTON DC
RHMFIUU/HQ USSOUTHCOM MIAMI FL
RUEHAC/AMEMBASSY ASUNCION 6448
RUEHCV/AMEMBASSY CARACAS 1410
RUEHMN/AMEMBASSY MONTEVIDEO 6656
RUEHSG/AMEMBASSY SANTIAGO 0670
RUEHBR/AMEMBASSY BRASILIA 6304
RUEHSG/AMEMBASSY SANTIAGO 0671
RUEHLP/AMEMBASSY LA PAZ AUG SAO PAULO 3470
RUEHRI/AMCONSUL RIO DE JANEIRO 2303

UNCLAS BUENOS AIRES 001591

SIPDIS

SIPDIS
SENSITIVE

WHA FOR WHA/BSC AND WHA/EPSC
E FOR THOMAS PIERCE
EEB/CBA FOR FMERMOUND
PASS USTR FOR KATHERINE DUCKWORTH AND MARY SULLIVAN
PASS NSC FOR DPRICE AND MSMART
PASS FED BOARD OF GOVERNORS FOR PATRICE ROBITAILLE
TREASURY FOR MMALLOY, LTRAN
USDOC FOR 4322/ITA/MAC/OLAC/PEACHER
US SOUTHCOM FOR POLAD

E.O. 12958: N/A
TAGS: EINV ECON ENRG PREL VZ AR
SUBJECT: COUNCIL OF THE AMERICAS CONFERENCE: GOA CHARM
OFFENSIVE

Ref: (a) Buenos Aires 1545
(b) Buenos Aires 1544
(c) Buenos Aires 1519
(d) Buenos Aires 1517
(e) Buenos Aires 1514
(f) Buenos Aires 1456
(g) Buenos Aires 1415

-------
Summary
-------

1. (SBU) The GoA used this year's Council of the Americas
conference in Buenos Aires both to claim economic success
and to stress its interest in U.S. investment. The high
profile GoA presence, and particularly presidential
candidate Cristiana Kirchner's wrap-up speech, have been
widely seen as an effort to add balance to Argentina's
foreign relations which had tipped noticeably to Venezuela
in many observers minds. The Council of the Americas'
leadership gave Senator Kirchner a very warm welcome which
was apparently intended to encourage her recent signals of
taking a more open approach to international affairs, while
she is still defending the model her husband has
championed. Some have been critical of the Council's
approach because serious questions about the sustainability
of the model and investor confidence have yet to be
addressed. That said, the Senator's signs of openness to
other countries and perspectives are important given her
strong lead in the presidential polls.
End Summary

------------------------------
The GoA: Upbeat and On-Message
------------------------------

2. (SBU) On August 7, key GoA Ministers and Cristina
Kirchner addressed an "Innovation to Consolidate Growth"
conference organized by the Council of the Americas.
Speakers included the Chief of Cabinet Alberto Fernandez,
Planning Minister Julio de Vido, Finance Minister Miguel
Peirano, Foreign Affairs Minister Jorge Taiana, and
President of the Central Bank Martin Redrado. All of them
took credit for 55 months of consecutive economic growth
and ratified the main tenets of the current GoA economic
model: maintaining a consistent primary fiscal surplus,
sustaining a "competitive" undervalued currency (and linked
trade surplus), holding sizeable foreign currency reserves
to cushion the economy against external shocks, and
actively promoting and protecting Argentina's growing
industrial sector.

---------------------------------------------
Planning Minster De Vido: What Energy Crisis?
---------------------------------------------

3. (SBU) Planning Minister De Vido, as in his recent
public and private statements (Refs E, F), denied there is
an energy shortage and attributed recent GoA electricity
and gas rationing to industrial users to a combination of
the coldest winter in 45 years, drought conditions that
have restricted hydro production and record GDP growth that
has boosted demand. He did not address industry charges
that current shortages are the outcome of the GoA's serial
interventions in the hydrocarbon and electricity sectors
and below-market caps on refined hydrocarbons and
electricity prices. De Vido said that current energy
"constraints" will be fully addressed by GoA plans to bring
on-line over 4,000 MW of new generating capacity in 2008/9,

including the 745 MW Atucha II nuclear facility, 1,600 MW
from the two FONINVENMEM generators due to come on-line in
2009, 910 MW in energy savings from the GoA's Total Energy
initiative, and 1,600 MW of capacity from a recently
announced tender by state-owned energy company ENARSA to
acquire seven new electricity turbines (Ref F). President
Kirchner, he said, will visit Bolivia August 10 to affirm
recent agreements to expand natural gas pipelines and to
have Argentina fund a gas drying plant on the Bolivian side
of the border to be linked to the pipeline.

---------------------------------------------
Cabinet Chief Fernandez: Transiting Purgatory
---------------------------------------------

4. (SBU) Chief of Cabinet Alberto Fernandez lauded GoA
economic performance to date and said that the Kirchner
administration had significantly improved institutional
quality by restricting the ability of the GoA to appoint
Supreme Court judges. "We have come from another reality
and are now back in the world," he said, adding that
Argentina had left the "hell" of the 2001/2 economic
crisis, was successfully transiting the "purgatory" of
economic and political renewal, but was not quite yet at
the doors of a "paradise" where the crisis' legacy of
misery, indigence and societal disorder have been fully
overcome. Fernandez predicted that Argentine growth would
stabilize at Chile-like rates of five to six percent. He
offered that Argentina needs to reinsert itself in the
international community, saying that "up to now we have
governed in emergency, but now we will govern with the
rules of normality." Finally, in response to a question
from a Dow Jones reporter on the recent outsized jump in
Argentina's country risk premium, Fernandez attributed the
increase entirely to sub-prime induced market volatility,

discounting any connection to increasing domestic inflation
and/or GoA efforts to low-ball headline inflation
statistics.

--------------------------------------------- --------
BCRA Governor Redrado: Passing Market Volatility Test
--------------------------------------------- --------

5. (SBU) Central Bank (BCRA) President Martin Redrado
defended Argentina's "administered" float and argued that
the BRCA's successful defense of the peso's trading range
during the prior week's extraordinary market volatility was
proof that the GoA's monetary and reserve accumulation
policies are working well to discourage speculation. He
called Argentine banks solid and noted they are
increasingly using local capital markets to fund their
growth. The progressive drop in public sector assets held
in private bank asset portfolios (from over 60% at the peak
of the economic crisis to under 20% currently), he said, is
freeing up reserves to support private sector growth.
Redrado cited Chile's successful taming of high inflation
rates in the 1980s and said that Argentina is studying the
examples of neighboring countries that have successfully
transitioned out of economic crisis. Lowering Argentine
inflation rates, he concluded, will take the coordinated
management of fiscal policy, dampening wage rate demands,
maintenance of a "competitive" exchange rate, and monetary
policy tools.

--------------------------------------------- -------
Economy Minister Peirano: Industrial Promotion Focus
--------------------------------------------- -------

6. (SBU) Like his peers, Peirano ratified the main pillars

of the economic model (twin surpluses, an undervalued
exchange rate, and accumulation of international reserves)
but placed special emphasis on "active" GoA promotion of
sector-specific initiatives to promote industrial
development. (Note: This emphasis was widely interpreted in
the media as support for continued protectionist trade
policy and subsidized energy prices.) Peirano also
emphasized the importance of sustaining "the internal
market." (Note: This is widely understood code for
maintaining a weak currency and deploying consumption-
boosting measures such as salary hikes and tax breaks. His
comment came after an increase last month in the minimum
non-taxable income level - of up to 900 pesos per month per
household - which critics described as a fiscally
irresponsible pre-election gift to voters. End Note).
Peirano focused the remainder of his remarks on trade and
industrial promotion, noting Argentina's active
participation in Mercosur consolidation talks and in
multilateral Doha agriculture and NAMA negotiations. He
did not address Paris Club or bond holdout issues managed
by his Ministry.

--------------------------------------------- ---
Candidate Cristina Kirchner: Few Specifics, But...
--------------------------------------------- ---

7. (SBU) The Council of the Americas conference was re-
convened in the late afternoon to accommodate the schedule
of Senator, First Lady and front-runner Presidential
candidate Cristina Kirchner. In a 45-minute speech without
notes, Kirchner defended the Argentine-specific model of
growth and development championed by her husband but
presented it in a less confrontational style designed to
suggest some room for evolution ahead. She called
Argentina "a good place to do business," dismissed the
energy crisis (calling a California blackout she had
personally experienced "no big deal") and defended the
GoA's "accumulation model", which she said had restored
jobs and household spending power and had "reinserted
Argentina into the world." Kirchner claimed that a
competitive exchange rate had created a diversified
economy, which - along with a flexible, publicly educated
workforce - left the country more resilient to outside
shocks. She called for a domestic social pact between
state, business, and workers to define long-term policies.
Kirchner also outlined that Argentina needs to build on its
advantages in the high tech and services areas which have
attracted new investments in part because of Argentina's
talented and relatively plentiful college educated
population.

------------------------------------
Private Economists: Call to Realism
------------------------------------

8. (SBU) Standard & Poor's sovereign analyst Sebastian
Briozzo and Merrill Lynch economist Pablo Goldberg
highlighted worrisome trends in inflation, in energy
infrastructure and in the government's capacity to borrow
money and warned that the GoA's expansionary economic
policies are increasing its vulnerability to external
shocks. Briozzo said the country's continued fiscal
surplus and a less vulnerable debt structure, with long-
dated bond maturities, makes it less susceptible to shocks
than it was before the 2001/2 financial crisis. But he
also warned that absolute debt levels remain high;
Argentina is overly dependence on commodity exports;
Argentina has failed to "consolidate political
sustainability;" and it has a damaging reputation for

changing "the rules of the game." He observed that "we
will see more (structural) bottlenecks and we want to see
how Argentina breaches its history of volatility," citing
the country's boom-bust economic record of the past half
century.

9. (SBU) Goldberg called the decline in the primary budget
surplus to 2.7% of GDP (the Merrill Lynch forecasts for
2007) a disturbing result, given that GDP has grown by 51%
since 2002 while the surplus has averaged 3.3%. That the
GoA has not used this growth to develop a bigger fiscal
buffer means "Argentina is not investing in macroeconomic
insurance against future shocks," he said. Goldberg added
that the GoA's intervention in the national statistics
agency (INDEC) and blatant manipulation of inflation rates
have seriously damaged its financing flexibility, since
bondholders no longer trust the pricing mechanism for bonds
linked to the consumer price index. Argentina can now
neither issue at fixed rates or with inflation-indexed
bonds, Goldberg said.

--------------------------------------------- ----
Ambassador's Dinner i/h/o Council President Segal
--------------------------------------------- ----

10. (U) On August 6, Ambassador hosted a dinner for COA
President Susan Segal with a group of 25 business leaders
who are supporters of the COA and strong proponents of
closer ties to the United States. Attendees included
Carlos de la Vega, President of the Argentine Chamber of
Commerce; Eduardo Eurnekian, President of Aeropuertos 2000;
Julio Werthein, President of the InterAmerican Commerce and
Production Council; Adelmo Gabbi, President of the Buenos
Aires Stock Exchange; Enrique Mantilla, President of the
Export Chamber of Commerce; Eduardo Pablo Amadeo, Former
Ambassador to the U.S.; Felipe Rovera, President of GM
Argentina; Juan Bruchou, President of Citibank; Jorge
Brito, President, Banco of Macro Bansud; Eduardo Elsztain,
Chairman of IRSA; Clarisa Estol, President of Banco
Hipotecario; Marcelo Mindlin, Chairman of the Grupo
Dolphin; Miguel A. Gutierrez, Partner of TRG Management
(The Rohaytn Group); Alixandre Schijman, Executive Director
for Global Policy of Time Warner; Luis Ribaya, Director,
Banco Galicia; and Maria Garana Corces, Regional Director
for the Southern Cone, Microsoft.

11. (SBU) A number of the guests arrived after attending a
ceremony at the Casa Rosada with Hugo Chavez. They
commented that Chavez' remarks were longwinded, but that
overall the ceremony and his visit to Buenos Aires were low
key. All of the guests expressed their appreciation for
the role the Council plays in providing Argentine officials
a forum to reach out to the business community in a
collegial atmosphere. While all expressed some concern
about growing economic distortions, most believed that
Argentina will continue to grow and feel that a Cristina
Kirchner follow-on administration will be in a better
position to take steps to address these distortions.

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

12. (SBU) At the conference, private economists' warnings
on growing distortions stood in stark contrast to the
uniformly upbeat outlook offered by government officials.
Cristina Kirchner's participation, immediately following a
visit by Venezuela President Hugo Chavez, was broadly
viewed as a sign that she intends to cultivate stronger

relations with the United States. Though her campaign
describes her as a "candidate of change," her Council
speech's defense of Argentina's "accumulation" model
suggests that she intends to continue applying the current
mix of heterodox macro- and micro-economic policies with
only slight initial modifications. There is much agreement
among private sector economists, bankers and business
leaders, however, that more significant and painful
adjustments in the model will be required to sustain
Argentine economic growth.

13. (SBU) Given Cristina Kirchner's large lead in the
polls, many private sector leaders who attended the Council
of the Americas event said privately that they believe the
best hope for policy change is to encourage the signs of
openness to other points of view in the Senator's
pronouncements and to work behind the scenes to influence
her thinking and that of her future advisors. This was
clearly the tact taken by the organizers of the Council
event. This is far from a sure thing, but it may well be
the most helpful path in the near term for those seeking
economic policy shifts in Argentina.
WAYNE

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