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Cablegate: Argentina's New Economy Minister Faces Daunting Policy

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E.O. 12958: N/A
TAGS: AR ECON EFIN ETRD PREL PINR
SUBJECT: Argentina's New Economy Minister Faces Daunting Policy
Challenges

Ref: (A) Buenos Aires 1360
(B) Buenos Aires 1496
(C) Buenos Aires 1545
(D) 06 Buenos Aires 1732

This cable contains sensitive information - not for internet
distribution.

-------
Summary
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1. (SBU) Incoming Economy Minister Martin Lousteau will replace
Miguel Peirano following the December 10 inauguration of
President-elect Cristina Fernandez de Kirchner (CFK). The new
Minister is a well-regarded 36-year old banker whose poise,
intelligence and discretion reportedly caught CFK's eye. However,
his youth, the subordination of his two predecessors to President
Kirchner, and the Kirchners' apparent decision to directly appoint
key second-tier Economy Ministry officials have raised questions
about the degree of autonomy Lousteau will be granted to tackle
pressing economic priorities, including accelerating inflation.
Lousteau has already traveled to Brazil with president-elect CFK and
was included in a meeting the Kirchners and Cabinet Chief Fernandez
held with visiting German Economy Minister Michael Glos, but he has
made no public statements. Nevertheless the youthful and photogenic
Minister has been the "news" in the incoming cabinet lineup.
Discussion of a possible Lousteau Economy Ministry agenda has served
as a proxy for a debate on how and how quickly the CFK
administration will address inflation and other macro and micro
policy disequilibria. It is expected that Lousteau will start out
by engineering a fiscal adjustment to help cool down the economy;
negotiating a near-term informal rescheduling of Paris Club arrears;
taming inflationary expectations via "social pact" negotiations with
labor and industry; and repairing national statistics agency INDEC's
tarnished credibility via a gradual normalization of its reporting
of CPI inflation (though there is much uncertainty about his
influence over INDEC at present.)
End Summary.

--------------------------------------------- ----
Lousteau: New Economy Minister to Replace Peirano
--------------------------------------------- ----

2. (SBU) In the aftermath of October 28 elections, it was widely
speculated that low-key Economy Minister Miguel Peirano, who had
replaced disgraced Minister Miceli July 17 (Ref A), would be
retained by CFK. Peirano was supported by major industrialists to
whom he had committed to sustain a rigorous domestic industry
promotion/protection policy (Ref B). However, during the week of
Nov 11, media reported that Peirano had conditioned his continued
tenure on the removal of Internal Commerce Secretary Guillermo
Moreno, who had frustrated Peirano's attempts to regain Economy
Ministry control over discredited national statistical agency INDEC
(Ref C). While Moreno notionally reports to the Economy Minister,
he is widely known to answer directly to President Kirchner and to
Planning Minister Julio de Vido, who have supported Moreno's heavy
handed enforcement of price controls

3. (SBU) Peirano's demand became fodder in a battle between De Vido
and Cabinet Chief Alberto Fernandez. This embarrassing cabinet
fight, along with domestic and international capital market
nervousness over Argentina's future economic policy direction
prompted the Kirchners to accelerate the announcement of key cabinet
positions. On November 14, Lousteau was chosen from a field of
candidates that was reported to include national revenue agency
director Abad, former Central Bank President Blejer, current Central
Bank President Redrado, Kirchnerist Congresswoman Marco del Pont and
Investment Promotion Agency Director Nofal.

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


How Much Autonomy Will Kirchners Allow Lousteau?
--------------------------------------------- ---

4. (SBU) At 36, Lousteau will be Argentina's youngest ever Economy
Minister. He is considered both academically qualified and
professionally capable given his prior work as Province of Buenos
Aires Production Minister and, most recently, as head of Banco de
Provincia de Buenos Aires (See bio para 12.) However, Lousteau's
youth and the involvement of President Kirchner in every aspect of
Argentine economic policy formulation have caused many to question
the degree of autonomy he will be granted and his ability to
influence incoming President CFK. Moreover, his apparent
willingness to accept the Kirchners' control over key second-tier
Secretary-level appointments -- appointments normally made directly

SIPDIS
by the Economy Minister - have led some local analysts to see
Lousteau as a subordinate cabinet member who will allow the
Presidential couple to directly manage key economic policy
decisions. Others hold out hope for a positive evolution over time.

5. (SBU) Embassy contacts report that the key Economy Ministry
Secretary of Hacienda position (the GoA's OMB-equivalent lead on

SIPDIS
budget development) has been reserved for Kirchner loyalist and
current ENARSA president Juan Carlos Pezoa. The budget process
remains crucial to what many here see as the Kirchners' intent to
weaken the traditional federalist autonomy of provincial governors
and further concentrate political power at the federal level.
Controversially, over the past four years, Kirchner presidency
budgets have significantly understated anticipated revenues and so
allowed the executive to utilize current "superpower" authority to
directly allocate over-budget revenues without parliamentary
oversight (Ref D). These superpower revenues have often been
allocated to provincial public works projects and to provincial
budget support in ways many interpret as patronage designed to
enhance the Kirchners' political influence over provincial
governors.

--------------------------------------------- --
Lousteau's Policy Priorities: Local Speculation
--------------------------------------------- --

6. (SBU) Lousteau has already traveled to Brazil with
president-elect CFK November 19 and was included in a meeting the
Kirchners and Cabinet chief Fernandez held with visiting German
Economy Minster Michael Glos November 21. But he has been very
careful to make no public statements on his policy priorities before
taking office. As a result, just what policy views Lousteau will
bring to the Economy Ministry and just how much room to maneuver he
will be granted by CFK has been the subject of intense media
speculation. In the absence of clearer economic policy signals from
CFK, discussion of a possible Lousteau agenda has served as a proxy
for a debate on how and how quickly the CFK administration will
address inflation and other macro and micro policy disequilibria
that threaten Argentina's soft landing to sustainable GDP growth in
the 5-6% range.

7. (SBU) For example, shortly after Lousteau was named, considerable
media attention was given to an economic policy proposal --
incorrectly attributed to Lousteau -- that was presented to CFK by
outgoing Buenos Aires province Governor Sola. Key components of
this plan included linking the peso to a trade-weighted basket of
currencies and offering holders of some $20 billion in "holdout"
debt a debt for equity option whereby holdouts who agree to invest
in Argentine fixed productive capital would receive a sweetened
payout option. Finally, after a week of silence by Lousteau, the
plan was attributed to Eugenio Diaz Bonilla, Argentina's IDB
Executive Director based in Washington.

8. (SBU) Most local analysts agree that Lousteau will with an action
agenda of: (1) engineering a fiscal adjustment to help cool down the
economy; (2) negotiating a near term informal rescheduling of Paris
Club arrears; (3) taming inflationary expectations via "social pact"


negotiations with labor and industry; and (4) repairing INDEC's
tarnished credibility via a gradual and politically palatable
normalization of INDEC's reporting of CPI inflation. On the fiscal
adjustment, Lousteau should be able to count on support from CFK: in
her campaign speeches, she referred a number of times to her intent
to boost Argentina's primary fiscal surplus from the 3% range in
2007 (more accurately 2.0-2.5% after discounting one-off factors) to
the 4% range. Market players here expect Lousteau to work to
deliver a 1.3 - 1.5% of GDP fiscal adjustment through a combination
of reduced subsidy payments (via public utility price adjustments);
work with the Planning Ministry to slow disbursements on
non-priority (read non-energy) public works projects; and via
increased revenues linked to increases in export tariffs on primary
commodities. Most local analysts call such fiscal tightening
welcome given dramatic pre-election increases in public spending
(public spending rose by over 54% year-on-year in the first nine
months of 2007 while revenues rose 42% during this period).

9. (SBU) On managing Argentina's foreign debt profile, Lousteau is
expected to work with Central Bank President Redrado to smooth the
maturity profile of Argentina's foreign and domestic debt portfolios
and to seek capital market opportunities to obtain the roughly US$ 7
billion in projected 2008 refinancing needs at the lowest possible
cost. Lousteau is also expected to engage early on the Paris Club
settlement issue, given the prospect of a near-term payback in the
form of needed official export credit agency financing. Finally,
Lousteau is known to be an advocate of a "competitive" (i.e., weak)
peso, but he is expected to argue against further weakening the
currency from current levels given the risk of further stoking
inflation. In any case, currency management remains under the
control of Central Bank President Redrado and of President Kirchner,
and Lousteau is unlikely to be given much weight in deciding how to
fine-tune exchange rate policy.

10. (SBU) Inflation remains a principal challenge for Lousteau.
Though official INDEC data puts annual inflation at around 9%,
private estimates suggest that "real" rates are in the 17-20% range.
Others, including Central Bank experts, estimating true inflation
somewhere in between official and independent estimates. Strong
post-election increases in food, fuel, transport, health care and
education prices have again raised public concerns over this issue.
However, CFK's pre-election statements that inflation rates are
"reasonable" in a context of high growth, her rejection of policy
criticisms, and the GoA's unwillingness to tighten monetary policy
make it unlikely that Lousteau will be granted the opportunity to
initiate any radical change in approach. Given this, Lousteau's
inflation fighting efforts will likely focus on implementing CFK's
"social pact," which are expected to involve sector-by-sector
negotiations between the GoA, business and trade unions, aimed at
fixing wage and price rises over a three-year period based on 2007
inflation. However, union doubts over official inflation data --
expressed regularly in public -- undermine prospects for such a
deal. Industry also rejects any fixing of prices for the same
reason, arguing that their input costs are rising and demanding that
productivity be factored into any negotiations, a condition rejected
by labor.

11. (SBU) Finally, Lousteau is expected to attempt to improve
INDEC's statistical reporting gradually and in a way that doesn't
confront Internal Commerce Secretary Moreno (who reportedly will
stay on in his position) and provoke the type of political tensions
that led to Peirano's early resignation. The current (and
controversial) head of INDEC's CPI unit, Beatriz Paglieri, who
recently traveled to Washington to research U.S. CPI methodologies,
had previously worked for Lousteau as Province of Buenos Aires
Production Ministry Secretary for International Relations. INDEC
workers continue to stage public protests with regularity and press
articles focusing on doubts about IDEC figures continue to appear
each week.

--------

Bio Data
--------

12. (U) Lousteau has served as President of the state-owned Banco
Provincia de Buenos Aires since December 2005. Previously, he
worked as Province of Buenos Aires Minister of Production
(August-December 2005) and as Chief of Cabinet of the Buenos Aires
Province Ministry of Economy (July 2004-August 2005) under Governor
Felipe Sola. From 2003-4, Lousteau worked at the federal Central
Bank under Governor Alfonso Prat-Gay and Vice Governor Pedro
Lacoste. From 1997-2002, he worked at the APL economic consulting
firm with Prat-Gay and Lacoste and at the Grupo Unidos del Sur, an
NGO dedicated to implementing government reforms created by
Francisco de Narvaez, who in 2007 came in third in the race for
governor of Buenos Aires province. While working at Unidos del Sur,
Lousteau co-wrote "Sin Atajos" (Without Shortcuts) with Javier
Gonzalez Fraga, former Central Bank Governor during the Menem
administration and 2007 presidential candidate Roberto Lavagna's
pick for his own Economy Minister. The book calls for an end to
"magic economic formulas" and a focus on developing state economic
institutions as the best means to address Argentina's historical
economic volatility. Lousteau was a Professor of Economics at the
prestigious Torcuato Di Tella and San Andres Universities. He holds
a BA in Economics (Summa Cum Laude) from San Andres University and a
MA in Economics from the London School of Economics.

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

13. (SBU) The longer a CFK administration takes to address growing
economic disequilibria, the more costly -- economically and
politically -- their correction will be. CFK is set to begin her
presidency on the downslope of GDP growth trends at a time when
foreign and domestic private sector investment needed to sustain
growth is increasingly constrained by concerns over the economic
policy environment, and as uncertainty and risk aversion is on the
rise internationally. It is encouraging that CFK has turned to a
technically capable economist/banker to face these challenges, but
serious questions remain about whether Lousteau will be given free
enough reign to do the right things.

WAYNE

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