Cablegate: Codel Shelby Discusses Agricultural Strike, Global


DE RUEHBU #0429/01 0981212
R 071212Z APR 08




E.O. 12958: N/A
SUBJECT: CODEL Shelby discusses agricultural strike, global
financial crisis, bond holdouts with financial institutions


1. (SBU) Representatives of U.S. commercial banks, investment banks,
insurance companies, and rating agencies told CODEL Shelby March 25
that the GoA's interventionist tendencies has scared off foreign
direct investment (FDI) -- except from Brazil -- and long-term
lending from the private sector, both crucial to sustainable growth.
They called the ongoing agricultural sector strike the worst crisis
the Kirchners have faced since 2003, and a direct challenge to their
heterodox economic model. End Summary

2. (SBU) Senator Richard Shelby (R-AL), Senator Judd Gregg (R-NH),
Senator Bob Corker (R-TN), Senator Mike Crapo (R-ID), and
Congressman Bud Cramer (D-AL) visited Buenos Aires March 23-26,
meeting with the Justice Minister and Central Bank President
(septels), in addition to having lunch with representatives of all
nine U.S. financial institutions operating in Argentina: CitiGroup,
JP Morgan, Goldman Sachs, Prudential Financial, Merrill Lynch,
Standard and Poor's, Moody's, Fitch Rating, and American Express.
Highlights are provided below.

--------------------------------------------- -----
Changing Face of FDI and Lack of Long-Term Lending
--------------------------------------------- -----

3. (SBU) Participants agreed that GoA intervention in the economy
and high inflation were both major constraints to both FDI and
long-term lending in Argentina, and predicted this would limit
Argentina's capacity to grow at high rates in the future. Fitch's
rep commented that when there is no long-term macro planning by the
government, it is difficult for businesses to look beyond the short
term or access long-term financing. Goldman Sachs' rep argued that
the GoA's regular market interventions have led directly to reduced
interest from foreign investors. He added that such regular
interventions have also encouraged both foreign and domestic
investors to prioritize shorter-term projects, where the investor
can recoup the investment within only a few years. Alternatively,
investors are putting their money into real estate or other assets
that will hold their value in a high-inflationary environment.

4. (SBU) CitiGroup's rep reported that there is a similar situation
with bank lending. Although private sector credit is growing
rapidly, at about 40% per year, it is still low as a percentage of
GDP and is increasingly dominated by short-term consumer credits.
The Citi rep added that, because of high inflation and negative real
interest rates, bank deposits average only 30-days. The combination
of high inflation and short-term deposits precludes long term
fixed-rate lending from banks to the private sector. He commented
that, in any case, the banks are reluctant to take on the risk of
long-term fixed rate loans, whereas companies do not want to risk
long-term, variable rate loans. The compromise is that companies
are rolling over very short-term, fixed rate loans, which limits
their growth opportunities. In sum, Citi's rep commented, the
banking sector's exclusive focus on short-term financing limits its
ability to support continued economic growth. (Private sector
credit in Argentina is approximately 14% of GDP, compared to over
20% prior to the 2001/2002 financial crisis, and compared to an
average of almost 30% in Latin American and over 80% in developed

5. (SBU) JPMorgan noted that many smaller Argentine companies are
financing themselves, either through retained earnings or by
repatriating capital held abroad. (Estimates of Argentine capital
held abroad are as high as $150 billion, including investments and
capital flight.) JPM's rep also noted that the fall in FDI from
traditional sources (U.S. and Europe) has been partially covered by
increased investment from local groups and also from Brazilian
companies, which are benefiting from the Real's appreciation against
the Peso. Both are better positioned to understand the risks of
doing business in the Argentine market, and both also have tacit GoA
approval for their investments.

6. (SBU) Fitch's rep agreed, adding that the GoA's inability to
issue debt internationally, and disinterest from traditional sources
of FDI, has forced it to create its own financing sources. For
example, the GoA is forcing Argentine pension funds to repatriate a

significant portion of capital they had earlier invested in other
Mercosur countries, and this has led to a surplus of liquidity in
the domestic market.

7. (SBU) In response to questions from the CODEL, various
participants noted that there is no significant Chinese investment
in Argentina, despite the increasing trading relationship between
the two countries. The Goldman rep added that China has made
significant investments in the region, particularly in energy,
agriculture, and mining, and is reportedly looking at possible
opportunities in Argentina. However, he noted that China is moving
cautiously, because it still considers Latin American the "backyard
of the U.S."

------------------------- --------------------------------
Agricultural Strike Poses Challenge for K's Economic Model
------------------------- --------------------------------

8. (SBU) JP Morgan's rep commented that the ongoing agricultural
sector strike, which started with the GoA's March 11 announcement of
much higher taxes on major agricultural export crops, is the worst
crisis the government has faced since 2003. He also explained that
the strike is a direct challenge to the Kirchners' economic model
(the tax-the-farmers-to-build-the-welfare-state and support
inefficient industry model on which Peronism and Kirchnerism is

9. (SBU) Because the rural area is not organized, and there are no
clear representatives directing the striking farmers, the GoA has
had having difficulty influencing the situation. Also, there are
widely divergent views among farmers, particularly between the
larger, more efficient commercial landholders and the smaller, less
efficient farmers, whose livelihood is directly threatened by the
new taxes. JP Morgan's rep speculated that the GoA would most
likely be forced to roll-back the recent export tax increase, or at
least create a dual system that differentiates between large and
small producers. (Note: this prediction came true March 31, when
the GoA announced measures to alleviate the impact on small and
medium farmers.)

10. (SBU) JP Morgan's rep also noted that the original justification
for export taxes in Argentina was to balance out the beneficial
impact to exporters of the GoA and Central Bank's policy of
maintaining an undervalued or "competitive" peso. Therefore, on one
hand the competitive exchange rate allows exporting farmers to earn
huge returns in peso terms, due to the high world prices for
agricultural commodities. On the other hand, the GoA takes a
percentage to be able to subsidize other sectors and consumers, so
as to share the benefits with all of society. However, the JPM rep
noted that the GoA is not taking into account the increases in the
costs of production due to inflation and higher-priced imports.
Therefore, farmers are being squeezed. (President Fernandez de
Kirchner and her Economy Minister justified the March 11 tax
increases as measures to keep down local food prices, foster income
redistribution, and encourage crop diversification -- away from soy,
which in the last ten years has dramatically increased its share of
cultivated land from 30 to 45%.)

----------------------------- ------------------------
Agreement Expected Eventually with Holdout Bondholders
----------------------------- ------------------------

11. (SBU) Although several of the participants agreed that the GoA
will eventually work out some kind of deal with the so-called
"holdout" bondholders (those who declined to participate in the 2005
debt exchange), there was also general agreement that the GoA would
have a difficult time fully resolving the problem. JPMorgan
commented that it would be almost impossible for the GoA to get 100%
participation, if it were to re-open the debt exchange. However, he
predicted the GoA would eventually re-open the exchange, and would
likely get around 75% participation in a deal similar to or slightly
worse than the original offer. Although the GoA would continue to
experience difficulties with the remaining holdouts, it would show
good faith to the U.S. and European courts (and ICSID tribunal)
overseeing holdout lawsuits. The Ambassador noted that it was part
of the USG's fiduciary duty to continue pressuring the GoA to reach
a mutually acceptable settlement with holdouts.

------------------------ ------------------------------
Limited Impact of Global Financial Turmoil on Argentina
------------------------ ------------------------------

12. (SBU) The consensus among participants was that turmoil in
global markets, resulting from the financial crisis in the U.S., has
had limited impact on Argentina to date. Fitch's rep attributed
this mainly to Argentina's relatively small financial sector and
limited access to international capital markets (due to the threat
of lawsuits from holdout bondholders). Nevertheless, Citi,
supported by others, argued that the situation could change if the
international crisis begins to impact global commodity prices.


13. (SBU) Financial sector participants were generally more downbeat
than they have been in previous meetings with Embassy officers over
the past year. As Citi's rep highlighted, "we're all making money
here, but you never know what will happen next." Clearly U.S.
financial sector reps are discouraged by the lack of predictability
in GoA economic decision-making. Instead of the "gradual
fine-tuning" that many of these same institutions predicted in 2007
would occur under the Cristina Fernandez de Kirchner administration,
there has been almost complete continuity on economic policies. As
several lunch participants pointed out, most of the cabinet is
unchanged and Nestor Kirchner is still the top decision maker on
economic issues. End Comment.

14. (U) CODEL Shelby cleared this message.


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