Cablegate: Argentine Economy Minister to Senator Dodd: The Kirchner

DE RUEHBU #0802/01 1641021
R 121021Z JUN 08



E.O. 12958: N/A
SUBJECT: Argentine Economy Minister to Senator Dodd: The Kirchner
Model Still Works

1. (SBU) New Economy Minister Carlos Fernandez highlighted the
Argentine economy's strong recovery since 2002 and continuing
strength during a May 29 meeting with visiting U.S. Senator
Christopher Dodd and Representative Xavier Becerra. The Minister
attributed the fast growth since 2003 to the "Kirchner" policies of
maintaining a "competitive" currency and high budget surpluses, and
claimed it is still a viable model. He said inflation is
manageable, calling it the byproduct of rapid growth ("and not the
worst outcome"). High export taxes, he asserted, are critical to
containing inflation and ensuring that Argentines do not pay world
prices for food. Both he and Argentine Ambassador Hector Timerman
argued that the Kirchner governments have done a lot to help small
farmers, and now they expect them to "return this generosity." The
Minister and Timerman called for closer relations with the U.S.,
including progress on Paris Club talks and increasing market access
for Argentine products (e.g., lemons). Timerman emphasized that
Argentine relations with Venezuela do not affect bilateral relations
with the USG. Senator Dodd emphasized USG and Congressional
interest in maintaining good relations, while also highlighting the
importance of sending appropriate signals -- and Kirchnerista Luis
D'Elia's May 28 statement that the "Empire" (USG) was behind the
farm strikes was not a good example. End Summary.

Kirchner Model Still Works

2. (SBU) Visiting United States Senator Christopher Dodd,
Representative Xavier Becerra, and Ambassador met May 29 with new
Economy Minister Fernandez and Argentine Ambassador to the U.S.
Hector Timerman. Dodd opened by sympathizing that the Minister had
to start his job dealing with the twin problems of high inflation
and an increasingly costly farmers strike. The Minister
acknowledged that he has spent his first month, since assuming
office April 25, focused on the Ag conflict, but said he was quickly
getting up to speed on his portfolio.

3. (SBU) While recognizing current challenges, Fernandez stressed
that the incredible recovery of the Argentine economy since the
2001/2002 crisis left the country in a strong position. He argued
that the "Kirchner" economic model of an undervalued exchange rate
and high budget surpluses was responsible for the fast growth, and
asserted that the model was still viable today. Never in Argentine
history, he stated, has the GoA managed public finances so well
(five straight years of fiscal surpluses). This allowed the Central
Bank to pursue a policy of maintaining an undervalued or
"competitive" exchange rate for a long time without the worry of
high inflation. The undervalued peso, in turn, had increased the
competitiveness of Argentine producers, leaded to strong growth, a
trade surplus, and the accumulation of record levels of official
reserves (now totaling nearly $50 billion). He concluded that with
a healthy and solid financial sector no longer required to finance
public deficits, and the broader private sector largely debt free,
the economy is still strong and capable of continued growth.

--------------------------------------------- ------
Inflation "Manageable" and Result of Lack of Supply
--------------------------------------------- ------

4. (SBU) In responding to Senator Dodd's question of whether high
inflation was affecting investment in Argentina, Fernandez skirted
the controversial issue of whether Argentine national statistics
agency INDEC is reporting accurate inflation numbers (INDEC reports
8-9% annual inflation, when most economists estimate it at about
25%). Without discussing numbers, Fernandez assured Dodd that the
GoA was attending to the issue. However, he professed not to be too
worried, calling it a "manageable problem." He noted that part of
the problem was the high world food prices that all countries are
facing. Nevertheless, he claimed that, at least in Argentina,
inflation was mostly the byproduct of rapid growth and the inability
of supply to keep pace with demand. He thought this was "not the
worst outcome," given that the high growth was also responsible for
huge job growth and poverty and indigence levels that were much
lower than in 2002 (albeit "still high").
5. (SBU) High taxes on key commodity exports, he asserted, are a
"fundamental" component to the GoA's effort to contain inflation.
The export taxes and other restrictions ensure that local prices for
basic food and energy prices are kept to reasonable levels.
"Otherwise, Argentines would have to pay world prices for these

BUENOS AIR 00000802 002 OF 003

products, but on Argentine salaries."

Hard Line with Large Farmers

6. (SBU) Fernandez pointed out that Argentina is not the only
country to use export taxes to deal with higher world prices for
staple foods. While recognizing that the GoA's last increase in
export taxes (in early March) had sparked the farmers' strike, he
argued that, despite appearances, the agricultural sector was not a
uniform body with the same exact problems. He noted there are four
main entities that represent both large and small producers, and
everything from grain producers to dairy farms to cattle ranchers.
All have varied interests, he added, but they are trying to maintain
a united front and "we all still refer to them as the 'campo.'"

7. (SBU) He stated, however, that the GoA differentiates between the
different groups. When announcing the sliding scale (or adjustable)
export taxes in March, he claimed the GoA had also introduced a
policy decision to compensate small producers. (Timerman
interjected that the GoA defines a small producer as a farm of 150
hectares or smaller. He also noted that the value of a hectare of
land in the pampas is $10-15,000, with the implication that the
larger small producers are sitting on land worth millions and are
not among the poor.)

8. (SBU) Both Fernandez and Timerman forcefully argued that the
Kirchner government had done a lot to help small farmers since
taking office in 1993. Timerman commented that in 1998 200,000
farmers lost their land due to plunging commodity prices at the time
(he compared this to similar occurrences during the Great
Depression). When Nestor Kirchner took office as President in 2003,
Timerman claimed that 43,000 Ag producers were about to have their
lands seized by the National Land Bank. However, Kirchner had saved
most of these producers (with only 3,000 still facing foreclosure).
Therefore, he noted, it is logical for the GoA to expect them now to
"return this generosity."

9. (SBU) Fernandez directed most of the GoA's ire against large
producers, particularly soy farmers. He said that the change in
relative prices of the various products was detrimental to milk and
meat production, as the high price of soy was attracting all
investment. He criticized the local practice of "pooling of land"
(large semi-corporate farming organizations financed by non-farmer
investors -- known locally as "sowing pools"), accusing them of
causing a massive shift to soy production, resulting in shortages of
milk and meat supplies. Therefore, he noted, the export taxes did
not only neutralize high global food prices for Argentine consumers,
but also ensured local supply of staple foods such as dairy and
meats. (Comment: The GoA has partially justified the March 2008
increase in soybean export taxes as a measure to avert the major
ongoing shift to soy farming. However, a key factor in this shift
was the high restrictions imposed on the dairy and meat producers,
which discouraged production and investment and made soybeans much
more profitable in relative terms.)

Advancing on Investment, Trade, Paris Club

10. (SBU) Both Fernandez and Timerman emphasized their interest in
closer relations with the USG, stressing in particular the
importance of U.S. investment in Argentina and also of increasing
access to the U.S. market for Argentine products. Timerman argued
that U.S. actions on trade (meaning opening to Latin American
exports) have a crucial impact on the region's democratization by
helping to improve living standards in the region (and thereby
increasing popular support for democratically elected governments).
He used Argentine exports of lemons as an example. He claimed that
Tucuman Province, one of the poorest in Argentina, had in recent
years redirected its economy to produce and export lemons. However,
he noted that some U.S. producers (California in particular) have
moved to block imports of these lemons. Timerman hyperbolically
argued that supporting the entry of lemons into the United States
was the equivalent of "support for democracy." The Ambassador
clarified for the Minister that that the ban on Argentine lemon
imports was actually a California court ruling, and not a USG

11. (SBU) In a repeat of what he had told the Ambassador the day
before (Reftel), Fernandez acknowledged that resolving the GoA's
debts to Paris Club creditors was a high priority. He repeated that

BUENOS AIR 00000802 003 OF 003

he was still getting up to speed on the issue, but planned to begin
considering available options and committed to coordinate closely
with the U.S. (Timerman later told the Ambassador on May 30 that he
had discussed Paris Club in detail with both Foreign Minister Taiana
and Economy Minister Fernandez. Taiana said he agreed fully with
the desirability of getting it done. Fernandez had not yet studied
the issue closely, but understood its importance and agreed to work
on it as soon as he is able to focus on issues other than the Ag
conflict. Timerman told Ambassador that he agreed that the goal
should be to get a Paris Club deal this year and that he wanted the
U.S. to be seen as one of the ones helping to make it happen.)

--------------------------------------------- --
Venezuela Should Not Affect Bilateral Relations
--------------------------------------------- --

12. (SBU) In response to a query from Senator Dodd on Argentina's
relationship with Venezuela and Venezuela's role in the region,
Fernandez commented that Venezuela's petroleum reserves made it a
key player in the South American economy, but with limits. He said
the key for the GoV was to find equilibrium in determining how much
to help the region. He thought that Argentina could help, with
Venezuela supplying energy and financing and Argentina supplying
human resources and food and technology exports. Fernandez's Chief
of Staff chimed in, using the example of dairy cooperative SANCOR.
The GoV's investment in SANCOR had revitalized the cooperative,
which in turn was providing critical technical assistance to
Venezuelan dairies in the area of milk production.

13. (SBU) Timerman interjected to emphasize that the GoA understood
that there were positive and negative aspects to its relationship
with Venezuela. He stated that Argentina was not "dependent" on
Venezuela. He continued that the GoA "has an open and close
relationship with the GoV, but not submissive." He paraphrased
President Cristina Fernandez de Kirchner in noting that Argentina
has close relations with many different countries, including
Venezuela, but these bilateral relationships should not affect its
relationships with other countries (such as the United States).

14. (SBU) Timerman concluded that democratization in Latin America
requires closer cooperation and more dialogue. Fernandez
interjected, noting his optimism about opportunities for Latin
American countries to integrate further. He saw Mercosur as the
foundation of this integration, in which Argentina plays a key role.
While acknowledging that regional integration can be "tortuously
slow," he argued for making the effort.

--------------------------------------------- -
"D'Elia Does Not Run Argentine Foreign Policy"
--------------------------------------------- -

15. (SBU) Senator Dodd and Representative Becerra, speaking in
Spanish, established a warm rapport with both Fernandez and
Timerman. They repeatedly emphasized USG and Congressional interest
in maintaining good relations with Argentina, with Dodd asking
several times for suggestions on how Congress and the USG can help
the GoA. Nevertheless, Dodd also took advantage of the opportunity
to question the meaning and importance of statements on May 28 by
"piquetero" leader Luis D'Elia. Dodd noted that D'Elia, who is
close to former President Nestor Kirchner, had publicly accused the
"Empire" (leftist code for the USG) of being the force behind the
farm strikes. Dodd emphasized that in maintaining close relations,
it was critical to remember the importance of sending appropriate
signals, and Kirchnerista D'Elia's statements were not the kind that
Argentina, "a regional leader," should send. Timerman responded
that D'Elia was an important social leader and friend of the GoA,
but "he is not the Foreign Minister and does not run [Argentina's]
foreign policy."

15. (U) This cable was cleard by the CODEL after departure.

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