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Cablegate: Argentina's Paris Club Announcement Prompts

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FM AMEMBASSY BUENOS AIRES
TO RUEHC/SECSTATE WASHDC IMMEDIATE 1950
INFO RUCNMRC/WESTERN HEMISPHERIC AFFAIRS DIPL POSTS IMMEDIATE
RUEHSO/AMCONSUL SAO PAULO IMMEDIATE 3772
RUEAIIA/CIA WASHINGTON DC IMMEDIATE
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RUEHRC/DEPT OF AGRICULTURE WASHINGTON DC IMMEDIATE
RUEATRS/DEPT OF TREASURY WASHINGTON DC IMMEDIATE

UNCLAS SECTION 01 OF 04 BUENOS AIRES 001236

SIPDIS

TREASURY FOR O"NEILL,TRAN, MALLOY

E.O. 12958: N/A
TAGS: EFIN ECON PREL AR
SUBJECT: ARGENTINA'S PARIS CLUB ANNOUNCEMENT PROMPTS
ACCLAIM AND RESERVATIONS

REF: A. BUENOS AIRES 1224
B. BUENOS AIRES 1233

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

1. (SBU) The local reaction to the Argentine President's
surprise September 2 announcement to pay Paris Club debt has
been mildly positive. The GoA is promoting the action as
part of a larger "debt reduction, development, and growth"
initiative. GoA officials expressed satisfaction with the
positive USG statement, although local media interpreted part
of the statement as a call for paying holdout bondholders as
well.

2. (SBU) Argentine industry has been most vocal in praising
the initiative, emphasizing the expected positive outcomes:
restoring Argentina's image, gaining confidence in the
economy, and accessing lower-cost financing. Spain, Italy,
Germany, and France also are reported to have issued positive
statements, and the Paris Club secretariat's statement
attracted much attention (septel). Many normally critical
media commentators, opposition politicians, and farming
groups also complimented the decision, while some of the
GoA's most leftist supporters criticized the move. However,
the garlands of praise were accompanied by reservations about
paying in a lump-sum with official reserves and arguing that
it does not address the real problems facing the country.

3. (SBU) Markets have reacted cautiously to the announcement,
with investors waiting for clearer signals of change.
Argentine and foreign economists and financial analysts,
especially those associated with Menem-era economic policies,
have been among the most skeptical of the decision's impact.
Septels will cover Central Bank, Finance Secretariat, and
Paris Club Secretariat reactions, as well as questions
related to legal aspects of the decision and the timeframe
for implementation. End Summary.

---------------------------------------------
President Shocks Country with Paris Club Plan
---------------------------------------------

4. (SBU) Argentines have responded positively to Argentine
President Cristina Fernandez de Kirchner's (CFK) announcement
(Reftel) that she had signed a decree instructing the Economy
Ministry to pay Paris Club debt using Central Bank reserves.
GoA officials were out in force following the announcement,
promoting the decision to the media and underscoring the
positive repercussions that would come of it, including
restoring confidence in Argentina. Chief of Staff Sergio
Massa told local media that the GoA took the action in order
to continue reducing debt to multilateral organizations and
bilateral creditors (a logical follow-on to the January 2006
payment to the IMF), break the vicious cycle of constant
Paris Club debt restructurings since 1983, and open access to
credit for the government and Argentine firms. According to
leading daily Clarin, Massa also claimed that CFK had
consulted on the issue with the Heads of Germany, Italy,
France, Spain, and also with WHA A/S Tom Shannon during his
recent visit. (Comment: We believe these "consultations" may
refer to nothing more than a general discussion of the Paris
Club issue and the need to resolve it. End Comment.)

5. (SBU) Central Bank President Martin Redrado, in his
closing speech at the Central Bank's annual monetary and
banking conference, threw his full support behind the
announcement, even though he is rumored to have been kept out
of the loop on the decision until the last minute.
(According to press reports, CFK and her husband,
ex-President Nestor Kirchner, kept a close-hold on the
initiative, involving only close advisors Oscar Parilli,
General Secretary to the President, Carlos Zaninni, Legal and
Technical Secretary, and -- possibly -- Chief of Cabinet
Sergio Massa.) Redrado has long opposed using reserves to
pay the Paris Club but, playing the good soldier, argued that
the payment was "part of an integral strategy" to regain
access to markets and "reinsert Argentina into the
international financial community."

----------------------------------
Roll-Out as Part of Larger Package
----------------------------------

BUENOS AIR 00001236 002 OF 004

6. (SBU) The GoA is promoting the proposed payment as part of
a larger "debt reduction, development, and growth"
initiative. It took out full-page advertisements in all
local papers to introduce the initiative, and announced in
addition to the Paris Club payment the signing of an
agreement with Brazil's development bank (BNDES), new credits
from state-owned Banco de la Nacion to Argentine exporters
and small- and medium-size businesses, and stronger
anti-dumping measures, all with the apparent goal of
increasing jobs, local production, and "social mobility," and
emphasizing the role of the state in "development and
growth." Details on this broader initiative are still
lacking.

-------------------------------------
Positive U.S. Statement Reassures GoA
-------------------------------------

7. (SBU) GoA officials were quoted in the press expressing
satisfaction with the USG statement, issued late September 2,
with press reports highlighting the U.S. comment that the
announcement was a positive step. Press reports also
indicated supportive statements from Spain, Italy, France,
and Germany. While the two main papers -- Clarin and La
Nacion -- highlighted the encouraging tone of the U.S. press
release, both stated in front-page headlines that the USG had
also called for the normalization of financial relations with
all external creditors. Both papers interpreted this as a
reference to untendere debt holders (the so-called "holdout"
bondholders that did not participate in the 2005 debt
exchange.)

--------------------------------------------
Argentine Industry Accentuates the Positives
--------------------------------------------

8. (SBU) Argentine private sector representatives, including
leaders of the main industry associations, were most vocal in
supporting the decision. The Presidents of the Argentine
Business Association and the Argentine Chamber of Commerce
(CAC) pledged support and emphasized that the move would lead
to investment and improved access to credit. They and other
local business representatives highlighted the expected
positive outcomes of the initiative, including restoring
Argentina's tarnished image in the world and regaining
confidence in the economy.

9. (SBU) CAC President Carlos de la Vega asserted that paying
Paris Club creditors would allow Argentina to access
lower-cost financing, particularly via official Export Credit
Agencies, such as U.S. EXIM, France's COFACE, and Germany's
HERMES. He specified that such credits would enable the
country to modernize its economic and social infrastructure.
Juan Carlos Lascurian, the head of the powerful Industrial
Union, agreed with this sentiment, adding that this was "a
fundamental step and important signal to the world, and would
help Argentina to recoup the confidence of developed
countries."

---------------------------------------------
Opposition Supports Payment, Criticizes Means
---------------------------------------------

10. (SBU) Many normally critical media commentators,
opposition politicians, and farming groups also made
complimentary statements regarding the decision to pay Paris
Club members. These included opposition leaders Elisa Carrio
(second place finisher in the 2007 Presidential election) and
Buenos Aires Mayor Mauricio Macri, both of whom emphasized
the importance of complying with Argentina's debt obligations
and reintegrating with world capital markets. Estranged Vice
President Julio Cobos applauded the decision, noting it would
help create better conditions for future investment. Another
striking feature of the reaction came from leftist leader
Luis D'Elia, the street activist who was one of the
government's most unqualified supporters during the recent
farm strike. D'Elia criticized the announcement, saying
that, "Cristina Fernandez surprised us with her decision to
write off the now nearly chronic debt with the Paris Club."

11. (SBU) Leaders of three of the four main farming groups --
until recently in a battle with the GoA over export taxes --
echoed these arguments. (Eduardo Buzzi, leader of the

BUENOS AIR 00001236 003 OF 004


Agrarian Federation, which represents small- and medium-size
farmers, questioned the origin of the debt and recommended
restructuring it.) Luciano Miguens, President of the
large-holders association, Sociedad Rural, made the strongest
case for clearing Paris Club debt, arguing that "it will
surely have positive effects on the economy, in particular
with regards to access to international credit, increased
investment, recuperation of bond prices, and diminution of
country risk."

12. (SBU) Nevertheless, most of these commentators qualified
their statements, and in particular disagreed with the GoA's
decisions to pay the Paris Club in a lump sum using official
reserves. Macri argued the GoA should have tried to
restructure the debt. Carrio noted that the payment was
late, did not form part of an overall financial restructuring
plan, and demonstrated weakness on the part of the government
(due to its need to rely on reserves). Macri's PRO
opposition party chimed in via a press release on September
3, stating that complying with external obligations is
fundamental, but using reserves was unnecessary. Many other
Argentine observers agreed, highlighting the possible
detrimental impact on the Central Bank and also arguing that
the payment does not address the real problems facing
Argentina: high inflation, statistics manipulation, lack of
access to capital markets, and overall crisis of confidence.

------------------------------------
Markets Flat Pending Clearer Signals
------------------------------------

13. (SBU) Investors have reacted cautiously to the news, and
the marginal gains in Argentine peso and dollar bonds and in
Argentina's main stock market (Merval) following the 12:00
p.m. announcement on September 2 mostly eroded on September 3
and 4, amidst low volume. Argentina's country risk rating,
as measured by JP Morgan's Emerging Market Bond Index Plus,
widened to 693 basis points on September 3, after closing at
678 basis points September 2 (and down from a recent high of
741 on August 8). Argentina's Credit Default Swaps (CDS)
tightened about 20 basis points following the announcement
and gave up the gains on September 3 and 4 (at market close
on September 4, five-year and ten-year CDS were trading at
769 and 841 basis points, respectively). The peso has only
slightly depreciated since the announcement, despite market
concerns that the Central Bank may decide to increase dollar
purchases to build back reserves. Local analysts are mostly
quoted stating that the market is waiting for clearer signals
on what further actions the government will take,
particularly with regards to restoring confidence in
government statistics and slowing spending growth in order to
reduce the rate of inflation.

---------------------------
Analysts Remain Unconvinced
---------------------------

14. (SBU) As reported Reftel, the initial reaction of many
local economists has been negative, albeit with some open to
the possibility that the decision could be net-positive if it
turns out to reflect a change of course in GoA economic
policy. Several local analysts have also noted that it is
better for the GoA to use reserves to pay down debt than to
finance increased spending (which some GoA supporters have
called for in the past). Nevertheless, most local analysts'
view is that the move unwisely uses reserves; reflects GoA
desperation to find sources of financing; raises concerns
about Central Bank solvency and the stability of the exchange
rate; and could empower the GoA to finance huge,
white-elephant infrastructure projects, such as the $4
billion proposal by the French company Alstom to build a
bullet train between Buenos Aires and Rosario.

15. (SBU) Foreign Bank analysis is broadly similar. Goldman
Sachs' assessment is that the payment is "a welcome and
positive step to regularize Argentina's financial standing
with the world...but does not resolve the main macroeconomic
problems currently facing Argentina, namely high inflation
and a high fiscal and financial dependence on commodity
prices." JP Morgan sees it as positive that "authorities are
no longer able to overlook the binding financial constraints
that market spreads are signaling," but argues that "the
one-off nature of the Paris Club payment reveals Argentina's
preference for maintaining the current policy mix."

BUENOS AIR 00001236 004 OF 004

16. (SBU) Citi and Lehman commentaries are more critical,
noting that the decision erases any notion of Central Bank
independence, opens the door to further litigation from
holdouts, and undermines the Central Bank's balance sheet.
Lehman's Guillermo Mondino, an Argentine who is a long-time
critic of the Kirchners, notes that despite supporters'
assertions that the act demonstrates GoA willingness to meet
debt obligations, the Paris Club payment reduces available
Argentine assets and therefore actually raises doubts about
the GoA's capacity to pay future debts. (Mondino worked for
Domingo Cavallo when he was Economy Minister in 2001.
Cavallo has also criticized the decision, for the same
reasons listed above.)

17. (SBU) Almost all analysts consider it negative that the
GoA will avoid the IMF by clearing all Paris Club debt.
Barclay's view is typical: "this solution to the Paris Club
issue is inferior to the more conventional negotiated
rollover and reflects both the intention to reassure the
market of its willingness to pay and the decision to avoid
the required surveillance program with the IMF. The cash
payment is a costly choice since it is unlikely to lower the
elevated risk premium that the country will face to roll over
short-dated debt or to provide much relief for next year's
financing needs -- the focus of recent market stress...While
(it) should open the door for bilateral infrastructure and
trade credits...the opportunity cost of liquid reserves
ultimately casts doubt on the effectiveness of the message."

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

18. (SBU) While overall reaction may be more mixed than the
GoA expected, the surprise of the announcement was complete
and shocked both the political establishment and markets.
This is the first time that the CFK administration has
proactively set the agenda -- getting out ahead of the press
and public opinion -- in contrast to its record over the last
eight months of constantly reacting to events. If the
Kirchners thought they needed a big event to shake up the
political/economic system in Argentina, they got it -- along
with everyone's attention. The GoA now has an opportunity to
expand on this announcement to demonstrate a shift towards
more rational economic policies. The question is whether
this populist, market-skeptical government will seize the
day.
WAYNE

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