Cablegate: Pensions Nationalization Proposal Prompts Financial Panic,

DE RUEHBU #1466/01 3011451
O 271451Z OCT 08 ZDS




E.O. 12958: N/A
SUBJECT: Pensions Nationalization Proposal Prompts Financial Panic,
Market Crash in Argentina


BUENOS AIR 00001466 001.2 OF 004


1. (SBU) The Argentine government appears to have been completely
unprepared for the plunge in Argentine stock and bond prices
following its announcement that it would nationalize the nation's
private pension system. GoA officials clearly did not think through
the possible negative consequences of this decision, and have
struggled to respond to the crisis, with both the GoA Treasury and
Central Bank intervening heavily in markets to sustain equity and
debt prices, bolster the peso, and prevent massive capital outflows
from the banking sector. The President apparently also had to call
her Spanish counterpart to reassure him, given the negative impact
on the Spanish stock market, and to address rumors of deciding to
end negotiations with the Spanish company Marsans over the
nationalization of Aerolineas Argentinas. .

2. (SBU) There is a heightened sense of fear and uncertainty in the
country, with increasing talk of recession in 2009, concerns about
GoA finances and default risks, and a growing sense that no economic
sector is immune from GoA intervention. Although the GoA is
optimistic about Congressional approval of the bill, Post is hearing
of rising opposition to the measure, particularly in the Senate.
The GoA may have a larger fight on its hands than it originally
expected, and at an incredibly sensitive time for both international
and domestic economies. Septel provides additional details about
the GoA plan, market reactions, and the increasingly negative
outlook for the Argentine economy. End Summary.

--------------------------------------------- ---------
Financial Panic Sparked by GoA Pension Nationalization
--------------------------------------------- ---------

3. (SBU) The freefall in stock and bond prices October 21-22 in
reaction to the GoA's October 21 announcement that it intended to
nationalize the private pension funds (AFJPs) (reftel) appears to
have caught the GoA completely unprepared. With the Buenos Aires
Stock market dropping over 20% in two days and the country risk
premium spiking to over 2,000 basis points, GoA officials struggled
to find ways to halt the market panic they clearly had not
anticipated. A high-level source close to the Casa Rosada told DCM
October 23 that the markets reaction hit the government ""like
Hurricane Katrina."" Cabinet Chief Sergio Massa is apparently being
pulled in a thousand directions at once as he tries to manage both
the fallout and demands from the Kirchners, and he is apparently
being ""overwhelmed"" by the multiple challenges the administration is

4. (SBU) Several other sources told Ambassador that the small circle
that made the pension decision had not anticipated the negative
market reactions, but had only considered that the public did not
like the private pension system and thus would likely support the
GoA's move. As the financial storm mounted, the Kirchners
reportedly responded with anger and vigorous efforts to calm the
markets, without going back on the decision.

5. (SBU) According to press reports (confirmed in general terms by
central bank contacts), the GoA reacted October 22 by buying both
local bonds and stocks. This intervention seems to have succeeded
in halting some of the panic-selling in the stock market, although
short-term bond prices continued to fall on October 23. The Central
Bank has also intervened heavily in currency markets, selling
dollars to bolster the peso and limit incentives for capital
outflows from the banking sector. While the BCRA has succeeded in
maintaining the peso relatively stable, banks report deposit
withdrawals and dollar purchases at rates up to five times higher
than normal (albeit still below the worst days of the farm crisis).
Argentine media speculates that the GoA is considering further
""market-friendly"" actions to counteract the negative perceptions of
the AFJP nationalization, and Post's contacts among private banks
expect this to focus on large scale bond repurchases.

--------------------------------------------- --------
GoA Motivated by Financial Concerns, but Ignored Unintended
--------------------------------------------- --------

BUENOS AIR 00001466 002.2 OF 004

6. (SBU) Although President Cristina Fernandez de Kirchner has
billed this as a ""rescue of future retirees from a failed system,""
Post's contacts (including at the central bank) uniformly agree that
the GoA's primary motivation for nationalizing the AFJPs is
financial. Facing increasing financing needs in coming years, no
access to international credit markets, plummeting commodity prices,
and growing fears of recession in 2009, the GoA was clearly
desperate for a source of funding to sustain debt payments and keep
from having to cut spending in the run-up to the mid-term 2009
elections. While there is disagreement over the actual financial
benefit to the GoA, in addition to taking possession of the AFJPs'
$30 billion in assets, it is likely to realize inflows of $8-10
billion in 2009 (including contributions, free deposits, and reduced
interest and principal amortization on GoA bonds held in AFJP
portfolios, see Reftel). This should fortify GoA finances
sufficiently to enable it to meet debt payments in 2009.

7. (SBU) However, according to a wide range of sources, the
President, ex-President, Cabinet Chief and Public Pensions Chief did
not appear to have taken into consideration the importance of the
private pension system to the financial sector. Not only are the
AFJPs the largest purchaser of GoA bonds (which comprise roughly 60%
of AFJP portfolios), but they also hold significant equity positions
in all the major local companies and banks, are a key source of new
financing for companies, and also are the largest source of
short-term trade financing. Therefore, by announcing the
nationalization (followed by a judicial order prohibiting AFJPs from
making any financial transactions in the near term), in one fell
swoop the GoA succeeded in cutting off a main trader in the stock
exchange and bond markets, eliminating a main source of financing
for companies and trade financing for exporter and importers, and
raising alarm among companies who now will have a highly
interventionist government as a major shareholder and potential
board member. The GoA also seems not to have considered that the
AFJPs own large stakes in foreign companies, and these positions
could be subject to attachment by holdout bondholders after the GoA
takes possession of AFJP assets.

8. (SBU) The immediate and negative impact on the Spanish stock
market also caught the GoA by surprise and set off a series of
consultations. These reportedly included a call from President
Cristina Fernandez de Kirchner to Spanish President Zapatero to
reassure him about Goa objectives on the pension moves and on the
nationalization of Aerolineas Argentinas, where press reported a GoA
decision to break off negotiations with the Spanish owners

Fear and Uncertainty Reign

9. (SBU) Most local and foreign analysts were already concerned
about weakening GoA finances in the face of plummeting global
commodity prices and a rapidly decelerating economy. The consensus
among Post's banking sector contacts even prior to the October 21
announcement was that Argentina was facing recession in 2009, and
default risks were on the rise. While agreeing that the AFJP
nationalization most likely reduces the risk of default over the
next few years, Post's contacts worry about its medium term impact
on the economy. Their main concern now is whether this latest
crisis will result in large-scale capital outflows from a now
significantly less liquid financial system. However, they also note
that AFJPs are the main source of financing in Argentina, and
scarcer credit without them could exacerbate the economic downturn,
and could enhance the GoA's leverage over the private sector. In
the face of this probable credit crunch and expanding GoA presence,
Banks now worry they may be the GoA's next target, as the GoA seeks
to ensure availability of credit (possibly through old-school
Peronist techniques, such as capped interest rates and forced
lending). Broadly, there is growing fear that no sector is immune
from GoA intervention. (Septel analyzes these issues in more

--------------------------------------------- ---
Rising expectations of a tough fight in Congress
--------------------------------------------- ---

10. (SBU) The Ambassador, DCM, and EconOffs have consulted widely

BUENOS AIR 00001466 003.2 OF 004

with economists, journalists, bankers, Central Bank (BCRA)
officials, and AFJP executives this week, and the initial consensus
was that the Argentine Congress would approve the measure relatively
easily, albeit possibly with some modifications. The sense was that
this issue does not resonate the same as the farmers strike with
either Argentine society or Congressional representatives, and also
that there is broad dissatisfaction in Argentine society with the
retirement system writ large, and the common perception is that the
AFJP system (with only 3-5 million mostly white collar regular
contributors), was poorly conceived, expensive to administer, and
has generally not met expectations. Certainly the GoA is publicly
optimistic that it has the votes necessary to get the bill through
both houses of Congress.

11. (SBU) However, the mood has shifted during the last 36 hours,
and there are increasing signs that many political leaders are
having doubts. At minimum, it appears that the Senate will push for
modifications to the GoA's bill, such as greater controls and
transparency with regards to GoA management of the funds. There are
increasing calls in Congress for guarantees that no funding from the
AFJPs will be used to finance expenditures or make debt payments.
Given the assumption that the GoA's primary motivation is to get
funds for these purposes, it appears the GoA may have more of a
fight on its hands than it bargained for.

12. (SBU) Opposition Congressman Esteban Bullrich told the
Ambassador October 24 that many opposition Radical party Deputies
and Senators, who initially supported the measure, are now leaning
towards opposing it. More significantly, Bullrich alleged that
during Senate Majority Leader Miguel Angel Pichetto's October 23
meeting with former President Nestor Kirchner (in which Chamber of
Deputies Majority leader Agustin Oscar Rossi also was present),
Pichetto insisted that he needed ""flexibility to make significant
modifications"" to the law, in order to get it through the Senate.
Kirchner is reported to have rejected this plea, but Pichetto's
concern is indicative of how strong opposition to the bill -- at
least as currently drafted -- may be in the Senate.

13. (SBU) Bullrich further notes that opponents are trying to
highlight how costly this measure will be to the Argentine society,
a tact that was highly successful during the July Senate vote over
the GoA's bill to raise export taxes. Finally, the reactions of the
Governors will be key, because Senators are much more responsive to
their Provincial constituencies than are lower house Deputies who
normally vote party lines. Many Governors are unhappy right now
with the GoA, not least because the GoA is said to be broadly
delaying both non-discretional and discretional funds transfers to
the provinces. (Septel will detail Argentina's co-participation
federal/provincial revenue sharing system.)

14. (SBU) Post's contacts until recently have also been relatively
sanguine regarding concerns about the possible social outcry. For
the same reasons stated in Para 6 above, most observers do not
expect social protests of the kind that could block the initiative
or destabilize the government. While there are efforts (mostly via
mass emails) to organize ""cacerolazos"" (pot-banging) protests, there
were doubts about how effective these calls for protest would be.
(There are emails calling for a cacerolazo at 8:00 p.m. local time
tonight.) That is also changing, according to Deputy Bullrich. He
pointed out that he set up a section of his website opposing the
AFJP nationalization, and within a day had received 4,000 comments
from outraged citizens (most likely AFJP contributors). This was a
much faster reaction than he saw during the spring farm strikes,
according to Bullrich, and he sees it as evidence that opposition
may be building in the public.


14. (SBU) During an October 22 lunch, several highly connected
journalists and bankers told Ambassador that some in the private
sector had initially characterized the GoA's move as a ""brilliant""
way to get more funds flowing into the GoA Treasury. However, as
the implications set in, most analysts now are portraying it as a
blow to Argentina's ability to attract investment, as it provides
further evidence of the GoA's willingness to change the rules of the
game at whim. It will thus likely reinforce the idea that Argentina
is an unpredictable place to invest, and will also undermine GoA

BUENOS AIR 00001466 004.2 OF 004

efforts to entice Argentines to repatriate capital back from
overseas. This is the overwhelming buzz in elite circles. Most
distressing to many in Argentina is the manner in which the GoA
concocted this scheme, originating and developing it within a small
group, not consulting the AFJPs or the broader financial sector, and
disregarding the probable negative consequences that were obvious to
most of Post's contacts. Once again the GoA has taken a bad
situation and made it worse through its own doing. To paraphrase
noted Argentine commentator Eduardo van der Kooy, in his October 23
column in Clarin, the impact of the global crisis on Argentina was
the equivalent of a light drizzle, a shower that Cristina and Nestor
Kirchner managed to turn into a downpour.


=======================CABLE ENDS============================

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