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Cablegate: Argentina: Cash-Strapped Goa to Nationalize Private Pension

VZCZCXYZ0004
OO RUEHWEB

DE RUEHBU #1442/01 2951819
ZNR UUUUU ZZH
O 211819Z OCT 08
FM AMEMBASSY BUENOS AIRES
TO RUEHC/SECSTATE WASHDC IMMEDIATE 2279
RUCNMER/MERCOSUR COLLECTIVE
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC
RUEATRS/DEPT OF TREASURY WASHINGTON DC
RUEHRC/DEPT OF AGRICULTURE WASHINGTON DC

UNCLAS BUENOS AIRES 001442

SIPDIS
SENSITIVE

E.O. 12958: N/A
TAGS: EFIN ECON EINV PGOV AR
SUBJECT: Argentina: Cash-Strapped GoA to Nationalize Private Pension
System

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Summary
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1. (SBU) The GoA will announce formally October 21 its plans to
submit a bill to Congress to "rescue" future retirees by
nationalizing Argentina's private pension system. Argentina's
social security system was partially privatized in 1994, with
workers given the right to choose between affiliating with a
"pay-as-you-go" public pension system and a "fully funded" private
pension system. Over nine million workers, some 39% of the active
labor force, have opted for the private pension fund system, which
controls assets of roughly US$ 30 billion and is Argentina's main
institutional investor. Nationalizing the private pension system
would allow the GoA to: 1) tap billions in private pension fund
cash; 2) roll over additional billions in interest and principal
payments on GoA securities held in private pension fund portfolios;
and 3) absorb an estimated US$ 4 billion (approx. 1% of GDP) in 2009
worker social security contributions into current, spendable tax
revenue.

2. (SBU) The nationalization initiative reportedly originated with
Chief of Cabinet Sergio Massa - who previously ran the public social
security administration - in response to a request for new revenue
ideas by former president Nestor Kirchner. A number of local
economists criticized the GoA action, calling it an asset grab and
clear evidence that is unable to meet upcoming 2009 financial
obligations with current resources in light of a deteriorating
global economic environment, profligate spending plans linked to
upcoming interim legislative elections, and spiking 2009/2010
sovereign debt maturities. Local equity markets reacted negatively
to the rumored move on Monday, bucking an international rally to
drop 3.3%, and Argentina's country risk premium widened to over
1,400 basis points. Opposition leaders are accusing the government
of grabbing new money to fund its current patronage system at the
expense of future retirees. In counterpoint, union leaders
supporting the Kirchner administration praised the move. Local
analysts are split over whether obtaining Congressional support for
the nationalization will be difficult. Some argue that the
initiative will appeal to the ruling coalition in Congress who
support populist measures; others expect an outcry from those
invested in the private system will lead to a fight in Congress. A
number of local analysts are portraying this nationalization as yet
another improvised, top-down decision to address immediate financial
needs with little thought given to possible social and legal
considerations or to its impact on Argentina's domestic financial
markets. End Summary.

----------------------------------------
GoA to Nationalize Private Pension Funds
----------------------------------------

3. (U) President Christina Fernandez de Kirchner (CFK) is planning
to announce October 21 that her administration will submit a bill to
Congress to nationalize Argentina's private pension system. A
formal rollout detailing the proposed nationalization is scheduled
for the evening of October 21.

4. (U) State-owned news agency Telam reported that the GoA had
decided to "reform" the social security system because, according to
Amado Boudou, head of public social security system ANSES, the
current financial crisis had demonstrated that the private pension
system is "conceptually flawed." Given recent significant losses in
the market value of private pension fund portfolios due to the
global financial crisis, Boudou said, the GoA would "have to rescue
in one way or another the future retirees that contribute to the
system." Another senior GoA official is reported saying: "Just as
the United States rescued the banks, we are going out to rescue the
people." Media reports that Boudou spent the afternoon of October
20 with Chief of Cabinet Sergio Massa and Legal and Technical
Secretary to the President Carlos Zannini drafting the initiative
and the legislative proposal.

--------------------------------------------- ----
Private Pensions: 14-Year Old Fully Funded System
--------------------------------------------- ----

5. (U) Argentina's social security system was partially privatized
in 1994, with workers given the right to choose between affiliating
with a "pay-as-you-go" public pension system and a "fully funded"
private pension system. As of August 2008, 9.5 million workers (39%
of the Country's working age population) had elected to belong to
the private pension fund system. Of this 9.5 million, only 3.6
million are active contributors, compared to roughly 5 million
active contributors in the state system.

6. (U) Receiving annual inflows of approximately ARP 13 billion (US$
4 billion) in worker contributions, the private pension system is

Argentina's main institutional investor. As of September 30, 2008,
private pension fund system assets totaled ARP 94.4 billion (US$ 30
billion, 9.4% of GDP). A full 60% of these assets are invested in
federal government securities, which, according to news reports,
have lost up to 40% of their value in the past year. The private
system is currently managed by ten independent fund administrators,
known as AFJPs. The top four funds that control roughly 60% of the
local private pension fund market are: Consolidar, run by
Spanish-owned BBVA Banco Frances; Maxima, run by HSBC Bank; Met
AFJP, run by U.S.-owned MetLife; and Origenes, run by the
Dutch-owned ING Group.


7. (SBU) In what many now see as an interim step towards full
nationalization, in 2007 the GoA gave private pension fund members
the option to transfer out of their AFJPs and to return to a
state-run defined payment system. The vast majority of AFJP members
chose not to convert to the public system. At that time, the GoA
also determined that new entries into the workforce were to default
to the state plan if they did not specifically elect AFJP
membership.

--------------------------------------------- --
AFJP Nationalization - Financial Relief for GoA
--------------------------------------------- --

8. (SBU) The nationalization initiative reportedly originated with
Chief of Cabinet Sergio Massa - who previously ran the public social
security administration - in response to a request for new revenue
ideas by former president Nestor Kirchner. According to local
analysts, nationalizing the private pension system would allow the
GoA to tap between US$ 2.5 and 4 billion that AFJPs currently hold
as cash and time deposits in the banking system. It would also
allow the GoA to roll over the US$3 billion the GoA would have had
to pay AFJPs in 2009 in interest and principal payments on GoA
securities held in AFJP portfolios. In addition, AFJP
nationalization into a pay-as-you-go system implies that workers'
social security contributions of an estimated US$ 4 billion (approx.
1% of GDP) in 2009 would be accounted as tax revenue, allowing the
GoA to spend additional funds ahead of October 2009 mid-term
congressional elections.

----------------------------
Economists, Pundits Negative
----------------------------

9. (SBU) A large number of local economists criticized the GoA
action, calling it an asset grab and clear evidence that the GoA
sees itself unable to meet upcoming 2009 financial obligations with
current resources in light of a deteriorating global economic
environment, robust spending plans linked to upcoming interim
legislative elections, and spiking 2009/2010 sovereign debt
maturities. Aldo Abram of think-tank Exante called the GoA move
"another swindling of future retirees." Alberto Bernal, head of
macroeconomic strategy at Bulltick Capital Markets, argued
"Argentina is moving back 20 years in terms of capital market
development via this decision." Juan Llach, former Secretary of
Economic Programming in 1994 (when the private pension system was
created), called the nationalization a negative development. "It
would be quite bad if (any GoA action) impeded the ability of AFJPs
to save, since they are an important part of the little market
demand for GoA securities today." And constitutionalist Gregorio
Badeni directly questioned GoA motives: "The AFJP system was
implemented precisely to guard against the state appropriating
(private) resources, because this is what it has traditionally done.
But evidently, the GoA needs fresh money that it can't get from
other sources."

--------------------------------------------- -
Markets Drop on Pension Nationalization Rumors
--------------------------------------------- -

10. (SBU) Markets echoed negative economist sentiments on Monday.
As rumors of the scope and impact on the domestic financial system
swirled, Argentina's Buenos Aires Stock Exchange Merval equity index
lost 3.3% (and 7.1% for a more restrictive Argentine-only index),
countering a global rally that was led by +/- 4% jump in major U.S.
indices and an 8.3% gain in Brazil's Bovespa. Argentine financial
sector stocks were particularly hard hit: Grupo Financiero Galicia,
which owns the country's biggest bank, dropped 15%; Banco Macro
dropped 13.4%, and Banco Frances lost 9.8%. Argentine bonds fell an
average 1.7% (with the GoA sovereign Peso Discount Bond dropping
12%) and Argentina's J.P. Morgan Emerging Market Bonds Index country
risk premium widened to more than 1,400 basis points. (Note: On
October 21 as of mid-day trading, the market continued its downward
descent, the Merval equity index dropping 12%, the JPMorgan country
risk widening almost 200 basis points to 1,593 basis points,
benchmark bonds such as the ARP Discount, ARP Par and Boden 2012

falling 16%, 7%, 9%, respectively.)

--------------------------------------------- ---
Opposition Condemns Nationalization, AFJPs Quiet
--------------------------------------------- ---

11. (SBU) Opposition leaders panned the government's nationalization
plans, accusing the government of exploiting domestic angst over
recent international market volatility. They charged that the GoA
was seeking to obtain a massive pool of new money to fund its
current patronage system at the expense of future retirees. Radical
party Chairman Gerardo Morales called it "an outright and desperate
grab for pensioners' savings" by the GoA. PRO congressman Esteban
Bullrich called it "a violation of private property." Elisa Carrio,
Civic Coalition opposition leader, said "the measure is not to
improve the pension system but to raid retirement funds and raise
funds."

12. (U) Representatives of the 10 individual AFJPs and the head of
the AFJP union (and former Under Secretary of Finance) Sebastian
Palla all maintained a studied silence October 20 in the face of
growing speculation on details of the GoA's nationalization
initiative. Local media reports that these representatives were
seeking audiences with Chief of Cabinet Massa and confirmed
privately that they had been neither consulted nor given any early
notice of the GoA's plans.

----------------------
Union Leaders Euphoric
----------------------

13. (SBU) Left-wing union leaders supporting the Kirchner
administration were uniformly upbeat and described the
nationalization as all but a done deal. Hugo Moyano, leader of the
General Confederation of Labor (CGT - Teamsters), called the move
positive for Argentina's union workers and said the nationalization
"will expose the great swindle that was the creation of the AFJPs."
Leonardo Fabre, Secretary General of APOPS, the union associated
with state-run social security system ANSES, said "God willing, the
president will announce tomorrow a return to the state-run system.
The private system does not work. It loses money. You can't have a
system in which people lose their retirement benefits." The only
union sour notes are coming from representatives of the 10,500
private pension funds employees who are worried their jobs would be
lost in a nationalization exercise.

------------------------------------
Prospects for Congressional Approval
------------------------------------

14. (SBU) Local analysts are split over whether the GoA will
encounter difficulty in obtaining Congressional support for the
nationalization of the AFJPs. Some argue that a nationalization of
the AFJPs would likely be supported by the 61% of the working
population who currently belong to the public pension system, and so
will appeal to the ruling coalition in Congress, who tend to support
populist measures. Other analysts argue that the popular outcry
from those invested in the private system will lead to a fight in
Congress. The Kirchners' coalition in Congress, while weakened
after the Senate's earlier vote against variable agricultural export
tariffs, still commands simple majorities in both legislative
chambers.

15. (SBU) The abrupt and vague nature of the nationalization plan
may well spark enough public concern that even ruling party-aligned
deputies and senators will show caution. The push-back may come not
over "nationalization" in principle but over details, including what
entity controls contributions and funds, whether the resources are
held in trust or are made available to the government, and what sort
of payouts are guaranteed under a new system. If public criticism
grows, then Senate approval may be harder to obtain, just as it was
over the government's ill-fated legislation raising export tariffs
on agricultural commodities. As Senators are more easily
recognizable in their provinces (three Senators per province) than
the numerous congressional deputies, they may be less inclined to
vote for legislation that does not have their constituencies'
support.

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Comment
-------

16. (SBU) A senior industrialist close to former President Nestor
Kirchner told us Kirchner recently confided to him that "I need to
control all the money" to address economic pressures linked to the
global financial crisis. This private pension fund nationalization
will flow considerable new cash resources to GoA coffers -- an
estimated extra US$ 4 billion a year (1% of GDP) in worker

contributions. The counterpoint deterioration in long-term debt
dynamics linked to expanded retirement payment obligations is a
problem future governments will have to address. These new monies
certainly will be welcomed by the Kirchner administration given
domestic spending imperatives tied to upcoming mid-term October 2009
elections. Signs of an expansionist offensive are already apparent.
On October 20, the GoA announced it will restore natural gas
subsidies for residential users. Three days earlier, Planning
Minister De Vido announced the GoA would launch a large
infrastructure program to offset the negative impact on the economy
of the global financial crisis.

17. (SBU) A number of local analysts say they view this private
pension fund nationalization initiative as a page out of a
now-standard CFK administration playbook: an improvised, top-down
decision to address immediate needs (in this case financial), with
the details to be worked out later and the longer term consequences
(in this case the potential social and legal implications and the
impact on Argentina's domestic financial markets) given little
thought. Septel will analyze these potential consequences, which
will likely be significant: for the past 14 years, private pension
fund investments have been an important source of liquidity in
domestic financial markets, and their nationalization will
substantially reduce the size of Argentina's capital market by
eliminating its main institutional investor.

WAYNE

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