Cablegate: Blow-by-Blow On Argentina's Nationalization of Pensions And

DE RUEHBU #1475/01 3011938
O 271938Z OCT 08



E.O. 12958: N/A
SUBJECT: Blow-by-Blow on Argentina's Nationalization of Pensions and
Resulting Financial Panic



1. (SBU) Argentine President Cristina Kirchner de Fernandez has
justified the GoA's nationalization of Argentina's private pension
system as a "rescue of retirees," although local analysts agree that
the real reasons are financial. Under Judicial order, the pension
funds were raided and blocked from making any transactions last
week. They resume operations today, under close surveillance of the
Superintendency of Pension Funds, and amid expressions of concerns
that the funds' foreign assets may become attachable by holdout
bondholders and reports that the GoA may order them to bring foreign
assets home. The Argentine Congress begins deliberations on the
nationalization October 29, and the GoA has expressed hopes of
pushing it through by the end of November, if not sooner. Local and
foreign economists and analysts have criticized the measure, calling
it a blatant asset grab and a sign of GoA desperation for funds in
order to meet spiking 2009 and 2010 debt maturities. The GoA
intervened heavily in the markets last week to halt panic selling of
Argentine stocks and bonds. The Central Bank (BCRA) also intervened
heavily, selling dollars to bolster the peso. Nevertheless, the
banking sector remains concerned about the possibility of
large-scale capital outflows. Bank contacts expect greater GoA and
BCRA intervention in the weeks to come. They argue that the markets
read the GoA's action as a sign of dangerous fiscal weakening in the
face of plummeting commodity prices and a rapidly decelerating
economy, with some economists predicting recession in 2009. End

2. (U) This is a companion piece to Ref A, providing added detail
about the GoA's decision to nationalize the private pension funds
(known in Argentina as AFJPs), the market's fiercely negative
reaction, and increasing concerns about economic and financial
stability in Argentina going forward.

--------------------------------------------- -------
President moves to nationalize private pension funds
--------------------------------------------- -------

3. (SBU) In their October 21 formal announcement of plans to
nationalize private pension funds (known locally as AFJPs),
President Cristina Kirchner de Fernandez (CFK) and Amado Boudou,
head of Argentina's Social Security System (ANSES), declared the
"end of the failed private system," and characterized their
initiative as "the rescue of future retirees from uncertainty and
bad management." Playing to traditional Peronist/statist
supporters, Boudou noted that "some countries decide to rescue banks
and companies, but the President chose to rescue regular people and
retirees." Both he and CFK promised "predictability and
sustainability" for future pensioners, and assured Argentines the
GoA would use the nationalized funds responsibly.

--------------------------------------------- --------
In the works for long time; global crisis gave excuse
--------------------------------------------- --------

4. (SBU) Ambassador and EmbOffs have heard from contacts that the
nationalization of AFJPs' $30 billion in assets has long been on the
Kirchners' "to-do" list, but recent international market
developments, and increasing concerns about the GoA's lack of access
to sufficient funds to cover spiking debt payment obligations during
2009 and 2010, pushed it up on their agenda. Cabinet Chief Sergio
Massa (who was head of ANSES from 2002 to 2007) and his close
associate, current ANSES Director Amado Boudou, originated and
developed the specific idea to nationalize the private pension
system. However, former President Nestor Kirchner is reputed to
have focused GoA attention on the nationalization concept by
regularly asking for ideas to get more money into the public coffers
to meet financing needs over the next several years, both for debt
payments and to continue subsidies and public works in advance of
the 2009 midterm elections. While Boudou, in recent interviews with
media, stated that the GoA plans to use AFJP resources for public
works and not directly for debt payments, budget monies are


BUENOS AIR 00001475 002 OF 005

Weak AFJP response

5. (SBU) As reported in Ref B on the concerns of the only
U.S.-controlled AFJP (MetLife), the AFJPs as a group have not
reacted strongly against the initiative. Indeed, AFJP contacts tell
Post that there is a fierce debate ongoing between those few AFJPs
that want to pursue a confrontational approach and the majority that
are worn down by GoA interference in their businesses and just want
to negotiate an acceptable exit. This resignation has been
compounded by the aggressive judicial raids an Argentine judge
ordered last week on all the AFJPs (reportedly at the request of the
Casa Rosada).

6. (SBU) The ostensible purpose of the raids was to secure computer
systems and information and check for fraudulent practices.
However, MetLife officials note that the Superintendency of Pension
Funds already had all of the information available, and numerous
AFJP sources allege to Post that the real reason is to intimidate
the AFJPs and their employees. The Judge also ordered a seven day
freeze on AFJP transactions. (Comment: The AFJPs will likely all
sue the GoA, if only to meet their fiduciary responsibilities. Many
contributors will also likely file lawsuits. Moreover, the four
foreign-owned AFJPs may eventually decide to seek redress under
their countries' Bilateral Investment Treaties with Argentina.
MetLife and HSBC, which runs the AFJP "Maxima," informed Econoffs
that they will consider the advisability of ICSID arbitration after
Congress passes the nationalization law and the GoA has clarified
the compensation - if any - it is willing to pay.)

--------------------------------------------- ---
Concerns about Asset Repatriation and Attachment
--------------------------------------------- ---

7. (SBU) The AFJPs resume activity today under tight surveillance
from the Superintendency of Pension Funds, headed by ANSES Director
Boudou. Boudou has limited AFJP trading in currency and Argentine
bonds until Congress passes the bill, and is also strictly
controlling the AFJPs over USD 2 billion in term deposits in the
local banking system. The AFJPs' ownership of billions in foreign
stocks, mutual funds, bonds, and other securities (including holding
significant equity positions in dozens of U.S. companies) has raised
questions about whether these foreign assets might be open to
attachment by the so-called "holdout bondholders." Local media
report that the GoA will require the AFJPs to repatriate their
foreign assets. While this will imply billions in capital inflows,
helping the BCRA to bolster the exchange rate, it is unclear whether
foreign lawsuits could block these transfers (since AFJPs are still
in private hands, but clearly following GoA instructions). The
AFJPs also hold significant stakes in many local companies
(including U.S.-origin companies), which has raised fears about
increased GoA influence and perhaps direct intervention in the
private sector. GoA sources have sought to downplay these fears,
and Boudou has also stated that since ANSES is prohibited from
holding more than 10% in any company, it will divest these excess
shares over 4-5 years to meet the limit.

GoA Hopes for Quick Congressional Passage

8. (SBU) MetLife officials tell Post they are currently preparing to
participate in the initial deliberations of the GoA's AFJP
nationalization bill, beginning October 29 before the Chamber of
Deputies' Budget committee. The AFJPs' Union (of which Met is a VP)
will present the industry's view. According to October 27 press
reports, the GoA is hoping to get the bill through the full Congress
in November, despite growing signs of opposition (Ref A). Local
media is reporting increasingly combative exchanges between GoA
officials and opponents in Congress, with the GoA rejecting many of
the changes to the bill that opponents in Congress are demanding.
Most press commentators still seem to believe that at most the
bill's opponents in Congress will only succeed in delaying it, and
possibly modifying it somewhat, although the fight will clearly be
tougher than GoA officials expected. (Comment: The Ambassador
heard from sources over the weekend that the President instructed
her Ministers Friday afternoon to get the AFJP bill passed as soon
as possible and through the Chamber of Deputies by October 31. She
and Nestor Kirchner are apparently worried about a drop in the value

BUENOS AIR 00001475 003 OF 005

of AFJP holdings, which is why they pushed for the judicial system
to impose the restraining order on AFJPs' trading activities. They
had originally hoped to get the bill through Congress in two weeks.
Realizing that will not happen, they have imposed new restraints on
AFJP operations from now on. End Comment).

Economists and Analysts highly critical

9. (SBU) In contrast to the AFJPs' relatively muted response, local
and foreign economists and analysts have loudly criticized the
measure, calling it a blatant asset grab and sign that the GoA is
desperate to raise funds to pay 2009 and 2010 debt obligations and
also to avoid cutting spending as the economy deteriorates and the
2009 mid-term elections near. The GoA's problem is twofold: lack of
access to financing and expectations of lower revenues, both
coinciding with a period of increasing financing needs. Argentine
bond yields have skyrocketed in response to the global financial
crisis, dashing the GoA's hopes of raising new cash through a debt
deal with holdout bondholders or smoothing out the spike in
amortizations during 2009-2011 through a mini-debt swap of bonds
coming due during this period (see septel). (Current Argentine bond
yields of well over 20% also likely eliminate the possibility of
placing GoA debt with Venezuela anytime soon.) These circumstances,
along with expectations of lower revenues going forward, lead all of
Post's contacts (including at the BCRA) to conclude that the GoA's
primary motivation for nationalizing the AFJPs is financial (and not
to "rescue" retirees).

--------------------------------------------- -------
GoA fumbles to respond to markets' negative reaction
--------------------------------------------- -------

10. (SBU) The freefall in stock and bond prices October 21-22 in
reaction to the GoA's announcement has created the most serious
financial crisis since the 2001-02 financial meltdown. The Buenos
Aires stock market (Merval) dropped 20% between the open of trading
October 21 and close of trading October 22, and at one point on
October 22 hit a low 26% below the October 20 close. Argentina's
country risk premium, as measured by JPMorgan's EMBI+, widened 575
basis points during the two days, closing on October 22 at 1,970 bps
-- at one point exceeding 2,000 bps. The 5-year Credit Default Swap
(CDS) for Argentina spiked up several thousand basis points to over
50% on October 22, as reported by Bloomberg. (Other estimates for
CDS are in the 30% to 40% range, but the fact is that no one is
closing CDS contracts at these levels, so the percentage is

11. (SBU) The BCRA maintained the peso at 3.24/dollar on October 22
through heavy selling of dollars on the spot and futures markets.
Traders estimate spot market sales of $400 million on October 21 and
$130 million on October 22. For the week, the peso depreciated 2%,
closing at 3.29/dollar, despite continuing, strong BCRA
intervention. Traders estimate that the BCRA sold more than $1
billion in reserves from October 20-24. There are strong signals
that the market is expecting a significantly weaker peso going
forward. The one-year NDF (non-deliverable forward contract, traded
outside of Argentina) increased from 4.35 pesos/dollar on October 17
to 5.50 pesos/dollar on Oct 24, while the one-month NDF increased
from 3.38 to 3.75 for the same period. In local currency trading,
which the BCRA is able to manipulate by selling dollars forward, the
one month contract is for 3.34 pesos/dollar and the one-year is 3.81

12. (SBU) Local analysts believe that the GoA was caught completely
off guard by the intensity of the adverse market reaction, and has
since struggled to cobble together a coherent response. BCRA
contacts confirm that 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. The Merval was mostly flat
October 23-24, and country risk tightened 185 basis points near the
end of the week. (The Merval closed down 27% for the week, for an
accumulated loss of almost 60% for year to date. The EMBI+ finished
the week at 1,832 bps, still the highest point since the 2005 debt
restructuring.) However, short-term bonds continued their free
fall. In fact, Argentine Bonds had their worst week since the 2005
debt restructuring. USD bond prices dropped on average 35% from
October 20-24, and benchmark bonds such as the Boden 2012, NY USD

BUENOS AIR 00001475 004 OF 005

Discount and NY USD Par decreased 28%, 39% and 11%, respectively
(giving them yields of 60%, 30% and 17%, respectively).

13. (SBU) According to the press, the GoA is considering further
"market-friendly" actions to counteract the negative perceptions of
the AFJP nationalization. Banco Galicia's Chief Economist told
Econoff October 23 that he expects the main thrust to be further GoA
bond repurchases, but on a large scale. For HSBC's Chief Economist,
GoA bond purchases are actually the "acid test" of whether the GoA
is ready to prove its "willingness to pay" its debts. With bond
prices at almost record lows, he believes it would be insane for the
GoA not to buy back bonds (rather than wait until maturity). Both
economists believe that done on a large scale, these repurchases
would go a long way to calming market concerns about possible
default during 2009 or 2010.

--------------------------------------------- ---
The specter of Recession in 2009 raises its head
--------------------------------------------- ---

14. (SBU) Markets are extremely nervous about expectations that the
GoA's fiscal situation will weaken in the face of sharply lower
prices for Argentina's main commodity exports and the rapid
deceleration of the economy. For the first time, Post is starting
to hear economists predict recession in 2009. Even before the GoA's
decision to nationalize AFJPs, both Banco Galicia and HSBC lowered
predictions for 2009 in response to falling commodity prices,
expecting a 1-2% contraction in GDP. (Septel reports that BCRA
President Redrado still expects economic output to stay positive in

15. (SBU) Their main concern now is whether this latest crisis will
result in a large-scale capital outflows from the financial system.
As of October 24, banks surveyed by Post report much higher than
normal "dollarization" (conversion of peso deposits to dollar
deposits and dollar purchases), but still below the worst days in
April and May during the farm crisis. BCRA contacts insist that
they can handle current levels of retail withdrawals. Large deposit
withdrawals by institutions, though, would be cause for alarm, but
are not a problem at present.

16. (SBU) Post's contacts contend that markets are also responding
to the growing fear that anything is possible now and no sector is
immune from GoA intervention. 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. AFJPs collectively have been the largest
institutional investor in Argentina. Without them, competition will
increase for scarce bank lending and GoA lines of financing,
potentially crowding out SMEs from credit markets, further
concentrating lending under state-owned banks (the two largest
state-owned banks already provide over 20% of total credit to the
market), and exacerbating the economic downturn. In the face of this
probable credit crunch, banks now worry they may be the GoA's next
target. Sourcing many of Post's closest banking sector contacts, an
October 22 Cronista article raises the concern that the GoA may
respond to the unavailability of credit by relying on traditional
Peronist interventionist policies (of the 1970s), e.g., capping
interest rates, forcing lending, putting sharper controls on capital
flows, and having official and parallel exchange rates.


17. (SBU) Several private sector contacts have argued to Ambassador
that, in many ways, the global economic crisis has helped the
Kirchners: 1) inflation is moderating; 2) energy use is not growing
and will likely stay flat with lower economic activity, thus helping
to avoid energy cuts to consumers and allowing the GoA to reduce
energy subsidies; 3) unions have backed off demands for wage
increases; 4) the GoA has a plausible excuse to pursue policies that
please its political base (e.g., protectionist trade measures,
nationalization of AFJPs); and 5) the crisis gives the government a
nationalistic rational with which to slap out at criticism from the
opposition. However, such relief comes at a price: a potentially
steep recession just prior to mid-term legislative elections. The
GoA's ill-considered decision to nationalize AFJPs will only
accelerate the likelihood of a precipitous downturn, even if many in

BUENOS AIR 00001475 005 OF 005

the GoA relish the possibilities of launching big new public works
programs given extra cash. Banco Galicia's Chief Economist told
Econoff that Cabinet Chief Sergio Massa initially was considering
using a sharp devaluation of the peso as the means to maintain
competitiveness and protect the fiscal surplus (and avoid default in
2009), and he consulted numerous economists and bankers on this
policy option. However, former President Nestor Kirchner reportedly
nixed the deal, worried that the devaluation would lead to a spike
in inflation and renewed union demands for wage increases, which in
his mind was unacceptable prior to the 2009 mid-term elections.
This led Massa to pursue Option 2: AFJP nationalization.


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