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Cablegate: Argentina: Lavagna Decries Goa Crisis Initiatives, Projects

VZCZCXYZ0020
PP RUEHWEB

DE RUEHBU #1696/01 3502035
ZNR UUUUU ZZH
P 152035Z DEC 08
FM AMEMBASSY BUENOS AIRES
TO RUEHC/SECSTATE WASHDC PRIORITY 2689
INFO RUEATRS/DEPT OF TREASURY WASHINGTON DC
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC
RUEHRC/DEPT OF AGRICULTURE USD FAS WASHINGTON DC
RUEHC/DEPT OF LABOR WASHINGTON DC
RHMFIUU/HQ USSOUTHCOM MIAMI FL
RUCNMER/MERCOSUR COLLECTIVE

UNCLAS BUENOS AIRES 001696

SIPDIS
SENSITIVE

E.O. 12958: N/A
TAGS: ECON EFIN ETRD EINV AR
SUBJECT: Argentina: Lavagna Decries GoA Crisis Initiatives, Projects
Stagflation in 2009, Warns on Money Laundering

Ref:(A) Buenos Aires 1682
(B) Buenos Aires 1667
(C) Buenos Aires 1653

This cable contains sensitive information - not for internet
distribution.


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

1. (SBU) Former Economy Minister and Presidential Candidate Roberto
Lavagna in a December 11 meeting with Ambassador projected
stagflation in 2009, with zero percent GDP growth but with real
inflation not falling below 20%, and warned about money laundering
concerns related to GoA legislation; see para 3 action request.
Lavagna said the GoA will command sufficient resources to remain
current on debt principal and interest payments coming due in 2009.
Lavagna doubted there would be an economic crisis in 2010 so long as
the GoA sustains "minimally rational" policies and can sustain
adequate foreign currency reserves. The international financial
crisis' impact on Argentina has been limited relative to its impact
on globalized Brazil given this country's isolation from
international capital markets. Nevertheless, Argentina would have
been in better shape to confront this crisis had the Kirchner
administration not abandoned the anti-cyclic fund Lavagna had
established in October 2005. Accumulating rainy day savings would
have done much to sustain business confidence and stem capital
flight in current uncertain times, but Lavagna called such prudence
incompatible with the Kirchner administration's vast appetite for
public spending.

2. (SBU) Lavagna called unworkable the recently announced GoA
package of public works and consumer/industrial credit stimulus
measures. As an alternative, he recently proposed a six-month
reduction in Argentina's 21% VAT tax to broadly stimulate
consumption and to address the regressive nature of the VAT on
poorer consumers suffering from the decline in economic activity.
Lavagna called the nationalization of the private pension funds
(AFJPs) another example of the GoA's penchant to interfere with
private sector players, including the GoA's recent tilting against
U.S. energy major AES's Edelap electricity distribution affiliate
and its just-announced intent to buy out Lockheed Martin's Cordoba
aviation facility.

3. (SBU) Lavagna called the GoA's capital repatriation proposal
"misguided." Over US$28 billion in capital flight over the past
three years left because of the Kirchner administration's failure to
create and sustain confidence in its economic management and because
of the GoA's regulatory and tax policy gamesmanship. Lavagna feared
that the only flight capital that would return to Argentina given
the program's limited safeguards on investigating fund sources under
this minimally supervised program would be "dark" money. A group of
prominent economists, politicians, and ex-GoA officials had joined
his blog appeal against this GoA proposal. Comment: Post would very
much appreciate immediate guidance/input from Washington on
GoA-supported legislation to allow the penalt-free return of
capital to Argentina that is likely to pass this week. Many
commentators have highlighted the chances of much dirty money
flowing in via this legislation. End Comment.

4. (SBU) Finally, Lavagna argued that the opposition will have a
hard time uniting in advance of October 2009's mid-term elections
given the spoiler role played by Elisa Carrio. "Carrio and Nestor
Kirchner are useful to each other," Lavagna argued, since both are
trying to destroy the center to ensure that no "rational" opposition
can coalesce.

End Summary

-----------------------------------------
Stagflation in 2009 But No Funding Crisis
-----------------------------------------

5. (SBU) Ambassador met December 11 with former Economy Minister and
2007 opposition presidential candidate Roberto Lavagna to review
Lavagna's views on Argentina's current economic performance, the
impact the international financial crisis has had here, upcoming
mid-term 2009 elections, the private pension fund nationalization,
the GoA's stimulus package and Lavagna's alternative VAT tax
reduction proposal, and Lavagna's vocal opposition to the GoA's
capital repatriation proposal.

6. (SBU) With the U.S. economy's recession now officially dated to

December 2007, Lavagna said that Argentina's economic downturn will,
in retrospect, be seen to have begun in the second trimester of
2006. He projected stagflation in 2009, with zero percent GDP
growth but with real inflation hovering around 20%. Despite the
significant drop in federal tax revenues that such decline in growth
implies, the GoA will, he said, command sufficient resources to
remain current on debt principal and interest payments coming due in
2009. This is due to the cushion provided by the nationalization of
private pension funds (which allows both the automatic rollover of
GoA government debt they held along with roughly US$ 4 billion per
year in contributor inflows) as well as to new budget law provisions
that allow the GoA access to an increased share of central bank
(BCRA) reserves and to (state-owned) Banco de la Nacion (BNA)
resources (Ref A). (Comment: Economists estimate that having access
to AFJP funds will reduce GoA annual financing needs by US$ 4-5
billion, with potential new lending from the BCRA and BNA topping
US$ 6 billion.)

7. (SBU) Lavagna doubted there would be an economic crisis in 2010
so long as the GoA sustains "minimally rationale" policies.
Maintaining adequate foreign currency reserves will be a key medium
term challenge for the GoA, since ongoing capital flight ("to
Uruguay, safety deposit boxes and to mattresses") is draining
central bank coffers and the 2007 and projected 2008 US$12 billion
trade surplus will "evaporate" in 2009 with the decline in
agricultural commodity prices.

--------------------------------------------- ----
VAT Reduction Alternative to GoA Stimulus Package
--------------------------------------------- ----

8. (U) Ambassador noted recent media coverage on Lavagna's doubts
about the efficacy of the recently announced (Ref B) GoA package of
public works and consumer/industrial credit stimulus measures. On
December 7, in an interview with Argentina's largest circulation
daily Clarin, Lavagna called these stimulus measures unworkable. As
an alternative he had recommended a six-month, two percentage point
reduction in Argentina's 21% VAT, with an additional one percentage
point VAT reduction for primary consumption basket products,
targeted at poor consumers. In that interview he called his
proposal the best way to broadly stimulate consumption and to
address the regressive nature of the VAT consumption tax on poorer
consumers impacted by the decline in economic activity.

9. (SBU) Lavagna noted that, as Economy Minister in the aftermath of
the 2001/2 economic crisis, he had implemented a similar two
percentage point reduction in the VAT in 2002. He said it had had
an immediate and significant psychological impact on the populace,
booting overall consumption and reducing headline prices on a number
of consumer goods. The GoA's automotive and consumer durable
stimulus packages won't be effective, Lavagna said; their
implementation rollout has been slow and painful with squabbling
between Kirchner administration officials (principally between new
Production Minister Debra Giorgi and Internal Commerce Secretary
Guillermo Moreno) over their structure already receiving
high-profile media attention. Lavagna offered little hope his
alternative proposal would be adopted, saying "I don't talk to
Nester Kirchner any more, though I know he looks at my suggestions
on my website."

--------------------------------------------- -
Lack of Counter-cyclic Funds Exacerbate Crisis
--------------------------------------------- -

10. (SBU) The crisis is having a major impact on Brazil's globalized
economy, Lavagna said, but less of one on Argentina, which is
relatively isolated from international capital markets. The
Kirchner administration's worst mistake, he said, was in abandoning
the anti-cyclic fund Lavagna had established in October 2005 shortly
before his departure from government, with a goal of accumulating
some US$15 billion. Chile established a similar fund years ago and
has accumulated US$23 billion to date. The idea of accumulating
rainy day savings, which would have done much to sustain business
confidence and stem capital flight in these uncertain economic
times, were simply incompatible with the Kirchner administration's
insatiable appetite for public spending, he said. Such public
spending had increased 50% in both 2006 and 2007 and had increased
roughly 41% to date in 2008. (Lavagna cautioned that changes in GoA
budget calculation methodology were understating the rate of
expansion of public spending and that the increase in 2008 public
spending to date has in fact been closer to 50%.) Lavagna said that
he had also proposed a reduction in taxes for employment-generating
small business in October 2005, but both this and his anti-cyclic
fund proposals were abandoned following the subsequent December 2005
cabinet shuffle, where Lavagna was relieved of his position.


--------------------------------------------- ----
AFJP Nationalization: Standard GoA Modus Operandi
--------------------------------------------- ----

11. (SBU) Lavagna called the AFJP nationalization just one more
example of the GoA's penchant to interfere with private sector
players. He called the GoA's recent tilting against U.S. energy
major AES' Edelap electricity distribution affiliate (Ref C) and its
just announced intent to buy out Lockheed Martin's Cordoba aviation
facility are only the latest in a string of GoA meddling that
included actions to expropriate Spanish-owned flag air carrier
Aerolineas Argentina and to ensure friendly local hands hold an
equity stake in energy major Repsol/YPF.

--------------------------------------------- ----
Blog on "Misguided" Capital Repatriation Proposal
--------------------------------------------- ----

12. (SBU) Lavagna said he had been focusing his attention and
blog-writing over the past few weeks on the GoA's "misguided"
capital repatriation proposal (Ref A). US$28-odd billion in capital
flight over the past three years ($3 billion in 2006, $8.8 billion
in 2007 and $16.5 billion to date in 2008) had left because of the
Kirchner administration's failure to create and sustain confidence
in its economic management, he said, and more specifically, because
of the GoA's serial regulatory and tax policy gamesmanship. Lavagna
feared that the only flight capital that would return to Argentina
under this minimally supervised program would be "dark" money.
"Good businesses want confidence, not easy repatriation fixes," he
added, noting that Mexican President Calderon (presumably referring
to his own experience with narco-traffickers) had earlier warned
about allowing such funds easy entry. "Once you let them in, you'll
never get them out," he quoted Calderon as saying.

13. (SBU) Lavagna said that a number of prominent economists,
politicians and ex-GoA officials had joined his blog appeal against
the GoA proposal to facilitate capital repatriation with only
limited safeguards on investigating fund sources. These include
former tax administration director Alberto Abad, former Economy
Minister Martin Lousteau, opposition PRO politicians Federico Pinedo
and Esteban Bullrich, former Cordoba governor Jose Manuel de la
Sota, former Menem Vice Economy Minister Juan Jose Llach and former
Buenos Aires province governor Felipe Sola. Lavagna said that these
officials had agreed that, if/when they returned to public office,
they would take steps to thoroughly investigate the sources of funds
entering Argentina under this repatriation proposal. Comment:
Many commentators have, in the press, made similar warnings about
dirty money flowing in, but the measure is set to be voted on by the
Senate this week. Post would appreciate Washington guidance on this
issue. End Comment.

------------------------------------------
Weak Opposition in 2009 Mid-Term Elections
------------------------------------------

14. (SBU) The opposition will have a hard time uniting against the
GoA in advance of October 2009 mid-term elections given the spoiler
role that opposition figure (and his fellow rival in last year's
presidential campaign) Elisa Carrio is playing, Lavagna said. He
noted that she had declined to join the large group of opposition
figures who supported Lavagna's anti-capital repatriation blog.
"Carrio and Nestor Kirchner are useful to each other," Lavagna
argued, since both are trying to destroy the center to ensure that
no "rational" opposition can coalesce.

15. (SBU) In the Province of Buenos Aires, Lavagna said that his own
votes in the 2007 presidential elections had been limited by Nestor
Kirchner's decision not to allow a single ballot law (on the model
of one in Cordoba province) to move forward. (Lavagna lost the 2007
presidential elections with 16.9% of the popular vote, vs. 23.0% for
Elisa Carrio and 45.3% for Cristina Fernandez de Kirchner). Kirchner
operatives paid people ARP 100 (roughly US$ 30) to remove opposition
party ballots from voting booths, Lavagna said, noting "we just
weren't ready for these tactics."

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

16. (SBU) Following his presidential election defeat in December
2007, Lavagna has maintained a low profile, engaging on specific
policy issues and defending his 2002-5 tenure as Economy Minister
under President Duhalde and Nestor Kirchner. Predictably, Lavagna
has been largely silent on two still-controversial economic

initiatives he championed during this tenure: the increased reliance
on new taxes that primarily accrue to the federal government that
substantially augmented the president's power and control over
provincial governors, and sustaining an undervalued currency that
has contributed substantially to domestic inflation. Lavagna had
been written off by some analysts as hopelessly politically naive
following a highly publicized February 2008 post-election
reconciliation meeting with Nestor Kirchner during which Lavagna
endorsed Kirchner's efforts to lead and reorganize the Peronist
party. Lavagna's subsequent public interventions have been limited
to critiques of GoA economic initiatives, where his experience and
reputation for seriousness have sustained his image as a voice of
sober reason.

WAYNE

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