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Cablegate: Argentina's Financial Service Players On Capital Markets,

VZCZCXYZ0000
RR RUEHWEB

DE RUEHBU #2647/01 3331551
ZNR UUUUU ZZH
R 291551Z NOV 06
FM AMEMBASSY BUENOS AIRES
TO RUEHC/SECSTATE WASHDC 6625
INFO RUEATRS/DEPT OF TREASURY WASHINGTON DC
RUCPDOC/USDOC WASHINGTON DC
RUEHRC/DEPT OF AGRICULTURE USD FAS WASHINGTON DC
RUEHC/DEPT OF LABOR WASHINGTON DC
RHMFIUU/HQ USSOUTHCOM MIAMI FL
RUEHAC/AMEMBASSY ASUNCION 5759
RUEHMN/AMEMBASSY MONTEVIDEO 5969
RUEHSG/AMEMBASSY SANTIAGO 5372
RUEHBR/AMEMBASSY BRASILIA 5609
RUEHSG/AMEMBASSY SANTIAGO 5373
RUEHLP/AMEMBASSY LA PAZ DEC SAO PAULO 3050
RUEHRI/AMCONSUL RIO DE JANEIRO 2065

UNCLAS BUENOS AIRES 002647

SIPDIS

SIPDIS

SENSITIVE

WHA FOR WHA/BSC AND WHA/EPSC
E FOR THOMAS PIERCE,
PASS NSC FOR JOSE CARDENAS
PASS FED BOARD OF GOVERNORS FOR PATRICE ROBITAILLE
PASS USTR FOR SUE CRONIN AND MARY SULLIVAN
TREASURY FOR ALICE FAIBISHENKO
USDOC FOR 4322/ITA/MAC/OLAC/PEACHER
US SOUTHCOM FOR POLAD

E.O. 12958: N/A
TAGS: EFIN ECON AR
SUBJECT: ARGENTINA'S FINANCIAL SERVICE PLAYERS ON CAPITAL MARKETS,
FINANCIAL INTERMEDIATION

Ref: Buenos Aires 2598

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Summary
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1. (SBU) Senior Argentine financial sector representatives outlined
to Ambassador their concerns about lagging development of domestic
capital markets. While optimistic about Argentina's medium term
growth prospects, they questioned whether existing channels of
financial intermediation can sustain levels of investment required
to maintain high real GDP growth. End Summary

2. (SBU) On November 27, Ambassador met with representatives of
Argentina's financial sector at a breakfast hosted by the Center for
Financial Stability (Centro para la Estabilidad Financiera, CEF) to
review the development of local capital markets. A cross section of
senior representatives of financial services institutions (banks,
bank chambers, insurance companies and pension funds) corporate
financial executives, and congress (including the chairman of the
lower house finance committee) attended.

3. (SBU) Discussion focused on participant concerns about the
lagging development of long term debt instruments in domestic
capital markets and whether existing formal channels of financial
intermediation can sustain the levels of investment required to
maintain high GDP growth rates. While post-crisis Argentine
investment levels have recovered to 21-22% of GDP, many questioned
the quality of such investment; a significant share of new
investment has been channeled into real estate development that does
not significantly add to Argentina's productive capacity. There was
general agreement that investment at the 25-26% of GDP level will be
required to underpin sustainable 5-6% medium term real GDP growth.

4. (SB) Bank and bank chamber representatives emphasized that, while
bank balance sheets and overall liquidity have improved considerably
since the depth of the 2001/2002 economic crisis, they remain highly
exposed to both currency and maturity portfolio mismatch, with no
market instruments available to hedge long term exposures. One
consequence has been the slow and limited development of a domestic
mortgage market. Representatives of insurance companies and private
pension funds were upbeat, explaining that the concentration of GoA
bonds in their portfolios was steadily declining and that expanded
GoA use of fiduciary funds to facilitate energy sector
infrastructure investment could offer attractive domestic investment
opportunities (Reftel).

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CEF Background
--------------
5. (SBU) CEF, the Center for Financial Stability, is a financial
service sector public policy think-tank established in 2002. Its
post-economic crisis focus is on the non-partisan analysis of the
regulatory structure of public finance, a highly politicized area of
public discourse under the Kirchner administration. Through a
program of policy notes, seminars and training, CEF works to
facilitate the exchange of information and opinions among policy
makers, regulators, market players and consumers of financial
services.

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Comment
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6. (SBU) A worthwhile meeting with players in the financial service
sector. Think-tanks like CEF play a key role in strengthening
Argentine civil society by serving as a forum for private-public
sector discussion of critical economic and social issues, including
on strengthening institutions. This is important at a time when

Argentina needs to continue building institutional capacity to pave
the way to sustainable growth.

7. (SBU) Argentina's financial system is recovering, but still
remains fragile. Banks are reporting profits but remain
undercapitalized and subject to systemic risk. In addition, there
is still considerable forbearance, allowing banks to deviate from
generally acceptable international accounting practices.
Ultimately, financial sector development in Argentina is tied to the
quality of GoA economic stewardship. The IMF writes: "... the
recovery of the banking system will depend critically on continued
improvements in the macroeconomic environment, the resolution of
policy-induced losses, and on a return to an institutional
environment that promotes sound banking practices."

WAYNE

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