Cablegate: Argentina Economic and Financial Review, September

DE RUEHBU #2044/01 2851832
P 121832Z OCT 07





E.O. 12958: N/A
17 - OCTOBER 5, 2007

1. (U) Provided below is Embassy Buenos Aires' Economic and
Financial Review covering the period September 17 - October
5, 2007. The unclassified email version of this report
includes tables and charts tracking Argentine economic
developments. Contact Econoff Chris Landberg at to be included on the email distribution
list. This document is sensitive but unclassified. It
should not be disseminated outside of USG channels or in any
public forum without the written concurrence of the
originator. It should not be posted on the internet.


1. Government alleges bank collusion in setting high rates
2. Argentine corporations tapping markets again, but face
much higher financing costs
3. GoA also reportedly considering bond issue, but faces low
demand and higher yields
4. Central Bank bans foreign purchases of new debt issuances
5. S and P upholds Argentina's rating, but calls for tighter
fiscal and monetary policy
6. GoA submits 2008 Budget Bill to Congress in the face of
opposition criticism
7. Argentina loses ground on Transparency International
"Corruption" and World Bank "Doing Business" indices
8. September CPI increases 0.8% m-o-m, below estimates of
"real" inflation; INDEC announces plan to introduce new CPI
methodology in November
9. Another INDEC scandal: underreporting of Mendoza Province
inflation figures


Government alleges bank collusion in setting high rates
--------------------------------------------- -----
2. (SBU) In response to the disproportionate impact of global
financial volatility on the price of Argentine assets, and
the resulting spike in local interest rates, the GoA accused
local and foreign banks of colluding in the setting of high
lending rates. Beginning late September, the Economy
Ministry's Internal Trade Secretary Guillermo Moreno (also
known locally as the price control czar) and the national
anti-trust commission (Commission Nacional de Defensa de la
Competencia) demanded detailed information on trading
activities from major financial sector entities, with the
ostensible purpose of discovering evidence of collusion in
setting rates.

3. (SBU) The Committee sent comprehensive surveys to the six
foreign banks operating in Argentina (Citi, JPMorgan,
Deutschebank, HSBC, BBVA, Santander) on all their trading
activities dating back to 2002, and then selectively called
in banks to grill them on their submissions. The Committee
also sent similar questionnaires to local pension funds and
banks, apparently with the added request for identities of
the local institutions' private consultants.

4. (SBU) The local and international banks raised rates
starting in July in direct response to international market
volatility and the global flight to quality. Argentine
assets were considered especially risky (due to manipulation
of official statistics, high inflation, falling fiscal and
trade surpluses, and GoA intervention in the economy), so
international investment and hedge funds immediately began
selling Argentine bonds. This is the reason why the
worldwide re-pricing of risk had a disproportionate impact on
Argentina. The rush to sell GoA and Central Bank bonds
caused a severe liquidity crunch in the local financial
system, steeply driving up local interest rates, including
the interbank rate, and forcing local retail banks to
compensate by dramatically raising rates across the board.
The fact that inflation is high and increasing is also a
factor, but more for medium to long term debt instruments.
Local financial analysts contend that Guillermo Moreno's
attack on the banks is just a continuation of the fiction

BUENOS AIR 00002044 002 OF 004

perpetrated by GoA leadership that the government's policies
are not the source of deteriorating economic indicators
(inflation, sentiment, lack of credit, falling investment).

Argentine corporations tapping markets again, but face much
higher financing costs
--------------------------------------------- --
5. (SBU) Global financial markets appear to be reopening
again for Argentine borrowers, following two months of
uncertainty and international market turmoil that began in
mid-July. On October 1, Edenor, one of Argentina's largest
power distribution companies, priced a ten-year bond at a
yield of 10.5% for $220 million, becoming the first Argentine
corporate to tap the markets since end-July. Joint managers
of the issuance, Deutsche and Citi, raised the offer from
$200 million in response to higher than expected demand.
However, the final yield was about 125 basis points higher
than the pricing expected when the deal was originally
announced in July (subsequently suspended due to poor market
conditions), and at least 175 bps higher than the pricing of
similar private debt issuances in the spring. Other
Argentine private companies are planning or considering
issuances, including IMPSA (Industrias Metalurgicas
Pescarmona), which has scheduled a seven-year $250 million
bond placement this week.

GoA also reportedly considering bond issue, but faces low
demand and higher yields
--------------------------------------------- --
6. (SBU) Local daily Cronista Comercial reported October 2
that the GoA is also considering an issuance, possibly prior
to the October 20-22 IMF/WB annual meetings. The Cronista
article states that the GoA would issue a $500 million bond
(no details of currency, maturity or pricing), despite
expectations of much higher yields than for previous GoA
issuances (given that Argentine bond prices have not
recovered from the crisis). An Embassy banking sector
contact asserted that there is no market appetite for a GoA
issue at the moment, and speculated that the Cronista report
may have originated with an investor holding a short-position
in Bonar X (a ten-year, dollar-denominated bullet bond with a
7% coupon issued under Argentine law, and maturing 2017).
This banker suspects that the investor is looking to cover
the short position, and is therefore sounding out the GoA to
reopen the bond -- which would make it similar to a private
issuance. The GoA last issued the Bonar X in mid-May at a
yield of 8.44%, compared to current trading levels of 10.05%.

7. (SBU) The same banker also noted the increasing cost to
the GoA associated with its inability to issue
internationally, for fear of attachment by holdout
bondholders. The banker estimated that recent global market
turmoil, which had a disproportionate impact on Argentina,
had increased the premium that the GoA must pay for only
being able to issue debt under domestic law to about 100
basis points (or 1%). For the sake of comparison, GoA
officials have argued to Emboffs in recent years that the
difference between issuing domestically or internationally is
only about 30-40 basis points. Given Argentina's estimated
financing needs for 2008 of $5-7 billion, a 100 bps premium
costs Argentina in the range of $50-70 million.

Central Bank (BCRA) bans foreign purchases of new debt
--------------------------------------------- -
8. (SBU) Starting with the BCRA's October 2 debt auction, the
BCRA implemented a change to its internal rules, banning
foreign entities from buying BCRA debt instruments (mainly
LEBACs and NOBACs, or letters and notes of the Central Bank).
Only local entities (including locally registered foreign
firms, including the six foreign banks operating here) are
now allowed to participate in the auctions. The BCRA took
this action to block out foreign hedge funds (or "hot
money"). Hedge funds can still purchase BCRA debt on the
secondary market, and the BCRA has over $20 billion in
short-term debt (avg maturity of about 2 years) outstanding.

S and P upholds Argentina's rating but calls for tighter

BUENOS AIR 00002044 003 OF 004

fiscal and monetary policy
--------------------------------------------- --
9. (SBU) On September 25, Standard and Poor's Ratings Agency
confirmed its Argentine rating at B for long term and B for
short-term sovereign debt, with a stable outlook. However, S
and P warned that the ratings could go either way in the
future, depending on the next administration's ability to
stabilize inflation and tighten both fiscal and monetary
conditions. According to S and P, Argentina's failure to act
in a timely manner to contain fiscal expenditures could
result in lower growth and higher inflation. S and P also
expressed concerns about institutional and policy risks,
specifically the allegations of government interference in
the GoA statistical agency, INDEC. S and P stated that this
alleged manipulation has "weakened the credibility of the
official inflation numbers," with official 2007 inflation
estimates below 10% while private analysts are forecasting
15-18% or higher.

Economic Outlook

GoA presents 2008 Budget Bill to Congress in the face of
opposition criticism
10. (SBU) Economy Minister Miguel Peirano presented the
highlights of the draft 2008 Budget to the Budget and
Treasury Committee of the Chamber of Deputies on September
19. His refusal to entertain questions following his
two-hour presentation angered opposition Deputies and led to
opposition denunciations in the local press. As with
previous years' budgets, the main assumptions of the 2008
budget are conservative compared to the Central Bank's survey
of private sector forecasts. This is the root of most
opposition criticism, because the conservative assumptions
for growth and inflation will result in an underestimation of
revenues of over $3 billion, by some estimates. Since
Argentina's so-called "super powers" Act gives the Executive
authority to reprogram expenditures without subsequent
Congressional approval, the President has great discretionary
power over the use of excess revenues. The Chamber of
Deputies is expected to debate the bill after the October 28
presidential elections.

Argentina loses ground on Transparency International and
World Bank indices
11. (U) For the second year in a row, Argentina fell in the
rankings of both Transparency International's "Corruption
Perceptions Index 2007" (CPI) and the World Bank's "Doing
Business" report, each released September 25. In
Transparency International's 2007 CPI ranking, Argentina
ranked 105 out of 180 countries (compared to 93 out of 163
countries in 2006) in terms of perceived levels of
corruption, with a 2.9 ranking on a scale of 0 - 10 (with 0
highly corrupt and 10 highly clean). Transparency
International notes that a score below three indicates that
"corruption is perceived as rampant." This rating places it
alongside Mongolia, Albania, Bolivia, and Burkina Faso. In
the Americas, Argentina ranked 23rd out of 32 countries.
Among Latin American nations, Chile (#22 in the global
ranking) and Uruguay (#25) again led the region in 2007, with
Venezuela and Haiti lowest ranked in the hemisphere.
Argentina also fell in the rankings of the World Bank's
"Doing Business" report. In the Bank's 2008 composite survey
on the "ease of doing business," Argentina ranked 109 out of
178 nations and territories surveyed, alongside Bangladesh,
Nigeria, Belarus, and Nepal. It ranked 22nd out of 31
countries in Latin America and the Caribbean. For
comparison, Argentina ranked 101 out of 175 in the 2007
report, and 93 out of 155 in the 2006 report.


September CPI increases 0.8% m-o-m, below estimates of "real"
inflation; INDEC announces plan to introduce new CPI

BUENOS AIR 00002044 004 OF 004

methodology in November
--------------------------------------------- ------
12. (SBU) On October 4, the GoA statistical agency INDEC
announced that the September CPI increased 0.8% m-o-m, in
line with market expectations of what INDEC would report, but
about half of the level of most economists' estimates for
"true" inflation. According to INDEC, accumulated inflation
for the first nine months of the year reached 5.8%, compared
to the 10-12% rate that most private consultants estimate.
All nine sub-indexes show increases, with the largest m-o-m
increases being: equipment and home maintenance (1.8%), other
good and services (1.1%) and housing (0.9%). Food and
beverages, the key sub-index to calculate the basic food
basket, increased 0.7%. Food and beverage prices are key
data used to measure indigence and poverty levels. The chief
economist of one of Argentina's largest unions calculates
that the poverty level would increase by nine percentage
points if the basic food basket were properly measured.
Meanwhile, Julio Cobos, the Governor of Mendoza Province and
also vice-presidential candidate and running mate of
presidential front-runner Cristina Kirchner, stated October 4
that INDEC will introduce a new CPI methodology next
November, based on a U.S. model.

Another INDEC scandal: underreporting of Mendoza Province
inflation figures
13. (SBU) The GoA Statistical Bureau INDEC announced
September 24 that the National CPI increased 0.8% m-o-m in
August. The National CPI is a weighted average of seven
provinces, including Buenos Aires (Province and City),
Mendoza, San Luis, Cordoba, Santa Fe, Tucuman and Catamarca.
The Director of Mendoza Province's Statistical Agency
subsequently notified INDEC in writing (with the formal
endorsement of the province's government) that INDEC had
incorrectly reported Mendoza's August CPI. INDEC included a
1.5% m-o-m increase for Mendoza, whereas Mendoza had
originally reported monthly inflation of 3.1%. This error
created a scandal when it was reported in local papers, with
local commentators adding it to the list of ways with which
the GoA has manipulated the CPI since February 2007.

14. (SBU) Local analysts say that the overall objective has
always been to report a low headline inflation figure, and
the alleged means of achieving this include: underreporting
items, deleting data, firing professional INDEC staff that
refused to go along with the manipulation, and strong-arming
the main grocery chains into holding store-wide sales on the
days that INDEC staff do pricing surveys. The GoA has
repeatedly denied such allegations, which are also the
subject of a judicial investigation. Most of these efforts
(as well as most price controls and subsidies) are focused on
the greater Buenos Aires area, which makes up roughly 35% of
Argentine GDP and population. As reported in the Economic
Report sent September 9, inflation in the provinces is
significantly higher than in Buenos Aires. And many
economists cite as evidence of GoA statistics manipulation
the fact that Buenos Aires city CPI increased 0.4% m-o-m in
August, only half the National CPI. The Buenos Aires city
CPI is generally used as the inflation benchmark for the
whole country, and is also used to build the inflation-linked
index that is used to adjust the GoA's peso-denominated debt.

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