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Cablegate: Goa Repeals Export Tax Resolution, Ending Farm Crisis


DE RUEHBU #0991/01 2002224
R 182224Z JUL 08



Ref: Buenos Aires 980

E.O. 12958: N/A
SUBJECT: GoA Repeals Export Tax Resolution, Ending Farm Crisis

1. (SBU) Late July 18, the GoA repealed the March 11 decree that set
off the 129-day battle with the rural sector by imposing sliding
scale export taxes on grains and oilseeds exports. This decision,
which follows the Argentine Senate's July 17 failure to pass the
resolution into law, returns export taxes to their previous levels
and has been widely welcomed by agricultural and opposition leaders.
The immediate economic impact will likely be a surge of up to $3
billion in exports of hoarded grains and soybeans. The fiscal
impact of the decision is less clear, but the GoA will likely lose
in the range of $2 billion in potential 2008 revenues. Markets have
reacted positively, albeit cautiously, to the decision. While the
Senate vote and repeal of the March decree are clear victories for
the agricultural sector, there is still a great level of uncertainty
over how the GoA will react. Will it try to win approval for a new
tax package? Will it reinitiate dialogue with the agricultural
sector as its leaders are calling for? Right now, the government is
probably still regrouping. But the widespread feeling in the
country seems to be that democracy is at work in ways not seen in
the memory of most Argentines. End Summary.

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2. (SBU) Argentine Chief of Cabinet Alberto Fernandez announced this
afternoon the repeal of the Economy Ministry's Resolution 125,
imposed March 11, which established sliding scale export taxes on
grains and oilseeds exports and provoked a 129-day farm strike that
hollowed out support for the Kirchner administration and accelerated
the deterioration of the Argentine economy. This decision, to be
published July 21 as Decree 1176, follows the dramatic July 17 vote
in the Senate to reject the government's bill that would have
sanctioned the March Resolution (Reftel). In announcing the
decision, Fernandez emphasized the government's respect for
institutions and said the repeal would allow the continuation of
discussions over export taxes in a more pressure-free and
"democratic" atmosphere.

3. (SBU) Decree 1176 repeals Resolution 125/2008 and the resolutions
that later modified it and returns export taxes from their current
levels (e.g., 45 - 50% for soybeans) to their previous fixed levels
prior to March 11 (Soybeans 35%; Soybean oil 32%; Soybean meal 32%;
Sunflower seed 32%; Sunflower oil 30%; Sunflower meal 30%; Corn 25%;
and Wheat 28%). Although this is a definitive victory for the
agricultural sector and should bring an end to the chronic protests,
there are numerous other agricultural sector complaints that the GoA
has yet to address, including tight control of the export
registration process and outright export bans on products such as
beef and milk.

4. (U) PUBLIC REACTION: Agricultural leaders welcomed the
revocation of Resolution 125. Luciano Miguens, head of the
Argentine Rural Society (SRA) termed it "extremely positive" and
called on the GOA to engage in a "real dialogue" with the
agricultural sector. Eduardo Buzzi, head of the Argentine Agrarian
Federation (FAA) welcomed the announcement but called on the GOA to
lower the export levies for small and medium producers to the 20-25%
range, and he urged rapid consideration and approval of new
legislation for leaseholders. Other farmers called for discussion
of broader agricultural policies to support the farming sector. The
political opposition applauded the end of Resolution as "late but
welcome," many of them lamenting the four months it took to resolve
the conflict. Elisa Carrio, the leader of the Civic Coalition (CC)
who finished second in the October 2007 presidential election,
thought the President's reversal was "very good since it will
resolve the conflict, and it allows society and the government to
take up the long-delayed agenda of how to deal with inflation, the
energy situation and the plight of retirees." Leader of the Radical
Party (UCR) Gerardo Morales said the GOA had no choice but to strike
down Resolution 125 and called for a new, broader agricultural
policy. Mauricio Macri, mayor of Buenos Aires and leader of the
center-right opposition (PRO), welcomed the GOA's announcement but
called on it to establish a dialogue with the agricultural sector.

5. (SBU) ECONOMIC IMPACT: The early impact will likely be an
initial surge in exports of hoarded grains and soybeans, which
private analysts estimate at as much as $3 billion in total sales.
This will provide a liquidity boost to the economy, with the
Argentine Central Bank likely reverting to its pre-crisis position
of purchasing incoming foreign currency on the spot market to
maintain a stable exchange rate. This should result in lower
domestic interest rates and a reversal of the capital flight of
recent months, which in turn should slow the deceleration of the
economy and lower high levels of uncertainty that have led to
deposit withdrawals and the stagnation of investment. Argentine
Central Bank officials privately estimate total potential exports
pending resolution of the farm strikes of $8-10 billion, and it has
quietly sought assistance from banks and pension funds to help
purchase the incoming foreign exchange. In the short term, at
least, the peso should remain relatively strong, near the current
level of 3 pesos/USD.

6. (SBU) FISCAL IMPACT: Also unclear is the possible fiscal impact
of this decision. At today's world prices, the annual revenue from
the now repealed GoA increase in the export taxes would have been in
the broad range of $2.5 to $3.5 billion. Subtracting the roughly $1
billion in subsidies and other forms of compensation plans the GoA
has developed to appease smaller farmers, the result is that the GoA
will lose in the approximate range of $2 billion in potential 2008
revenues by repealing the tax. Many local analysts are concerned
that the reduced revenues will lead to a deterioration of the GoA's
fiscal balance if the GoA either does not reduce the pace of
expenditure growth (currently running at about 40% per year) or is
unable to find alternative sources of funding. This in turn could
exacerbate inflation, which aside from the farm strike has been the
other main source of instability in the Argentine economy this

7. (SBU) MARKET REACTION: Markets have reacted positively, albeit
cautiously, to the Senate vote and today's decision to repeal the
March Resolution. The Argentine stock market has increased 1.3%
since the Senate vote, and bond prices have increased in the 2-4%
range, depending on the instrument. Argentine risk levels, as
measured by the 10-year Credit Default Swap (CDS) and sovereign risk
premium (JP Morgan's Emerging Market Bond Index - EMBI), have fallen
significantly. After hitting a post-default high of 806 basis
points on July 14, the 10-year CDS fell to 718 basis points by close
of markets on July 18. Likewise, the EMBI country risk measure for
Argentina fell to 598 at markets' close July 18, after hitting 668
bps on July 15, the highest level since the GoA's 2005 debt
restructuring. Nevertheless, there is clearly a wait-and-see
mentality, and few investors seem to be ready to allocate capital to
Argentina before it becomes fully clear how the GoA will react to
its Senate defeat.

8. (SBU) The combination of the Senate rejection and the GoA's
repeal of the March decree is a clear victory for the Argentine
agricultural sector, and sure to have a short-term positive effect
in the form of increased exports of agricultural commodities.
However, there is still a great level of uncertainty over how the
GoA will react, and also over what medium-term impact this decision
will have on GoA finances and the economy. There is an opening for
the GoA to take a more accommodating stance, working with the
farmers and Congress to fashion a more acceptable export tax regime.
Nevertheless, given President Cristina Fernandez de Kirchner's low
approval ratings, she is likely feeling pressure to increase
spending to consolidate support among low-income voters and rebuild
support in the middle class. The open question is whether to fund
this increased spending the Kirchners will look to re-impose the
higher export taxes via another potentially damaging battle in
Congress, thereby kicking off the next chapter in the battle with
the agricultural sector, or will try to put together some
alternative income package.

9. (SBU) The GOA's revocation of Resolution 125 or its timing was
not a sure thing, so the announcement made by Cabinet Chief Alberto
Fernandez was a welcome relief (after a day of complete silence from
Casa Rosada on the Senate vote) as it instantly calmed the public by
suggesting the Kirchner administration may take the high road in
moving past this conflict. The conflict with the "campo" has been a
watershed for the Kirchners, and the staggering setback in the
Senate may be the opportunity for Cristina Kirchner to re-launch or
re-invent her government. Like the rest of Argentina, CFK and her
inner circle may still be absorbing the implications of the
political dynamics unleashed by the government's 129-day
confrontation with the agricultural sector.

10. (SBU) On the broader scale, we have run into numerous Argentines
whose eyes well up with tears as they recount the events of this
week and how for the first time in their memory the Congress has
seriously debated such a vital topic. There is a clear feeling of
pride and hope that perhaps a new quality of democracy can emerge
from this tumultuous series of events.

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