Cablegate: Argentina Economic and Financial Review, September 7-11,

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E.O. 12958: N/A
TAGS: EFIN ECON EINV ETRD ELAB EAIR AR
SUBJECT: ARGENTINA ECONOMIC AND FINANCIAL REVIEW, SEPTEMBER 7-11,
2009

1. (U) Provided below is Embassy Buenos Aires' Economic and
Financial Review covering the period September 7-11, 2009. The
unclassified email version of this report includes tables and charts
tracking Argentine economic developments. Contact Econ OMS Megan
Walton at WaltonM@state.gov 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.

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GOA ANNOUNCES A 76% PARTICIPATION RATE IN BOND EXCHANGE
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2. (SBU) Minister of Economy Amado Boudou announced September 7 that
the GoA achieved an average 76% participation rate in the two local
bond swaps that closed the same day, which were designed to draw
bonds linked to the controversial official inflation rate out of the
market. Cutting the supply of these bonds would reduce pressure on
the GoA to manipulate inflation statistics, which the GoA is widely
believed to have been doing since 2007. According to information
from the Ministry of Economy, the first part of the exchange the GoA
achieved a 60% participation rate (out of ARP 8.3 billion in
eligible bonds), and the second part (announced shortly after the
first opened) an 86% participation rate (out of ARP 14.0 billion
eligible for that exchange).

Before the swaps, market analysts predicted that the main
participation in the exchange would be by Argentine government
entities holding the bonds, but actual participation by retail
investors beat their expectations. As a result of the exchange, the
GoA will issue ARP 4.25 billion in Bonars 2014 and ARP 10.8 billion
in Bonars 2015. According to the GoA, this liability management
transaction will reduce debt payments by ARP 7.2 billion over the
next three years and generate a nominal debt reduction of ARP 2
billion. In contrast, former BCRA President and congressional
Deputy-elect Alfonso Prat-Gay argued that the transaction will only
reduce debt payments by ARP 4.5 million during the remaining
two-plus years of the term of President Cristina Fernandez de
Kirchner at the cost of increasing debt service by ARP 11 billion
for the next President. Besides alleviating near-term debt
amortizations, this transaction will also reduce GoA exposure to
inflation. (Note: Prior to the exchange, about one-third of GoA
debt stock was in inflation-adjusted bonds.)

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ICSID RULES AGAINST ARGENTINA IN AZURIX CASE
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3. (SBU) On September 1, 2009 the Annulment Committee of ICSID (the
World Bank's International Court for the Settlement of International
Disputes) dismissed an Argentine government request to annul a 2006
award to U.S. firm Azurix in the amount of over $165 million. This
is the second case in which Argentina has exhausted all ICSID
procedures and is expected to implement an awarded payment. The
first was a case filed by CMS; while their annulment request was
dismissed on September 25, 2007, the GoA has yet to make any payment
in this case, arguing that the claimant did not follow to necessary
proceedings to implement the awarded payment.
Background: Azurix won a 30-year concession in 1999 to manage a
significant share of Buenos Aires province's water and wastewater
management facilities. Many of its tariff rights under the
concession contract were effectively repudiated by the Province when
the water in one city turned sour in April 2000 because of algae in
the local reservoir, which was under the Province's exclusive
control. According to Azurix, provincial officials blamed Azurix
for the problems, refused to allow the company to bill for its
services, required the company to provide bottled water to the town
at the company's expense, and publicly announced that people should
not pay their water bills. The Province also allegedly repudiated
Azurix's right to amortize its bid payment. In January 2001, Azurix
filed for ICSID arbitration. While the arbitration case remained in
process, Azurix filed for bankruptcy in December 2001 and returned
operation of all its water and wastewater management facilities to
provincial authorities in March 2002. In June 2006, the Tribunal
decided that the respondent had failed to accord full protection and
security to the investment and that the respondent had breached the
U.S.-Argentina Bilateral Investment Treaty by taking arbitrary
measures that impaired the claimant's use and enjoyment of its
investment. Therefore, it awarded compensation of USD 165.2 million
plus interest. Argentina registered an ICSID annulment proceeding
on December 11, 2006 in order to contest the award, and the
September 1 ruling was a response to that proceeding.
KELLY

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