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Cablegate: Argentina Economic and Financial Review, January 18-21, 2010

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FM AMEMBASSY BUENOS AIRES
TO RUEHC/SECSTATE WASHDC 0346
INFO WESTERN HEMISPHERIC AFFAIRS DIPL POSTS
RHEHAAA/NATIONAL SECURITY COUNCIL WASHINGTON DC
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC
RUEAIIA/CIA WASHINGTON DC
RUEATRS/DEPT OF TREASURY WASHINGTON DC
RUEHSO/AMCONSUL SAO PAULO

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SENSITIVE
SIPDIS
SIPDIS

E.O. 12958: N/A
TAGS: EFIN ECON EINV ETRD ELAB EAIR AR
SUBJECT: Argentina Economic and Financial Review, January 18-21, 2010

REF: 09 BUENOS AIRES 1175

1. (U) Provided below is Embassy Buenos Aires' Economic and
Financial Review covering the period January 18-21, 2010. 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 Says Debt Swap Moving Forward

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2. (SBU) In a radio interview January 19, Minister of Economy
Amado Boudou denied that the debt restructuring is facing any
obstacles from the US Securities and Exchange Commission (SEC),
adding that the swap is moving forward as scheduled and the GoA
anticipates a 60% participation rate. His statement came in
response to local press articles over the weekend reporting that
additional information requests by the SEC regarding the debt swap
signaled problems for moving it forward. According to the press
reports, the SEC requested that the GOA provide details on the
integrity of the National Statistical Agency and its method to
calculate inflation, inquired about the risk of attachment of
official funds by holders of defaulted Argentine debt, and asked
for clarification regarding purpose and operation of the debt
repayment fund (the so-called Bicentennial Fund) that the GoA is
trying to establish with central bank reserves to pay (or
guarantee) 2010 debt payments. The Minister said that the GoA had
expected and received on January 15 SEC requests for additional
information that is the norm for debt swaps and that the GoA is
preparing to response by January 22. Boudou noted that the GoA and
the SEC had three information exchanges for the 2005 debt exchange.

3. (SBU) Meanwhile, Secretary of Finance Lorenzino, who is on a
road show to the UK, Italy, and Germany to promote the swap with
holdouts there, stated in a press interview that the GoA is on
track to launch the debt restructuring with the remaining holdouts
in late January/early February and expects to complete the process
by the end of February.

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Congress Bicameral Commission to issue its view on Central Bank
President removal

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4. (SBU) In a press conference on January 19, President Cristina
Fernandez de Kirchner announced that she has asked Congress
(currently in summer recess until March) to set up as soon as
possible the Bicameral Budget and the Finance Commissions to issue
a view on her intent to remove Central Bank (BCRA) President Martin
Redrado. [Background: On January 8, the President issued a DNU
(necessity and urgency decree, N 18) removing Redrado without
Congressional recommendation (arguing that it was in summer recess)
after Redrado refused to resign at CFK's request for failing to
implement a previous GoA decree to set up a $ 6.57 billion fund
(the "Bicentennial Fund") with Central Bank reserves to pay 2010
debt payments. [See previous Embassy reporting on this issue]

5. (SBU) The Bicameral commission to review Redrado's removal is
composed of five members: the Presidents of the Lower House Budget
and Finance Commissions, the Presidents of the Senate Budget and
Finance Commissions and the vice-President. The President of the

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Lower House, Eduardo Fellner requested January 20 that the two
commissions meet on January 21 to elect their Presidents.
Reportedly, pro-Kirchner Deputy Gustavo Marconato will head the
Budget Commission, while opposition Deputy (from the Coalicion
Civica) Alfonso Prat-Gay will lead the Treasury Committee. While
the Senate has not yet set up its commissions, the GoA is pushing
for the commission to issue its recommendation with just three
members as it meets the required quorum. The GoA has stressed that
the commission's recommendation is nonbinding and that CFK can
legally dismiss Redrado once the commission has released its
findings.

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Primary fiscal surplus declining; GoA spending up

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6. (SBU) In a press conference January 19, Minister of Economy
Amado Boudou announced that the primary fiscal surplus reached ARP
5.1 billion in December, compared to a deficit of ARP 3.5 billion
in 2008. He also noted that the full-year 2009 primary fiscal
surplus declined 47% y-o-y to ARP 17.3 billion, equivalent to 1.5%
of GDP -- well below the 3.1% level of 2008, but higher than the
GoA revised 2009 budgeted figure of 0.5%. However, the primary
fiscal surplus figure is mainly the result of two accounting
gimmicks that inflate the surplus: (1) accounting as revenues US$
2.5 billion (ARP 9.6 billion) received in 2009 from the IMF Special
Drawing Rights (SDRs) allocation to the BCRA (this amount is
determined by the member country shareholder stake); and (2)
accounting as earnings ARP 8.3 billion from the ANSES (Social
Security Agency) investment portfolio. In addition, total revenues
were augmented with the unorthodox addition ARP 5 billion from the
nationalized pension funds and the BCRA transfer of extraordinary
profits (from unrealized profits due to the peso depreciation) of
US$1.2 billion in 2009. Absent the unorthodox accounting, the GoA
would have posted a primary fiscal deficit in 2009.

7. (SBU) During the year, revenues totaled ARP 260.2 billion (up
19%), while primary expenditure reached ARP 242.9 billion (up 30%),
raising concerns regarding the GoA's ability to rein in spending in
2010. Taking into account interest payments on debt, the overall
fiscal balance shows a deficit of ARP 7.1 billion, (equivalent to
0.6% of GDP), compared to a 2008 overall fiscal surplus of ARP 14.6
billion (1% of GDP). In its press release, the GoA noted that in
the middle of an international economic crisis, Argentina
maintained its three economic pillars: the two twin surpluses
(fiscal and trade) and a high level of international reserves,
which allowed the country to weather the crisis without economic
disruptions or fiscal adjustments.

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Inflation UP

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8. (SBU) National statistics agency INDEC announced January 15
that December 2009 inflation increased 0.9% m-o-m, in line with
market expectations of INDEC announced figures, but well below
private estimates of an actual increase in inflation of about 2%
m-o-m. The highest price increases were in food and beverage
(1.6%), entertainment (2.2%) and clothing (1.6%). For the year,
INDEC estimated that inflation increased only 7.7%., in sharp
contrast with private estimates of 15-17% y-o-y.

9. (SBU) Most private analysts expect inflation to accelerate
slightly in 2010 to between 18-20%, due to higher commodity prices,

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the recovery of domestic demand, the expected elimination of energy
and transport subsidies, unanchored inflation expectations (see
item below), and a loose fiscal policy coupled with a high salary
inertia.

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Inflation expectations dropped to 20%

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10. (SBU) On January 18, the Finance Research Center of Di Tella
University reported that inflation expectations for the next twelve
months dropped to 20% in January, from 25% in December. Inflation
expectations have kept steady during the whole year, hovering
around 20%, except in the months of February, August and December
when they jumped to 25%. As part of the end-of the year survey, Di
Tella also surveyed people's perceived inflation during the last
year. Surprisingly, people estimated that 2009 inflation was 30%,
much higher than true inflation estimates of approximately 17%,
demonstrating the downside of a lack of public confidence in INDEC.
KELLY

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