VZCZCXYZ0002
RR RUEHWEB

DE RUEHBU #0213/01 0301036
ZNR UUUUU ZZH
R 301036Z JAN 06
FM AMEMBASSY BUENOS AIRES
TO RUEHC/SECSTATE WASHDC 3253
INFO RUEATRS/DEPT OF TREASURY WASHDC
RUCPDOC/USDOC WASHDC
RUEHRC/USDA FAS WASHDC 2053
RUEHC/DEPT OF LABOR WASHDC
RHMFISS/HQ USSOUTHCOM MIAMI FL

UNCLAS BUENOS AIRES 000213 
 
SIPDIS 
 
PASS FED BOARD OF GOVERNORS FOR PATRICE ROBITAILLE 
TREASURY FOR DAS LEE, RAMIN TOLOUI AND CHRIS KUSHLIS 
NSC FOR SUE CRONIN 
AND OCC FOR CARLOS HERNANDEZ 
USDOC FOR ALEXANDER PEACHER 
USDOL FOR ILAB PAULA CHURCH AND ROBERT WHOLEY 
USCINCSO FOR POLAD 
OPIC FOR GEORGE SCHULTZ AND RUTH ANN NICASTRI 
 
E.O. 12958: N/A 
TAGS: EFIN ECON ELAB ALOW AR
SUBJECT: Argentina Economic and Financial Weekly for 
the week ending January 27, 2006 
 
--------------------------------------------- -------- 
Weekly Highlights 
--------------------------------------------- -------- 
 
- The peso depreciated 0.7 percent against the USD, 
closing at 3.07 ARP/USD. 
- The GOA issues USD 312 million of Boden 2012 bonds 
to Venezuela. 
- GOA increases its efforts to reach price-restraint 
agreements. 
- Bondholder attachment of USD 105 million of BCRA 
reserves awaits final ruling from U.S. Court of 
Appeals. 
- Three public hearings on electricity rates 
suspended. 
- HSBC purchases Banca Nazionale de Lavoro's 
subsidiary in Argentina. 
- Commentary of the Week: "We Don't Have to Play on 
the Edge of the Abyss" 
 
--------------------------------------------- -------- 
MARKETS 
--------------------------------------------- -------- 
 
--------------------------------------------- -------- 
The peso depreciated 0.7 percent against the USD 
during the week to close at 3.07 ARP/USD. 
--------------------------------------------- -------- 
 
¶1.  The peso depreciated 0.7 percent versus the USD 
this week, closing at 3.07 ARP/USD.  This week's 
depreciation is mainly explained by higher dollar 
demand by banks as well as greater Central Bank (BCRA) 
intervention in the FX market, where it purchased USD 
200 million and EUR 10 million in the first four days 
of the week.  The BCRA's purchases of dollars averaged 
USD 49 million per day this week, almost double the 
USD 23 million daily average in the first three weeks 
of January.  The peso exchange rate has depreciated 
0.7 percent since the beginning of year. 
 
--------------------------------------------- -------- 
ECONOMY / FINANCE 
--------------------------------------------- -------- 
 
--------------------------------------------- -------- 
The GOA issues USD 312 million of Boden 2012 bonds to 
Venezuela. 
--------------------------------------------- -------- 
 
¶2.  On January 24, the GOA published a resolution in 
the Official Gazette, reopening the Boden 2012 for 
another USD 312 million in bonds, after receiving a 
bid from the Republic of Venezuela.  In 2005, the GOV 
purchased USD 1.6 billion of GOA bonds, which helped 
the GOA cover its financial needs.  The Venezuelan 
Finance Minister has said that Venezuela is willing to 
purchase USD 2.5-3.0 billion of GOA bonds in 2006. 
This would help the BCRA rebuild its reserves after 
the GOA used USD 9.5 billion in reserves to pay off 
the IMF. 
 
--------------------------------------------- -------- 
GOA increases its efforts to reach price-restraint 
agreements. 
--------------------------------------------- -------- 
 
¶3.  The GOA signed a number of price-restraint 
agreements this week with several suppliers of goods 
and services.  These agreements are expected to last 
one year, but also are contingent on the evolution of 
input prices and - in some cases - are subject to bi- 
monthly monitoring of any changes in the economic 
environment.  Most of these agreements target food, 
housecleaning products, toiletries and the tourist 
sector (the latter is important now, during the summer 
holidays here), and advance the GOA's efforts to 
create a basket of basic goods and services with 
controlled prices.  Officials of the Ministry of 
 
Economy and President Kirchner himself plan to 
continue meeting with leading producers and retailers, 
including major supermarket chains, to close new 
agreements and broaden the range of products and 
services subject to the agreements.  However, the GOA 
still faces stiff opposition in the beef industry to a 
new price-restraint agreement that would keep prices 
unchanged.  On January 24, Chief of Cabinet Fernandez 
threatened to increase beef export taxes (they are 
currently at 15 percent) if beef prices continue to 
increase.  Reaching an agreement with the beef sector 
is key to the GOA's anti-inflation effort because beef 
prices constitute 4.5 percent of the basket of goods 
used to measure consumer prices. 
 
--------------------------------------------- -------- 
Bondholder attachment of USD 105 million in BCRA 
reserves awaits ruling from U.S. Court of Appeals. 
--------------------------------------------- -------- 
 
¶4.  On December 30, the investment funds EM Ltd. and 
NML Capital Ltd. obtained an order temporarily 
attaching USD 105 million in BCRA reserves held at the 
Federal Reserve Bank of New York (FRBNY).  On January 
12, Judge Thomas Griesa of the Federal Court for 
Southern District of New York ruled in favor of the 
BCRA and overturned the attachment order.  According 
to the GOA's attorney, the court accepted the GOA's 
argument that the reserves are the property of the 
BCRA, not the GOA, and therefore immune from 
attachment and execution under the U.S. Foreign 
Sovereign Immunities Act.  However, the plaintiffs 
have appealed Griesa's ruling to the U.S. Court of 
Appeals and Judge Griesa therefore granted their 
request that the funds remain frozen until the Appeals 
Court issues its ruling.  It is unclear when the U.S. 
Court of Appeals will decide the appeal, but the BCRA 
already is able to perform its normal foreign exchange 
and monetary activities.  Most analysts expect that 
the Court of Appeals will uphold Griesa's ruling. 
 
--------------------------------------------- -------- 
Fitch Ratings will raise Argentina's rating from 
Restricted Default if it reaches an agreement with 
holdouts. 
--------------------------------------------- -------- 
 
 
¶5.  On January 25, a director of Fitch Ratings stated 
that Fitch may upgrade Argentina from its "Restricted 
Default" rating if the country makes a new debt offer 
that achieves broad acceptance from holdout creditors. 
A "Restricted Default" rating is for an entity that 
has failed to make due payments on some, but not all, 
of its financial obligations and is one step above the 
"Default" rating. 
 
--------------------------------------------- -------- 
Three public hearings on electricity rates were 
suspended. 
--------------------------------------------- -------- 
 
¶6.  On January 23, the ENRE - Argentina's electricity 
regulator - postponed three public hearings on 
potential increases in electrical rates for 
residential users.  The public hearings scheduled for 
February and March were for one electricity 
transporter (Transener) and two electricity 
distributors (Distrocuyo and Edelap).  Public hearings 
are a legally required step before rates for 
residential users can be increased.  The utilities 
reportedly were surprised by the suspensions since 
they have been trying to re-negotiate their long-term 
contracts for three years.  ENRE said that it needed 
more time to review the companies' tariff increase 
proposals.   It did not indicate when the public 
hearings would be re-scheduled. 
 
--------------------------------------------- -------- 
The GOA delays - for the third time - privatization of 
the mail service. 
--------------------------------------------- -------- 
 
¶7.  On January 25, the GOA delayed (for the third 
time) the auction to re-privatize the mail service, 
this time until June 30.  In November 2003, the GOA 
took over the postal service, Correo Argentino, when 
the concessionaire - the Macri Group - did not pay the 
royalties called for in the concession contract.  At 
that time, the GOA said that it would re-privatize the 
service within six months.  However, in June 2004, 
President Kirchner created a state-owned mail company 
("Correo Oficial de la Republica Argentina SA") to 
operate the concession, and the GOA has delayed 
repeatedly the planned re-privatization. 
 
--------------------------------------------- -------- 
BCRA maintains Lebac interest rates; demand remains 
concentrated at the short end of the curve. 
--------------------------------------------- -------- 
 
¶8.  The BCRA received bids of ARP 1.9 billion in its 
January 24 Lebac auction, well above the ARP 1.3 
billion announced amount and the ARP 1.6 billion in 
Lebacs that came due during the week.  Investors 
concentrated 70 percent of their bids for ARP Lebacs 
at the short-end of the curve (less than 3 months). 
Like the last four auctions, the BCRA was unable to 
roll over its maturities, accepting bids for ARP 1.6 
billion.  The yield on the 49 -day and the 70-day 
Lebac remained unchanged at 6.76 percent and 6.90 
percent, respectively.  The yield on the 105-day Lebac 
reached 6.90 percent.  Lebacs for maturities of more 
than 3 months were withdrawn yet again due to lack of 
interest. 
 
--------------------------------------------- -------- 
President Kirchner says unemployment fell to 10.0-10.2 
percent in the fourth quarter of 2005. 
--------------------------------------------- -------- 
 
¶9.  On January 25, President Kirchner announced that 
the unemployment rate fell to 10.0-10.2 percent in the 
fourth quarter of 2005, down slightly from 11.1 
percent in the third quarter.  INDEC is scheduled to 
release the official unemployment data on February 28. 
BCRA President Redrado also predicted that the 
unemployment rate fell to 10 percent at the end of 
2005 and forecasted that unemployment would fall to 
the single-digit level in 2006.  Unemployment peaked 
at 21 percent in May 2002. 
 
--------------------------------------------- -------- 
HSBC purchases Banca Nazionale del Lavoro's subsidiary 
in Argentina. 
--------------------------------------------- -------- 
 
¶10.  HSBC Bank announced it would purchase Banca 
Nazionale del Lavoro's (BNL) subsidiary in Argentina 
for USD 155 million.  With the acquisition, HSBC will 
double in size and will jump to seventh place by size 
of credit portfolio.  HSBC's Argentine business has 
traditionally been oriented to corporations, and the 
BNL purchase will expand its customer base to 
individuals and small companies.  HSBC will absorb the 
1,800 employees from BNL. 
 
--------------------------------------------- -------- 
Provinces ask the GOA for funds and renegotiation of 
provincial debts. 
--------------------------------------------- -------- 
 
¶11.  On January 24, Ambito Financiero reported that 
many provinces are waiting for Minister of Economy 
Miceli to respond to their demands to restructure 
provincial debt owed to the GOA and to receive more 
GOA funds (either money promised during the 
congressional campaign last October or to pay GOA debt 
to the provinces).  Provincial debt totals ARP 75.2 
billion and is adjusted by CER (an inflation-linked 
index).  70 percent of this debt (or ARP 52.7 billion) 
is owed to the GOA.  Some provinces have proposed a 
provincial debt restructuring to the GOA, including 
maturity extension and/or principal reductions that 
would be used to fund fiduciary trusts to fund 
provincial infrastructure developments.  Some of the 
fund requests of the provinces include: ARP 65 million 
for La Rioja province to cover its fiscal deficit and 
increases in provincial public sector wages; ARP 5 
million owed to Mendoza province for the maintenance 
of federal prisoners; and ARP 78 million promised to 
Mendoza province by the Federal Housing Plan to 
construct 4,500 houses. 
 
--------------------------------------------- -------- 
U.S. Appeals Court rules in favor of Mendoza's 
province debt restructuring. 
--------------------------------------------- -------- 
 
¶12.  The U.S. Second Circuit Court of Appeals rejected 
an appeal by Greylock Capital seeking to overturn a 
New York District Court approval of Mendoza province's 
2004 debt restructuring.  On January 23, lawyers for 
the province announced that the Appeals Court ruled in 
favor of upholding the District Court's decision on 
the fairness of the terms of the debt exchange.  The 
Appeals Court agreed with the province that the 
contract regulating the debt exchange allowed for a 
simple majority of bondholders to accept the 
province's use of special clauses to repeal its 
sovereign immunity.  Greylock had contended that 
passage of such amendments required unanimous consent. 
Mendoza province achieved a 65 percent participation 
rate in its October 2004 restructuring of its USD 250 
million Aconcagua bond debt.  The debt exchange 
extended the maturity of the bonds by eleven years, 
to 2018, and reduced the nominal interest rate from 
10 percent to 5.5 percent, implying a net present 
value reduction of 50 percent. 
 
 
--------------------------------------------- -------- 
Commentary of the Week: "We Don't Have to Play on the 
Edge of the Abyss" by Aldo Abram, an economist and 
director of the Exante consulting firm. [Note: 
Translated and abridged with permission of the author 
from an editorial published in La Nacion on January 
¶23.  End Note.] 
--------------------------------------------- -------- 
 
 
¶13.  When we used 34 percent of the Central Bank's 
reserves and weakened its ability to confront a 
crisis, many argued that it wasn't important because 
they didn't expect any crisis.  But it should be said 
that crises don't announce their arrival and that, in 
fact, the probability of a more complicated 
international environment is growing. 
 
¶14.  At the beginning of 2005 [the Federal Reserve] 
appeared to have gained control over the depreciation 
of the dollar.  But ... in the second half the dollar 
again experienced strong pressure to depreciate.  The 
world began to seek protection in gold ... Today, its 
value is above USD 550, which is not a good sign, as 
gold only reaches such high levels before crises or 
surges of inflation. 
 
¶15.  They say that there is no worse blind person than 
someone who does not want to see.  To follow inflation 
trends, the majority of analysts look at the evolution 
of consumer price indices that exclude food and 
energy, which are very volatile.  East Asian demand 
for these commodities has increased greatly and, as a 
consequence, so have their prices.  People have 
limited incomes.  When something in their consumption 
basket rises in price, they reduce their demand for 
other goods until their prices adjust and accommodate 
their lower spending capacity.  Thus, the only way 
that prices for other goods and services won't go down 
is if there is a generalized price increase, i.e., if 
inflation generated by the Central Bank allows a 
relative adjustment of prices as all prices increase. 
 
¶16.  Given that analysts are removing from the CPI 
those components that are increasing for structural 
reasons and constitute the major weight in the 
indicator, they are measuring price tendencies with 
reference to the remaining products, those that have 
little margin to increase.  Conclusion: they don't see 
the inflation that is indicated by the total index and 
by the dollar's loss of value. 
 
¶17.  The Fed will not be able to ignore a new bout of 
inflation.  Thus, in the second quarter, its reference 
rates could increase by a half percentage point and 
reach levels not much below 6 percent.  The problem 
with this is that, each time this has happened before, 
Argentina has suffered a serious crisis.  This is 
because capital abandons the riskiest economies - like 
ours - in an unstable international environment. 
 
¶18.  In the last few years, the depreciation of the 
dollar has favored us by raising the prices of the 
commodities that we export.  Also, the government 
could maintain a "high exchange rate" with the peso 
devaluing along with the dollar.  But in the scenario 
I've laid out, the Fed's monetary contraction will 
have as its objective an increase in the dollar's 
value, which will mean that the winds of fortune will 
change direction. 
 
¶19.  Before paying the IMF, the relation between 
international reserves and financial instruments of 
the Central Bank gave an exchange rate of ARP 3.5 per 
dollar.  That meant that, in the event of a crisis, if 
it had wished to, the Central Bank could have twisted 
the market's arm before reaching that exchange rate. 
Now, the relationship is ARP 5.2 per dollar, which 
implies that the Central Bank's chances of success in 
preventing a run are at exchange rates above ARP 4 per 
dollar, at least. 
 
¶20.  For this reason, it would be advisable for the 
Central Bank to give priority to rebuilding its 
international reserves, minimizing its emission of 
pesos and, because of this, reducing domestic 
inflation.  It should do this basically through 
Central Bank debt instruments, fiscal savings and 
government bond issuance.  Then, in the event of an 
international crisis, the social and economic cost 
that we will have to pay will be low, if the 
government understands that the best way to confront 
it is to maintain fiscal solvency, control inflation 
and allowing the dollar to rise (for certain, selling 
reserves).  If not, we will, unfortunately, repeat old 
and sad histories from our past.  [Note: We reproduce 
selected articles by local experts for the benefit of 
our readers.  The opinions expressed are those of the 
authors, not of the Embassy.  End Note.] 
 
 
GUTIERREZ