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DE RUEHBU #0408/01 0521239
ZNR UUUUU ZZH
R 211239Z FEB 06
FM AMEMBASSY BUENOS AIRES
TO RUEHC/SECSTATE WASHDC 3538
INFO RUEATRS/DEPT OF TREASURY WASHDC
RUCPDOC/USDOC WASHDC
RUEHRC/USDA FAS WASHDC 2083
RUEHC/DEPT OF LABOR WASHDC
RHMFISS/HQ USSOUTHCOM MIAMI FL

UNCLAS BUENOS AIRES 000408 
 
SIPDIS 
 
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 
USSOUTHCOM 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 February 17, 2006 
 
 
--------------------------------------------- -------- 
Weekly Highlights 
--------------------------------------------- -------- 
 
- The peso was unchanged against the USD, closing 
again at 3.08 ARP/USD. 
- Venezuela buys a further USD 308 million of Boden 
2012 bonds. 
- Limited negative impact of foot-and-mouth disease as 
the EU only bans Argentine beef exports frm the 
infected region. 
- GOA reached price-restraint agreements with 
wholesale distributors. 
- GOA announces changes in social plans. 
- Telefonica agreed to suspend its ICSID arbitration 
claim against the GOA. 
- Monthly economic activity index up 9.1 percent in 
¶2005. 
- Commentary of the Week: "Doubts and certainties 
about the Bilateral Agreement Signed with Brazil" 
 
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MARKETS 
--------------------------------------------- -------- 
 
--------------------------------------------- -------- 
The peso was unchanged against the USD this week, 
closing again at 3.08 ARP/USD. 
--------------------------------------------- -------- 
 
¶1.  The peso remained flat versus the USD this week, 
closing at 3.08 ARP/USD.  Earlier in the week, the 
peso depreciated one cent to 3.09 ARP/USD after the 
Central Bank (BCRA) purchased USD 64 million in the FX 
market on February 14.  Then the BCRA kept up its 
active intervention by purchasing a total of USD 247 
million which was neutralize by increased exporters 
sales as well as inflows to purchase domestic bonds, 
allowing the peso to recover its lost cent and close 
the week at 3.08 ARP/USD -- unchanged from last 
Friday's close.  The peso exchange rate has 
depreciated 1 percent since the beginning of year. 
 
--------------------------------------------- -------- 
ECONOMY / FINANCE 
--------------------------------------------- -------- 
 
--------------------------------------------- -------- 
Venezuela buys a further USD 308 million of the Boden 
¶2012. 
--------------------------------------------- -------- 
 
¶2.  On February 14, the GOA reopened the Boden 2012 
and sold USD 308 million (face value) to Venezuela. 
This debt sale is the third purchase during 2006, 
bringing the 2006 accumulated amount to USD 929 
million (face value) and USD 750 million effective 
value.  In 2005, the GOV purchased USD 1.9 billion 
worth of GOA bonds (USD 1.6 billion effective value). 
The GOV is reportedly planning a new purchase of USD 
250 million of GOA bonds by the end of February. 
 
--------------------------------------------- -------- 
Limited negative impact of foot-and-mouth disease as 
the EU only bans Argentine beef exporters from the 
infected region. 
--------------------------------------------- -------- 
 
¶3.  On February 15, the European Union (EU) announced 
its decision to ban Argentine beef imports from only 
eight departments from the Province of Corrientes -- 
where an outbreak of foot-and-mouth disease was found 
last week.  This decision will help to moderate the 
negative impact from the disease since the EU in one 
of the largest markets for Argentine beef exports. 
Meanwhile, Israel announced it will ban beef imports 
only from Corrientes, while Chile stopped all beef 
imports from Argentina.  Many countries have not yet 
announced any decision.  According to Secretary of 
Agriculture Miguel Campos, exports of beef are likely 
to fall by around 20 percent or USD 280 million in 
monetary terms as a result of the outbreak.  However, 
Campos added that the losses are unlikely to be as 
large as initially feared, since many countries are 
limiting the export ban to the infected region, which 
represents a very small share of Argentine production. 
 
--------------------------------------------- -------- 
IADB to approve USD 500 million-loan to Argentina. 
--------------------------------------------- -------- 
 
¶4.  Argentina's representative at the Inter-American 
Development Bank (IADB), Eugenio Daz Bonilla, stated 
February 13 that the IADB may approve the USD 500 
million adjustment loan to Argentina during its 
February 22 meeting.  The IADB board will discuss the 
loan approval after having received an assessment 
letter from the International Monetary Fund (IMF) 
complimenting Argentina's recovery but also pointing 
out pending reforms.  If approved, this loan would be 
the first adjustment loan received by the GOA without 
the umbrella of an IMF program.  Meanwhile, the World 
Bank (WB) maintains on hold loans to the GOA for USD 
875 million. 
 
--------------------------------------------- -------- 
GOA reached price-restraint agreements with wholesale 
distributors. 
--------------------------------------------- -------- 
 
¶5.  The GOA closed a new agreement with the country's 
leading wholesale distributors on February 14.  These 
new price-restraint agreements aim to maintain prices 
on 300 basic goods unchanged for one year, but also 
are subject to a bi-monthly monitoring of any changes 
in the economic environment.  The Ministry of Economy 
and President Kirchner announced that they expected to 
close a new agreement with the Buenos Aires Central 
Market next week, which is the main price maker for 
fruits and vegetables in the country.  According to 
local media, the agreement will include a list of 
prices of the most popular goods in order to stabilize 
prices for those goods.  Reaching an agreement with 
the Central Market is key to the GOA's anti-inflation 
effort, since fruits and vegetables prices represent 
3.7 percent of the Consumer Price Index. 
 
--------------------------------------------- -------- 
GOA studying increasing the minimum income tax 
threshold, as demanded by unions. 
--------------------------------------------- -------- 
 
¶6.  On February 16, Deputy Agustin Rossi -- the head 
of the Peronist block -- stated that the executive 
branch can implement an increase of the minimum 
threshold for the income tax paid by employees by 
decree as foreseen in the 2006 Budget Law. 
Reportedly, the GOA will increase the minimum 
threshold by 20 percent as well as reduce the tax rate 
for the excess income above the threshold, beginning 
in April.  According to analysts, this measure will 
have an annual fiscal cost of ARP 530 million. Unions 
have been demanding this measure for some time. 
However, Hugo Moyano -- the leader of the CGT union -- 
stated that unions will only accept a minimum 
threshold of ARP 3,000 per month for single employees 
and ARP 4,000 per month for married employees -- much 
higher levels than the GOA is proposing.  Currently, 
the minimum threshold is ARP 1,835 per month for 
single employees and ARP 2,235 per month for married 
employees.  Reportedly, the GOA is also considering 
increasing the minimum threshold for the wealth tax to 
ARP 200,000 from its current level of ARP 102,000. 
 
--------------------------------------------- -------- 
GOA announces changes in social plans. 
--------------------------------------------- -------- 
 
¶7.  On February 13, the GOA announced a reform in 
social programs, by which recipients of the Head-of- 
Household Program can voluntarily choose to receive 
Training and Employment Insurance while they retrain 
to improve their skills to look for a job.  The aim of 
the measure is to boost job creation by setting up 
Employment Offices that will serve as a link between 
employers and job seekers.  Head-of-household 
recipients receive ARP 150 per month, while the 
Training and Employment Insurance Program will provide 
ARP 250 per month for a maximum of two years.  The 
Ministry of Labor estimated that 500,000 individuals 
will subscribe for the new Training and Employment 
Insurance Program in 2006. 
 
--------------------------------------------- -------- 
GOA to amend the Labor Risk Law. 
--------------------------------------------- -------- 
 
¶8.  On February 14, President Kirchner announced that 
the GOA will send to Congress a bill to amend the 
Labor Risk Law by next week.  According to local 
media, the Senate will start debating the bill in 
early March - when Congress begins its ordinary 
sessions.  Under the bill, workers who suffer work 
accidents will have to choose between obtaining 
compensation provided by insurance companies and 
presenting claims before civil courts to request 
greater compensation.  Employers have long requested 
an amendment of the Labor Risk Law to prevent 
employees from seeking compensation from both sources. 
However, employers would have preferred legislation 
limiting employees to obtaining compensation from 
insurance companies instead of having the option of 
presenting claims against employers in civil courts. 
 
--------------------------------------------- -------- 
Telefonica agreed to suspend its claim against the 
GOA. 
--------------------------------------------- -------- 
 
¶9.  The GOA and Telefonica signed a Letter of 
understanding February 14 in which the company agreed 
to suspend its claim against the GOA for USD 2.8 
billion in the International Center for the Settlement 
of Investment Disputes (ICSID -- an independent 
tribunal associated with the World Bank).  [ Note: 
Telefonica's claim before the ICSID is the largest the 
GOA faces.]  In exchange for suspending its claim, 
Telefonica will be able to extend for one hour the 
period in which it charges the highest tariff and to 
increase by three times the rates on incoming 
international calls.  These changes will provide an 
additional annual income of approximately USD 20 
million for the company.  The agreement, however, does 
not include any direct increase in tariffs.  President 
of Telefonica in Argentina Mario Vazquez announced 
investments worth ARP 1 billion in Argentina during 
¶2006.  On February 16, Minister of Planing De Vido 
stated that the GOA expects to reach an agreement with 
Telecom (the other largest telephone company) at the 
beginning of March, following Telefonica's agreement. 
 
--------------------------------------------- -------- 
BCRA rolls over its maturities. 
--------------------------------------------- -------- 
 
¶10.  The BCRA received bids of ARP 1.2 billion in its 
February 14 Lebac auction, above the ARP 893 million 
in Lebacs that came due during the week.  This allowed 
the BCRA to roll over its maturities for the third 
time in several weeks, accepting bids for ARP 1 
billion.  The yield on the 63-day Lebac dropped from 
7.0 percent to 6.98 percent.  The yield on the 42-day 
Lebac and 140-day Lebac remained unchanged at 6.80 
percent and 7.65 percent, respectively.  Lebacs for 
other maturities were withdrawn due to lack of 
interest.  As in the previous auction, investors 
concentrated more than 70 percent of their bids in 
Nobacs of more than 9 months.  The BCRA accepted ARP 
742 million of Nobacs (72 percent of the accepted 
amount in the auction).  The yield on the nine month 
Nobac reached 3.13 percent, while the yield on the 434 
and 679 day Nobac remained unchanged at 6.19 percent 
and 5.56 percent, respectively. 
 
--------------------------------------------- -------- 
Monthly economic activity index up 9.1 percent in 
¶2005. 
--------------------------------------------- -------- 
 
¶11.  The monthly economic activity index increased a 
strong 8.1 percent y-o-y in December, slightly below 
the BCRA market survey forecast of 8.3 percent.  The 
index jumped an impressive 9.1 percent in 2005, above 
market consensus of 9 percent and after increasing 9 
percent in 2004 and 8.3 percent in 2003.  The increase 
in the index is mainly attributed to a 7 percent 
increase in industrial activity, pushed by the 
construction component as well as exports performance. 
The strong 2005 growth will provide a 4 percent carry- 
over effect for 2006.  The BCRA consensus survey 
estimates a 6.8 percent increase in the index for 
¶2006.  However, some private analysts predict GDP 
growth as high as 8 percent for 2006.  The monthly 
economic activity index is viewed as a reliable 
leading indicator of GDP. 
 
--------------------------------------------- -------- 
Commentary of the Week: "Doubts and Certainties about 
the Bilateral Agreement Signed with Brazil".  By Felix 
Pena.  [Note: Translated and used with permission of 
the author, from an article published February 8 in La 
Cronista Comercial.  End Note.] 
--------------------------------------------- -------- 
 
¶12.  The region needs a solid relationship between 
Argentina and Brazil.  The Competitive Adaptation 
Mechanism (MAC) can contribute to this.  But Mercosur 
also needs to search for a mechanism with greater 
reach. 
 
¶13.  The bilateral agreement is a very long text with 
several parts open to interpretation. 
 
¶14.  In the current South American context, anything 
that helps strengthen relations between Argentina and 
Brazil is positive.  The region's pace of evolution is 
accelerating. 
 
¶15.  In each country in the region, two simultaneous 
processes are being put to the test by contradictory, 
rending forces at the global level, both in the area 
of security as well as economic competition.  One is 
the consolidation of strong and stable democracies. 
The other is the construction of modern economies, 
supported by social cohesion, technical progress and 
international competition.  Both feed on each other, 
require a lot of coordination of social energy, and 
implicitly require recognition of the fact that 
politics and economics are closely linked in the real 
world.  Argentina and Brazil -- especially together 
with Chile and Uruguay -- can play the roles of hard 
core democracies that contribute to the stability of 
the region. 
 
¶16.  An analysis of the question of safeguards (or 
"competitive adaptation") should be taken from this 
political perspective. 
 
¶17.  Technically, the new protocol implements the 
Agreement on Economic Complementarity - ACE 14 - 
reached in December 1990 in ALADI and that, in turn, 
is based on the still extant Treaty of Integration 
between Argentina and Brazil, signed in 1998.  A legal 
basis is article 22 of ACE 14, in which both countries 
agreed to introduce corrective mechanisms for 
 
potential disequilibria in the enjoyment of the 
benefits of the agreement.  What was recently agreed, 
therefore, is something that was foreseen. 
 
¶18.  Will this new agreement contribute to strengthen 
the bilateral relationship, reducing the recurrent 
commercial disputes that almost always exist in a few 
sectors of production or, at least, neutralize the 
political tensions between the two countries created 
by these disputes? 
 
¶19.  It is premature to make predictions yet, and we 
won't gain much by being overly optimistic. 
Nevertheless, it is useful to note a few risks with 
the intent of preventing the creation of future 
problems that affect the quality of bilateral 
relations.  At least three risk factors are evident 
from reading the text of the agreement. 
 
¶20.  The first is the result of the technical 
legislation used.  It is a very extensive text that 
opens up several areas to interpretation problems and, 
therefore, to its peaceful application.  A more 
austere text would have been better, following various 
precedents that exist on safeguards in trade 
agreements.  Much will depend on the efficiency of the 
Monitoring Commission and of the willingness of the 
sectors involved to reach agreements.  As a last 
resort, the agreement provides for technical 
arbitration by an Experts Group.  Its decision will be 
obligatory and not subject to appeal.  But the non- 
compliance of the parties with the decision, which is 
the suspension of the competitive adaptation 
mechanism, could be very costly in political terms, 
because it would require the "rejection of the 
agreement" (one assumes that this refers to rejecting 
the new protocol). 
 
¶21.  The second risk results from the fact that the 
new agreement remains outside of the dispute 
resolution mechanism agreed in the Protocol of Olivos. 
Because it is not an instrument of Mercosur, a party 
cannot resort to that mechanism in the case of a 
controversy.  Experience indicates that these 
controversies are frequent in any agreement on trade 
or regional integration.  For example, the diversion 
of trade that originates from other preferential trade 
agreements could be a source of future controversies. 
 
¶22.  The third risk is that Mercosur has not been able 
to create a similar instrument.  If it does create 
one, according to article 29, the new protocol will no 
longer be applicable.  And if it doesn't create one? 
That could affect Mercosur and open the door to 
problems because trade relations between Argentina and 
Brazil will become excessively bilateralized.  This 
would not be a problem except for the asymmetries of 
relative economic size and relative competitiveness 
between the two countries, which was precisely one of 
the reasons given for negotiating the new protocol. 
An excessive bilateralization does not appear to be 
convenient for Argentina. 
 
¶23.  We proposed a flexible architecture for Mercosur 
in an article written with Fabio Giambiagi that 
appeared in La Cronista on November 11, 2005. But we 
had imagined it being the result of a consensual 
process involving the other two partners and always 
within the parameters of the fundamental Treaty. 
 
¶24.  Given the sensibilities exhibited in recent 
times, both in Paraguay and Uruguay, it would seem 
advisable to proceed in this way as soon as possible, 
to substitute a similar Mercosur instrument for this 
new protocol.  [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