VZCZCXYZ0012
RR RUEHWEB

DE RUEHBU #0800/01 1001210
ZNR UUUUU ZZH
R 101210Z APR 06
FM AMEMBASSY BUENOS AIRES
TO RUEHC/SECSTATE WASHDC 4097
INFO RUEATRS/DEPT OF TREASURY WASHDC
RUCPDOC/USDOC WASHDC
RUEHRC/USDA FAS WASHDC 2133
RUEHC/DEPT OF LABOR WASHDC
RHMFISS/HQ USSOUTHCOM MIAMI FL

UNCLAS BUENOS AIRES 000800 
 
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 April 7, 2006 
 
--------------------------------------------- -------- 
Weekly Highlights 
--------------------------------------------- -------- 
 
- CPI up 1.2 percent m-o-m in March - above market 
expectations.  PPI down 0.6 percent m-o-m. 
- GOA and meat sector reached an agreement to reduce 
prices of eleven popular beef cuts. 
- Trucker's union and GOA agree to a 19 percent salary 
increase - below the 29 percent demanded. 
- Tax revenues rose 25 percent y-o-y to ARP 10.4 
billion in March - in line with market expectations. 
- BCRA meets its monetary target for the eleventh 
consecutive quarter. 
- Commentary of the Week:  "There is Space for a New 
Crisis" 
 
--------------------------------------------- -------- 
CPI up 1.2 percent m-o-m in March - in line with 
market expectations.  PPI down 0.6 percent m-o-m. 
--------------------------------------------- -------- 
 
¶1.  The Consumer Price Index (CPI) increased 1.2 
percent m-o-m in March, well above market expectations 
of 1 percent following a 0.4 percent m-o-m increase in 
February.  Last month's increase brought inflation to 
2.9 percent in the first quarter of the year, compared 
to a 4 percent increase in the first quarter of 2005. 
CPI core inflation was up 1.23 percent, but was offset 
by a 0.06  percent fall in the seasonal component. 
The monthly rise was driven mainly by an increase in 
the prices of education (+9.5 percent), clothing (+6.1 
percent - due to the beginning of the autumn season) 
and food and beverages (+1.5 percent, despite price- 
restraint agreements between the GOA and many 
producers and retailers).  These increases were 
partially offset by a fall in leisure activities (-3.1 
percent).  Meat prices (representing 4.5 percent of 
the consumer basket) increased 3.4 percent m-o-m in 
spite of the ban on beef exports.  Year-on-year, CPI 
rose 11.1 percent.  The BCRA consensus survey 
forecasts 12.0  percent inflation in 2006, down from 
12.5 percent forecast last month, reflecting a slight 
fall in inflationary expectations that is likely from 
the GOA having signed price restrain agreements with 
many sectors of the economy including foods and 
beverages, apparel, school supplies, toiletries, 
physicians' fees, pharmaceuticals and hotels.  The 
2006 Budget projects a 9.1 percent inflation rate for 
2006 and the Central Bank's inflation target range is 
8-11 percent. 
 
¶2.  Producer prices decreased 0.6 percent m-o-m in 
March, due to a 4 percent decrease in primary goods 
prices that was partially offset by a 0.7 percent rise 
in the prices for manufactured goods.  The price of 
electricity remained unchanged, while prices for 
imported goods increased 0.6 percent.  The PPI index 
increased 10.8 percent y-o-y. 
 
 
--------------------------------------------- -------- 
GOA and meat sector reached an agreement to reduce 
prices on eleven popular beef cuts. 
--------------------------------------------- -------- 
 
¶3.  On April 7, the GOA reached an agreement with the 
meat sector to reduce the prices of 11 popular cuts of 
beef and to maintain those prices until the end of the 
year.  As part of the agreement, the GOA eliminated 
the minimum 280 kg. weight for cattle to be 
slaughtered, an unpopular rule that the GOA instituted 
to increase supply.  This agreement came after three 
months of disputes between the GOA and the meat 
industry, and one month after the GOA imposed a beef 
export ban.  Reportedly, the export ban will be lifted 
in 30 to 60 days, after domestic market supply reaches 
normal levels.  However, the ban will be lifted first 
only for the most expensive cuts, frozen beef and 
 
 
thermo-processed meat.  According to some reports, the 
GOA also will implement a 30 percent export quota on 
the front quarters of the cow. 
 
--------------------------------------------- -------- 
Trucker's union and GOA agree to a 19 percent salary 
increase, less than the 29 percent increase demanded. 
--------------------------------------------- -------- 
 
¶4.  Minister of Labor Carlos Tomada announced an 
agreement with the truck driver's union this week, in 
which the GOA agreed to a 19 percent salary increase, 
to be implemented in two installments, a 10 percent 
increase effective April and a 9 percent increase 
effective in July.  The union had been on strike, 
asking for a 29 percent increase.  The strike 
threatened to slow exports and created problems in 
garbage recollection and transportation of cash to 
bank ATMs.  Separate from the agreement, the GOA 
promised the sector that it would gradually eliminate 
road-tolls for the transport sector and that it will 
finance the purchase of new trucks with low interest 
loans from Banco Nacion.  This 19 percent salary 
increase will set a precedent (and probably a ceiling) 
for future wage negotiations for other sectors of the 
economy.  Already on April 6, three sectors - 
including: banking, railroad and building maintenance 
employees - agreed to wage increases (of 17 percent, 
17 percent and 18.5 percent, respectively) all less 
than 19 percent agreed by the trucker's union. 
Reportedly, the food sector will follow suit next 
week. 
 
--------------------------------------------- -------- 
The Senate approves the rescission of Aguas 
Argentina's concession contract . 
--------------------------------------------- -------- 
 
¶5.  On April 5, the Senate approved a bill that 
rescinds Aguas Argentina's concession contract for 
water and sewer services in Buenos Aires.  The Chamber 
of Deputies had already approved it on March 29, and 
the bill will become law once it is published in the 
Official Gazette.  The Chamber of Deputies also 
approved the creation of the state-owned water company 
AYSA (Agua y Saneamientos Argentinos SA) this week, 
after having postponed its debate for a week when some 
deputies questioned the legal structure of the new 
company and raised concerns about a future re- 
privatization of the company. 
 
--------------------------------------------- -------- 
Tax revenues rose 25 percent y-o-y to ARP 10.4 billion 
in March - in line with market expectations. 
--------------------------------------------- -------- 
 
¶6.  March federal tax revenues increased 25 percent y- 
o-y to ARP 10.4 billion - in line with market 
expectations of ARP 10.7 billion.  Labor contributions 
jumped 60 percent y-o-y due to increases in formal job 
creation and salary increases.  VAT revenues rose 30 
percent y-o-y, reflecting strong economic activity. 
Income tax and trade tax revenues increased 15 percent 
and 14 percent y-o-y, respectively.  According to the 
GOA, the increase in tax collection is due to VAT, 
income tax revenues and labor contributions, which 
together provided 75 percent of March tax collection. 
In real terms, revenues increased 12 percent y-o-y. 
The BCRA consensus survey forecasts 2006 tax revenues 
at ARP 139 billion. 
 
--------------------------------------------- -------- 
A federal judge from San Luis province rules against 
the GOA beef export ban. 
--------------------------------------------- -------- 
 
¶7.  On April 4, a federal judge in San Luis province 
issued an injunction against the GOA beef export ban. 
[The GOA suspended beef exports for 180 days starting 
 
March 14 to increase local supply and avoid further 
increases in domestic beef prices in an attempt to 
control inflation.]  The injunction was granted in 
favor of the San Luis Rural Society and may eventually 
lead to a temporary suspension of the beef export ban. 
However, some legal experts questioned the decision 
because the injunction was granted to the Rural 
Society, not to exporters.  Chief of Cabinet Alberto 
Fernandez severely criticized the ruling and predicted 
that the GOA will appeal the measure. 
 
--------------------------------------------- -------- 
BCRA meets its monetary target for the eleventh 
consecutive quarter. 
--------------------------------------------- -------- 
 
¶8.  On April 3, the Central Bank (BCRA) announced that 
it fulfilled its monetary target for the first quarter 
of 2006, the eleventh consecutive quarter in which the 
BCRA has met its target.  According to preliminary 
BCRA data, the average M2 (cash plus public and 
private sector current and saving accounts) level 
during the quarter was close to the lower end of its 
Monetary Program target of ARP 104.4 billion, and ARP 
4.7 billion below the upper limit of ARP 110.9 
billion.  The BCRA began this year to target M2 
instead of the monetary base because M2 better 
reflects monetary conditions due to the increase in 
the money multiplier.  The BCRA was aided in meeting 
its monetary target by a contraction in the monetary 
base -- caused by bank repayment of discount window 
loans taken out during the 2001 financial crisis (see 
story below), the BCRA's issuance of Lebacs and 
Nobacs, and the GOA's repayment of short-term loans to 
the BCRA -- that more than offset BCRA purchases of 
foreign currency in the FX market.  The 2006 monetary 
program envisions an expansion of M2 of 21.2 percent 
in 2006, well below the 36 percent, 33 percent and 25 
percent increases seen in 2003, 2004 and 2005, 
respectively. 
 
--------------------------------------------- -------- 
Banks pay back ARP 527 million in rediscount loans to 
the BCRA. 
--------------------------------------------- -------- 
 
¶9.  On April 4, Banco Galicia pre-paid ARP 527 million 
in discount borrowing to the BCRA.  This prepayment, 
plus the banks' payment of an ARP 59 million 
installment of the matching system (under which banks 
repay the BCRA for financial assistance received 
during the 2001 financial crisis) generated a monetary 
base contraction of ARP 586 million.  Following these 
pre-payments, only three banks - out of twenty-four at 
the beginning of the 2002 crisis - will have 
outstanding discount borrowing from the BCRA, totaling 
ARP 6.1 billion.  With this pre-payment, Banco Galicia 
still holds 48 percent of its original discount 
borrowing from the BCRA. 
 
--------------------------------------------- -------- 
BCRA rolls over its maturities.  Investors 
concentrated their bids in Nobacs and short term 
Lebacs. 
--------------------------------------------- -------- 
 
¶10.  The BCRA received ARP 513 million in bids at its 
April 4 Lebac auction, less than the ARP 1.2 billion 
in Lebacs that came due during the week.  However, the 
BCRA received ARP 958 million in bids in its Nobac 
auction.  As in previous auctions, the BCRA was able 
to roll over its maturities by accepting bids for ARP 
1.3 billion (ARP 493 million in Lebacs and ARP 768 
million in Nobacs).  The yield on the 28-day Lebac 
decreased from 6.69 percent to 6.62 percent, the yield 
on the 63-day Lebac remained unchanged at 6.85 
percent, while the yield on the 84-day Lebac decreased 
slightly from 7.18 percent to 7.15 percent.  Lebacs 
for other maturities were withdrawn due to lack of 
 
interest.  The spread on the nine-month Nobac 
decreased five basis points from 2.80 percent to 2.75 
percent, while the spread on the two-year Nobac 
dropped six basis points from 4.73 percent to 4.67 
percent.  Investors continue concentrating their bids 
in Nobacs, since these instruments have a variable 
rate and provide a higher yield and short-term Lebacs 
given that these instruments do not have any 
adjustment in its interest. 
 
--------------------------------------------- -------- 
Employment index increased 0.5 percent m-o-m in 
February - according to Ministry of Labor survey. 
--------------------------------------------- -------- 
 
¶11.  The Ministry of Labor announced that its 
employment index increased 0.5 percent m-o-m in 
February.  (The index is based on surveys from the 
cities of Buenos Aires, Mendoza, Rosario and Cordoba). 
The trade and services sector had the highest job 
creation in February (up 0.5 percent m-o-m) followed 
by manufacturing (up 0.4 percent m-o-m). These gains 
were partially offset by a slight decrease in the 
construction sector (down 0.1 percent m-o-m).  The 
index increased 9.8 percent y-o-y. 
 
--------------------------------------------- -------- 
March labor demand index down 0.3 percent m-o-m - 
fourth consecutive fall. 
--------------------------------------------- -------- 
 
¶12.  The March labor demand index calculated by Di 
Tella University decreased 0.3 percent m-o-m to 110.39 
points.  Labor demand has decreased 3.23 percent so 
far during 2006.  Despite the fall for the fourth 
consecutive month, the index is still above its pre- 
2001 crisis level.  The labor demand index is up 29.7 
percent y-o-y.  [The index is based on comparisons of 
job vacancy announcements printed in the two largest 
newspapers of the country.] 
 
--------------------------------------------- -------- 
Commentary of the Week:  "There is Space for a New 
Crisis", by Aldo Abram, from an article published in 
La Nacion.  (Note: Translated and used with permission 
of the author, from an article published April 2 in La 
Nacion.  End Note.) 
--------------------------------------------- -------- 
 
¶13.  With the fall of the Berlin Wall and the USSR, 
some people rushed to announce "the end of history." 
Now, they are predicting "the end of crises," given 
the large earnings of investors and the bonanza that 
the worldwide boom in stock and real estate markets 
has brought to Latin American countries, based on 
immense international liquidity and economies of East 
Asia that are growing strongly as capitalism advances 
there.  Could it be true, or is it only a necessity to 
believe that earnings and trees can grow infinitely? 
 
¶14.  Let's look at the world.  There are no crises 
now, but: 
 
¶15.  United States: Faced with an economic slowdown 
since 1999 and the low level of inflation, the Federal 
Reserve decided to lower interest rates from 6 percent 
to just 1 percent in the third quarter of 2003.  While 
this produced favorable results, the US Government ha 
been running a rampant budget deficit since 2001 and 
the economy has begun to grow rapidly.  Both of these 
resulted in an important increase in credit demand and 
pressure to raise interest rates, which the Federal 
Reserve refused to recognize.  To cover the increase 
in credit demand, the Fed had to emit huge quantities 
of dollars that people didn't demand to save, but to 
spend. 
 
¶16.  The US dollar began to depreciate and, towards 
the middle of 2004, inflationary expectations turned 
 
worrisome.  To change this trend, the Federal Reserve 
began gradually raising its reference rates, which 
will neutralize the pressures caused by increasing 
credit demand.  Although the dollar is not 
strengthening, the general bet in the market is that 
the increase in the Federal Funds rate from 5 percent 
or 5.5 percent will maintain the current low level of 
price indexes.  But if it is necessary to increase it 
to 6.5 percent?  Would not the resulting strong 
contraction in liquidity affect capital flows? 
Wouldn't the rapid appreciation of the dollar cause a 
drop in commodity prices and stock and real estate 
markets?  Won't an aggressive increase in US interest 
rates pull along with it those of Europe and Japan? 
How would all of this affect emerging markets? 
 
¶17.  Europe:  The principal countries of Europe are 
finding it politically difficult to face the 
structural reforms needed to minimize welfare costs, 
and economic changes that will require the adoption of 
a new media and information revolution.   Despite the 
excellent work of the European Central Bank to 
maintain the stability of the Euro, it suffers 
constant attacks by those who don't want to confront a 
world that is changing and find it easier to blame the 
new unified currency instead.  Could the social unrest 
and the resistance to change of the Germans, French 
and other Europeans break the solidity of the Euro? 
Will the birth pains of the new European economy kill 
the process of deepening the European Union?  Could an 
increase in risk perception or a strong contraction in 
international liquidity provoke a new economic crisis 
in the EU? 
 
¶18.  Argentina:  The economic recovery process of the 
past few years has been based on a monetary and 
exchange rate policy that produces a controlled but 
high rate of inflation and a high primary fiscal 
surplus.  Nevertheless, the government sees the state 
as the motor of growth.  Taking a peso from the 
private sector and spending it through the public 
sector generates growth.  Because of this, the tax 
burden is at record levels and there is no interest in 
using a part of the enormous increase in revenues to 
look for a more just or efficient tax system. 
Maintaining fiscal solvency is a necessary cost to 
bear so that the government can apply the rest of its 
policies. 
 
¶19.  The State determines the economic model, and 
therefore it should intervene to fix relative prices, 
direct investment to projects it considers convenient, 
arbitrarily influence businesses' cost structure, 
nationalize infrastructure projects or directly take 
over public service companies (mail, energy, air 
navigation, railroads, water and sewer, etc.) 
 
¶20.  The basic policy principle of the administration 
is distribution of income, not only through state 
spending on assistance programs, but also through 
salary increases imposed by decree, changes in labor 
conditions, the freezing of public service tariffs, 
agreements or controls on prices, restrictions on 
exports, etc. 
 
¶21.  With a monetary policy supporting a high exchange 
rate that carries with it high levels of inflation, 
won't people begin to flee from the peso?  Won't price 
agreements lead to the establishment of maximum 
prices?  Won't increases in export taxes and bans on 
exports become the norm? 
 
¶22.  Public service companies saw their contracts and 
the regulations that govern their operations broken 
unilaterally by the State.  There will not be 
investment in public services while tariffs are frozen 
and great uncertainty remains about their future 
evolution.  The higher inflation goes, the less likely 
it is that the government will allow tariff increases, 
 
while the real value of what public service providers 
recover in tariffs is going down.  How can this 
vicious circle be broken?  For how long will the 
accumulated investment made prior to the crisis 
sustain the quantity and quality of public services? 
How many services will ultimately end up being wholly 
or partially re-nationalized? 
 
¶23.  Conclusion: There is no crisis at the moment, but 
they do continue to exist. 
 
¶24.  In fact, one can come up with other possibilities 
in addition to those noted, ranging from an avian flu 
epidemic to some major conflict in some sensitive part 
of the world. 
 
¶25.  For these reasons, governments, businesses and 
investors should act with caution keeping these risks 
in mind and positioning themselves adequately to 
confront them.  (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