VZCZCXYZ0006
RR RUEHWEB

DE RUEHBU #0862/01 1071511
ZNR UUUUU ZZH
R 171511Z APR 06
FM AMEMBASSY BUENOS AIRES
TO RUEHC/SECSTATE WASHDC 4186
INFO RUEATRS/DEPT OF TREASURY WASHDC
RUCPDOC/USDOC WASHDC
RUEHRC/USDA FAS WASHDC 2146
RUEHC/DEPT OF LABOR WASHDC
RHMFISS/HQ USSOUTHCOM MIAMI FL

UNCLAS BUENOS AIRES 000862 
 
SIPDIS 
 
SENSITIVE 
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: GOA Will Easily Cover its Financial Needs in 
2006 
 
 
¶1. (U) Sensitive but unclassified.  Not for Internet 
distribution. 
 
------- 
Summary 
------- 
 
¶2. (SBU) The GOA will have no difficulty meeting its 
USD 11 billion in financing needs in 2006.  Under a 
conservative set of assumptions, the GOA will have 
resources of USD 12.3 billion from its five main 
sources of financing: its primary fiscal surplus; debt 
roll-overs from the World Bank and the IADB; BCRA 
financing; any excess cash that the GOA may have 
accumulated; and new market issuance.  Under a more 
optimistic set of assumptions (including additional 
Venezuelan bond purchases and additional new debt 
issuance), the GOA's resources could reach USD 15.3 
billion.  There is strong demand for GOA debt and the 
recent upgrade in GOA debt by S&P indicates that 
markets and analysts are positive about Argentina's 
economic fundamentals despite the GOA's unorthodox 
policies.  President Kirchner continues to burnish his 
fiscal conservative credentials, and seems to 
understand that the fiscal surplus conserves his 
macroeconomic anchor.  He also understands that a 
competitive exchange rate is a key element in 
sustaining the balance of payment surplus. 
Argentina's strong fiscal and balance of payments 
surpluses bode well for President Kirchner fortunes, 
despite an unorthodox policy approach, at least into 
the medium term.  End Summary. 
 
-------------------- 
GOA debt obligations 
-------------------- 
 
¶3. (U) The GOA faces USD 9.5 billion in debt payments 
(principal and interest services) in 2006, of which 
USD 3.2 billion are owed to the World Bank (WB) and 
the Inter-American Development Bank (IADB).  (Note: 
The GOA fully repaid its USD 9.5 billion debt to the 
IMF on January 2, 2006.  End Note.)  The remaining 
debt payments include Guaranteed Loan payments of USD 
1.8 billion, Boden bonds for USD 3.4 billion, Bocones 
(consolidated bonds) for USD 539 million and new bonds 
issued during the 2005 debt restructuring for USD 613 
million (these are according to GOA statistics, which 
do not include payments due to holdouts from the 2005 
restructuring). 
 
¶4. (SBU) Debt payments may increase by up USD 800 
million to a total of USD 10.3 billion when two GOA 
commitments made during the 2005 GOA debt 
restructuring are included: 
 
- First, an estimated USD 390-400 million payment to 
be paid to holders of the GDP-linked coupon given to 
bondholders as an incentive to participate in the GOA 
debt exchange.  (Note: All restructured bonds came 
with an attached option that is linked to GDP growth. 
This option pays 5 percent of the excess GDP growth 
above a trend forecast, which declines from 4.3 
percent to 3.2 percent in the first nine years and 
stabilizes at 3 percent after 2014.  End Note.)  The 
payments are due in 2006 for growth in 2005 that 
exceeded the forecast. 
 
- Second, the GOA commitment to use any excess payment 
capacity left from less than 100 percent participation 
in the debt exchange to repurchase existing performing 
debt or new restructured debt for six years.  This 
excess payment capacity is estimated at approximately 
USD 400 million.  (Note: participation in the debt 
exchange reached 76 percent.  End Note.)  The GOA has 
discretion to decide which bonds to repurchase and it 
could buy back any performing debt.  In November 2005, 
the GOA used USD 98 million of the USD 318 million 
 
 
excess capacity available for repurchases but has not 
made any additional repurchases since then, and it is 
not clear if it will repurchase any in 2006. 
According to press reports, the GOA may interpret its 
repurchase commitment to be met by its prepayment to 
the IMF in January 2006, since the IMF debt was 
performing debt as required by the exchange 
prospectus.  However, most investors likely will be 
disappointed by this new interpretation of the clause 
and view it as a change of rules since investors 
expected that the GOA would repurchase Bodens or new 
restructured debt that would improve the performance 
of GOA bonds.  Thus, it remains unclear whether the 
GOA will need to use the USD 400 million in 2006. 
 
¶5. (U) Additionally, GOA debt payments may increase a 
further USD 400 million when including interest and 
principal amortization on Boden bonds recently issued 
to the Venezuelan government (GOV).  The GOV has 
purchased USD 2.4 billion of Boden 2012 bonds since 
July 2005, which are not included in the latest GOA 
debt statistics (from June 2005, before the GOV 
purchases).  The Boden 2012 is a USD-denominated bond 
which amortizes in eight equal installments of 12.5 
percent each, which will increase GOA debt payments by 
USD 400 million in 2006.  This large Boden payment 
comes due in August, and the GOA will need to plan 
ahead to ensure it has this amount available. 
 
¶6. (SBU) The Embassy estimates that debt payments also 
may increase a further USD 240-300 million due to 
inflation (assumed at 12 percent) given that some GOA 
debt (most Guaranteed Loans and some Bodens and 
restructured debt) have CER (CPI-linked index) 
adjustment clauses.  This would bring the GOA's debt 
payments to USD 11 billion. 
 
------------------------------------------ 
Debts 
------------------------------------------ 
                     USD in billions 
Multilaterals           3.2 
Guaranteed Loans        1.8 
Bodens                  3.4 
Bocones                 0.5 
Restructured bonds      0.6 
------------------------------------------ 
Sub-Total               9.5 
------------------------------------------ 
Additional Adjustments 
Buyback commitments     0.8 
New Boden payments      0.4 
Inflation adjustment    0.3 
------------------------------------------ 
Total                  11.0 
------------------------------------------ 
 
----------------- 
Financing Sources 
----------------- 
 
¶7. (U) The GOA has five main financing sources: its 
primary surplus; debt roll-overs by the WB and the 
IADB; BCRA financing; any excess cash that the GOA has 
accumulated; and new market issuance.  The 2006 
primary fiscal surplus is projected at USD 7.3 billion 
(3.6 percent of GDP), according to the BCRA consensus 
survey.  This market consensus primary surplus is, 
however, more optimistic than the GOA 2006 budget 
assumption of a 3 percent of GDP primary fiscal 
surplus (approximately USD 5.8 billion) based on a 
highly conservative GDP growth rate of 4 percent - 
while the consensus survey is already forecasting 6.8 
percent growth. 
 
¶8. (SBU) The WB and IADB have principal amortizations 
of USD 1.0 billion and USD 1.4 billion, respectively. 
It is unclear how much the WB and the IADB may be 
 
willing to refinance this year given that there is no 
IMF program in place.  The WB currently has on hold 
USD 875 million in loans to the GOA.  On March 1, the 
IADB approved a USD 500 million adjustment loan to 
Argentina, the first adjustment loan it has made to 
without an IMF program, after having delayed its 
approval for two weeks.  For this analysis, the 
Embassy assumes that the WB does not roll over its 
principal payments, while the IADB refinances all USD 
1.4 billion in principal payments due. 
 
¶9. (U) BCRA financing to the GOA is limited to USD 600 
million, according to the limits set by the BCRA 
charter.  (Note: The BCRA's charter allows it to 
provide the GOA short-term financing equal to up to 12 
percent of the monetary base plus an additional 10 
percent of the GOA's tax collection during the last 
twelve months.  End Note.)  The BCRA has lent the GOA 
USD 5.0 billion already and therefore can only lend an 
additional USD 600 million as of March 27.  Some 
analysts believe that the BCRA will change its charter 
to allow additional borrowing from the BCRA, but we do 
not assume this in making our calculations.  A recent 
Deutsche Bank report estimated GOA cash holdings at 
USD 2.7 billion at the beginning of 2006.  This seems 
rather high, but we do not have any other estimates to 
double check this figure against. 
 
¶10. (U) It is difficult to estimate GOA new market 
issuance because it depends on many factors, among 
them: market conditions; Venezuela's willingness to 
purchase more GOA debt; investment decisions by 
private pension funds (AFJPs); bank refinancing 
assumptions; and investor's appetite for GOA debt. 
Since the beginning of the year, the GOV has purchased 
USD 1.2 billion worth of GOA debt with an effective 
value of USD 1.0 billion.  The Venezuelan Finance 
Minister has said several times that the GOV is 
willing to purchase about USD 2.5 billion, implying 
another USD 1.5 billion in purchases during 2006. 
AFJPs may provide USD 1 billion in 2006, assuming that 
they receive monthly cash-flows of USD 80-100 million 
from contributors.  According to economic consultants, 
new market issuance will range from a low of USD 1 
billion to a maximum of USD 2.5 billion, taking into 
account international investors' appetite for emerging 
market debt, Argentina's strong fundamentals, and the 
scarcity of emerging market debt to debt repurchases 
by many countries. 
 
¶11. (U) The Embassy excluded some financing sources 
which may be unlikely to materialize to make the 
analysis more conservative.  The excluded sources are: 
USD 1.5 billion additional bond issuance to the GOV; 
USD 1.5 billion new market issuance; and USD 2.7 
billion GOA cash holdings given the lack of 
alternative estimates.  Even without those sources, 
the GOA's total financial resources will reach USD 
12.3 billion (summarized in the table below). 
 
---------------------------------------- 
Sources 
---------------------------------------- 
                       USD in billions 
Primary Surplus             7.3 
IADB roll-over              1.4 
BCRA financing              0.6 
Bonds issued to Venezuela   1.0 
New issues - AFJPs          1.0 
New issues - other          1.0 
---------------------------------------- 
Total                      12.3 
---------------------------------------- 
 
------------------------------------ 
GOA issues USD 500 million of Bonars 
------------------------------------ 
 
¶12. (U) In the first week of March, Secretary of 
Finance Alfredo MacLaughlin traveled to New York to 
sound out banks about the possibility of issuing a new 
USD-denominated bond under U.S. law, which would be 
the first non-domestic GOA bond issued after the 
restructuring.  However, the GOA decided against this 
attempt (at least for now) because of the risk of 
attachment by holdout bondholders (those who did not 
participate in the 2005 GOA debt exchange).  Instead, 
the GOA decided to issue USD 500 million of Bonar 
(Bono de la Nacion Argentina), a new five-year USD 
denominated instrument under Argentine law with a 
fixed interest rate coupon of 7 percent and principal 
maturing in one installment in March 2011.  In its 
March 22 auction, the GOA received bids for USD 726.7 
million, well above the USD 500 million announced 
amount.  The GOA accepted bids for USD 500 million at 
a yield of 8.36 percent, above the 7.80-8 percent 
yield range predicted by the market.  The resolution 
providing for Bonar issuance allows the GOA to issue 
up to USD 1.5 billion of these bonds, and a new 
auction for another USD 500 million is expected in 
coming weeks.  These issuances are already included in 
the USD 1 billion market financing and AFJP financing 
sources estimate in the previous section. 
 
---------------------------- 
S&P upgrades GOA debt rating 
---------------------------- 
 
¶13. (U) On March 23, Standard & Poor's (S&P) announced 
an upgrade of GOA long-term debt from B minus to B, 
and an upgrade to the GOA's short-term debt from C to 
B, both with stable outlook.  According to the S&P 
press release, the upgrade is based on Argentina's 
strong growth and GOA fiscal surplus along with the 
reduction of GOA debt as a result of the 2005 
restructuring.  This upgrade may translate into lower 
financing costs for new GOA debt issuances. 
 
----------------- 
Financial Balance 
----------------- 
 
¶14. (U) The GOA's financial accounts are manageable 
even under conservative assumptions, with payments of 
USD 11 billion and resources of USD 12.3 billion and a 
financial surplus of USD 1.3 billion.  The USD 12.3 
billion in resources requires at least USD 2 billion 
in new debt issuance, but this seems easily achievable 
given that the GOA already has issued USD 500 million 
and is preparing to issue an additional USD 500 
million in the near future.  The USD 1.3 billion 
surplus also assumes that the IADB refinances USD 1.4 
billion and the BCRA provides another USD 600 million 
in financing.  Under an optimistic scenario, resources 
could reach USD 15.3 billion if Venezuela buys another 
USD 1.5 billion in GOA debt and the market absorbs 
another USD 1.5 billion in additional debt.  This 
seems probable given the strong appetite for emerging 
market debt and the strong Argentine fundamentals. 
 
-------------------------------------------- 
Measures reducing the primary surplus do not 
jeopardize GOA financial program 
-------------------------------------------- 
 
¶15. (SBU) The GOA has recently introduced two measures 
which will reduce the primary fiscal surplus. 
However, the fiscal impact of these measures is rather 
small and does not jeopardize the soundness of the GOA 
financial program.  The two measures are: 
 
- The increase of the minimum threshold for the income 
tax paid by employees, which has not been revised 
since the 2002 devaluation in spite of high inflation 
and nominal wage increases since December 2001.  The 
minimum threshold for the income tax will be increased 
 
from ARP 1,835 to ARP 2,400 per month for single 
employees, and from ARP 2,235 to ARP 3,200 per month 
for married employees, effective April 1.  According 
to official estimates, this measure will have an 
annual fiscal cost of ARP 1.5 billion (USD 487 
million) which will generate a relatively small impact 
on the GOA financing program.  For 2006 the impact may 
be even smaller, only USD 365 million, because the 
measure is effective starting April. 
 
- A suspension on beef exports for 180 days and an 
increase of export taxes on boned cuts and heat- 
processed beef from 5 percent to 15 percent.  The aim 
of these measures is to increase local supply and 
avoid further increases in domestic beef prices.  Beef 
prices constitute 4.5 percent of the basket of goods 
used to measure consumer prices, and the beef sector 
had resisted the GOA's demands for voluntary price 
restraints as part of the GOA's anti-inflation effort. 
According to Embassy estimates, the 180-day beef 
export ban will cost the GOA around ARP 184 million 
(USD 60 million) in lost export tax collections, not a 
significant loss compared to monthly tax revenues of 
ARP 10-11 billion.  Again, this measure will not 
jeopardize the GOA financial program.  (Note: The 
export ban may significantly reduce future investment 
in the beef sector and result in a large negative 
impact on export receipts in years to come.  End 
Note.) 
 
¶16. (U) The GOA is considering increasing the maximum 
amount exempt from the wealth tax, currently at ARP 
102,000 (USD 33,000).  The revision of this threshold 
has an estimated fiscal cost of ARP 300 million (USD 
97 million). Even if passed, this will not 
significantly affect the GOA's finances this year. 
 
-------- 
Comments 
-------- 
 
¶17. (SBU) In spite of its use of price restraint 
agreements as an anti-inflation policy, its lack of 
action on structural reforms, and the much-criticized 
Presidential style of dealing with problems and 
attacking critics, President Kirchner continues to 
burnish his fiscal conservative credentials.  The GOA 
continues to enjoy a strong financial position of 
"never spending a peso more than comes in as revenue". 
The expected 2006 fiscal surplus and the favorable 
market conditions make GOA financial needs achievable 
without much effort.  S&P's upgrade also reflects how 
positive markets and analysts are on Argentine 
economic fundamentals despite its unorthodox policies. 
Kirchner appears to understand that a competitive 
exchange rate and orthodox public financing policies 
are critical to maintaining hefty surpluses in the 
balance of payments and the fiscal side. His strong 
fiscal surplus serves as an inflation anchor, and his 
policy initiatives, such as the increase of the 
minimum income tax threshold and the beef export ban, 
are fashioned to have minimal fiscal impact. 
 
¶18. (U) The recent GOA Bonar auction confirms the 
strong market appetite for GOA debt -- despite the 
higher than expected yield -- and indicates that the 
GOA will not have any problem issuing more debt to 
finance its 2006 needs.  Also, GOA debt payments are 
relatively small in 2006, in part due to the 2005 debt 
restructuring in which the GOA both reduced its 
payments and lengthened its maturities.  New 
restructured debt accounts only for 6 percent of the 
USD 11 billion payments in 2006. 
 
LLORENS