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FM AMEMBASSY BUENOS AIRES
TO RUEHC/SECSTATE WASHDC 5568
INFO RUEATRS/DEPT OF TREASURY WASHDC
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UNCLAS BUENOS AIRES 001835 
 
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 
August 11, 2006 
 
 
--------------------------------------------- -------- 
Weekly Highlights 
--------------------------------------------- -------- 
 
- Argentina President Nestor Kirchner reacted negatively to possible 
GSP exclusion. 
- Argentina and Venezuela "Southern Bond" could be issued in 
September. 
- Argentina and Brazil plan to stop using the dollar as commercial 
exchange currency advances. 
- GOA beef export ban has caused USD 147 million in export losses. 
- The IMF publishes the article IV review of Argentina. 
- Economic Minister Felisa Miceli said that inflation will be 
significantly lower than in 2005. 
- Commentary of the Week: "There is a subtle change in monetary and 
exchange rate policy" 
 
--------------------------------------------- -------- 
Argentina President Nestor Kirchner reacted negatively to possible 
GSP exclusion. 
--------------------------------------------- -------- 
 
¶1.  On August 8, Argentine President Nestor Kirchner reacted 
negatively to the announcement that Argentina could lose benefits 
from the Generalized System of Preferences (GSP) program.  The GSP 
grants duty-free treatment to US imports of goods from developing 
countries, including Argentina.  According to US Trade 
Representative Susan Schwab, the administration wants to determine 
whether certain countries should be excluded from the GSP program 
and asked for public comments on whether the benefits should be 
limited or withdrawn from certain countries, based on statutory 
criteria.  Kirchner said that Argentina is an independent country 
that is not going to be pressured by "not too serious actions," 
comparing them to "old theories proper of the Roman Empire."  He 
appears to have - as did many journalists - interpreted the GSP 
review as retaliation against countries that didn't support the US 
to reach an agreement in the Doha Round of global trade talks and to 
form a Free Trade Area of the Americas, and specifically against 
Argentina for its closer ties to Venezuela and actions at the Mar 
del Plata Summit in November, 2005.  The Secretary of Foreign Trade, 
the Argentine Ambassador to the US, and the head of the Argentina 
Exporters Chamber all said that this review should not be 
interpreted as retaliation. 
 
--------------------------------------------- -------- 
Argentina and Venezuela "Southern Bond" could be issued in 
September. 
--------------------------------------------- -------- 
 
¶2.  On August 9, Venezuela's Congressional Finance Committee 
approved a joint bond sale between Argentina and Venezuela.  The 
so-called "Southern Bond" could be issued during the first two weeks 
of September for USD 1 billion and, according to the market 
response, a second tranche of USD 1 billion would be issued later. 
The "Southern Bond" will be a combined asset, half of it will be the 
Argentine Boden 2012, and the rest, a Venezuelan fixed rate bond. 
The first issuance will be offered in the Venezuelan market, to be 
sold to locals and possibly external secondary markets. 
 
--------------------------------------------- -------- 
Argentina and Brazil plan to stop using the dollar as commercial 
exchange currency advances. 
--------------------------------------------- -------- 
 
¶3.  On August 7, during the Mercosur central bank presidents summit 
in Uruguay, Martin Redrado (President of the BCRA) and Henrique 
Meirelles (President of Brazil Central Bank) agreed to start working 
on a project to begin using their local currencies in bilateral 
commercial transactions (Argentina-Brazil bilateral trade is 
currently worth about USD 16.5 billion a year).  As of now, each 
country purchases dollars to buy exports from the other partner, 
while in the future both countries will operate in Argentine pesos 
and in Brazilian reales.  According to Argentine officials, the use 
of this procedure will not be obligatory and a joint commission will 
gather to start working on the project on August 14. 
 
--------------------------------------------- -------- 
GOA beef export ban has caused USD 147 million in export losses. 
--------------------------------------------- -------- 
 
 
¶4.  According to the National Food and Animal Health Inspection 
Service (SENASA), Argentine beef exports were USD 480 during first 
half of 2006, against USD 627 in the same period in 2005 (-23 
percent y-o-y).  By volume, beef sales decreased 37 percent y-o-y. 
[On March 8, 2006, the GOA imposed a ban beef exports for 180 days 
and raised export taxes on boned cuts and heat-processed beef from 5 
percent to 15 percent in an attempt to keep inflation under control. 
 On May 29 the GOA eased the ban through an export quota system.] 
 
--------------------------------------------- -------- 
The IMF publishes article IV review of Argentina. 
--------------------------------------------- -------- 
 
¶5.  On August 9, the IMF published its article IV review of 
Argentina.  The IMF praised Argentina's fiscal tightening after the 
economic crisis, the state of the banking system and the recovery 
process.  However, the IMF criticized the fiscal erosion during 
2006, growing labor informality, price controls and the lack of 
measures to encourage investment.  According to the IMF, price 
controls in Argentina are affecting the business environment and 
creating capacity problems in some sectors.  Some of the IMF's 
recommendations were: for the GOA to curb the growth of primary 
spending, increase real interest rates to make them positive and 
allow for a greater upward flexibility (i.e., let the peso 
appreciate) of the exchange rate.  The complete review can be found 
at http://www.imf.org/external/np/sec/pn/2006/pn 0693.htm. 
 
--------------------------------------------- -------- 
The Chamber of Deputies approves an amendment to the Consumer's 
Defense Law and increases the power of the Secretary of Internal 
Commerce. 
--------------------------------------------- -------- 
 
¶6.  On August 9, the Chamber of Deputies approved an amendment to 
the Consumer's Defense Law that will increase the powers of the 
Secretary of Internal Commerce Guillermo Moreno.  Under the 
 
SIPDIS 
amendment, Moreno will be able to impose fines of up to ARP 5 
million on companies that do not comply with consumer affairs 
regulations.  Opposition deputies from the PRO party and businessmen 
criticized the amendment, arguing that the same secretary will be in 
charge of arranging price agreements with companies as well as 
applying fines to those same companies.  The bill now goes to the 
Senate, where it is expected to be passed. 
 
--------------------------------------------- -------- 
Economic Minister Felisa Miceli said that inflation will be 
significantly lower than in 2005. 
--------------------------------------------- -------- 
 
¶7.  On August 9, Economic Minister Felisa Miceli stated in a speech 
to the private sector that inflation this year is likely to be 
significantly lower than in 2005.  Miceli also said that the GOA is 
committed to maintain the fiscal primary surplus of at least 3.3 
percent of GDP in 2006 and to follow a similar strategy in 2007, and 
to keep a "competitive" exchange rate.  During the same event, the 
Planning Minister Julio de Vido stated that the GOA is not going to 
change its utilities' tariff policy and that power supply during the 
upcoming years is assured. 
 
--------------------------------------------- -------- 
The GOA wants to keep rising rent prices down. 
--------------------------------------------- -------- 
 
¶8.  After meeting with members of the real estate sector to talk 
about rising rent prices, the Secretary of Internal Trade Guillermo 
Moreno will try to reduce the cost of mortgage loans.  Moreno talked 
to BCRA President Martin Redrado to seek an overall reduction in 
monthly mortgage payments and will meet with private bank directors 
shortly to ask them to increase the supply of mortgage loans (i.e., 
lower mortgage rates).  According to the National Bureau of 
Statistics (INDEC), rents have increased 7.2 percent in 2006, while 
the CPI increased 4.9 percent. 
 
--------------------------------------------- -------- 
Consumer Confidence Index down 3.3 percent m-o-m. 
--------------------------------------------- -------- 
 
¶9.  The consumer confidence index -- measured by Torcuato Di Tella 
 
University -- decreased 3.3 percent m-o-m in August.  All three 
index components decreased: consumer sentiment toward the 
macroeconomic environment (-3.1 percent m-o-m), consumer willingness 
to purchase durable goods and real estate (-7.4 percent) and 
improvement in personal situation (-0.2 percent m-o-m).  The index 
has still risen 7.3 percent y-o-y.  The index is based on surveys of 
individuals and consumer willingness to purchase durable goods, 
houses and cars. 
 
--------------------------------------------- -------- 
The GOA agrees to increase transportation fares. 
--------------------------------------------- -------- 
 
¶10.  The GOA will gradually increase transportations fares.  For 
medium and long distance buses, the GOA authorized an immediate 10 
percent fare increase and another, close to 15 percent, on September 
¶7.  For domestic airfares the increase scheme is 10 percent now and 
an additional 10 percent on September 7.  Finally, the rise for 
taxis will be implemented in two steps reaching a 23 percent 
increase by September. 
 
--------------------------------------------- -------- 
Argentina Supreme Court unlikely to readdress the "pesification" 
decree while vacancies remain. 
--------------------------------------------- -------- 
 
¶11.  According to Argentina Supreme Court justice Carmen Argibay, 
until new judges are named to the Supreme Court or the Congress 
reduces the number of seats on the bench, it will be difficult to 
reach the absolute majority needed to reach a statement on the 
"pesification" issue.  The Argentine Supreme Court currently has 
nine seats; at present the Supreme Court has seven judges, and 
positions are divided on this issue.  On October 26, 2004, the 
Supreme Court ruled against a court injunction, validating the 2002 
decree which converted dollar deposits into pesos, but that ruling 
was not taken as binding by the lower courts. 
 
--------------------------------------------- -------- 
Labor union leaders propose a 19 percent increase in the minimum 
retirement pensions. 
--------------------------------------------- -------- 
 
¶12.  Labor union leaders proposed to the GOA a 19 percent increase 
in the minimum retirement pensions, from ARP 470 to ARP 560.  Union 
members are organizing a demonstration for August 23 to support this 
request.  According to union leader Hugo Moyano, President Nestor 
Kirchner in a private meeting committed himself to improve minimum 
retirement pensions before the end of 2006. 
 
--------------------------------------------- -------- 
Argentine Supreme Court ruled against selective pension increases. 
--------------------------------------------- -------- 
 
¶13.  On August 8, the Argentine Supreme Court ruled against 
selective pension increases established by the GOA, claiming that 
this action infringes the National Constitution, particularly for 
the case of pensions above ARP 1,000 per month.  According to the 
Court member Ricardo Lorenzetti, the issue of pension mobility 
should be solved in the short term, by including it in the 2007 
Budget.  Private consultants estimate that if the GOA applies 
pension mobility, the cost of this measure will be approximately ARP 
5.2 billion annually, or 0.8 percent of GDP.  Argentine President 
Nestor Kirchner asked to include this issue in the Congress 2007 
Budget debates. 
 
--------------------------------------------- -------- 
The GOA announces a 180-day glass export ban. 
--------------------------------------------- -------- 
 
¶14.  On August 7, the GOA announced a 180-day glass export ban, the 
aim of this measure is to increase local supply and avoid further 
increases in domestic glass prices.  The GOA justified its decision 
by noting that there has been a "significant increase" in the 
domestic price of glass and an 85 percent y-o-y increase in glass 
exports during the January-May period. 
 
--------------------------------------------- -------- 
The BCRA consensus survey reduces its 2006 inflation forecast. 
--------------------------------------------- -------- 
 
 
¶15.  The BCRA consensus survey reduced its 2006 inflation forecast 
from 11.5 percent to 10.9 percent, as expectations for prices eased 
after July CPI figures turned out to be lower than expected (+0.6 
percent m-o-m).  The BCRA consensus survey includes the forecasts of 
17 banks, 19 economic consultants, 8 foundations and research 
centers, and 11 universities. 
 
--------------------------------------------- -------- 
Italian court rules against Banca Nazionale del Lavoro for selling 
Argentine bonds. 
--------------------------------------------- -------- 
 
¶16.  The Tribunal of Cuneo, in north Italy, ruled against the Banca 
Nazionale del Lavoro bank for "irresponsible selling" of Argentine 
bonds to some of their clients.  The Italian banks will have to pay 
EUR 154,250 plus interest to more than 450,000 bank clients.  The 
Argentine public bonds under consideration are those which the GOA 
defaulted on during its 2002 economic crisis. 
 
--------------------------------------------- -------- 
June wage index increased 1.23 percent m-o-m -- below market 
expectations. 
--------------------------------------------- -------- 
 
¶17.  The National Bureau of Statistics (INDEC) announced that the 
wage index increased 1.23 percent m-o-m in June, below market 
expectations of 1.40 percent, and increased 17.74 percent y-o-y. 
This index defines wages as a price, without considering hours 
worked or special payments for productivity gains.  This index 
surveys the formal and informal private sector and the public 
sector, which rose 1.44 percent, 1.05 percent and 0.79 percent, 
respectively.  The consensus survey forecasts a 16.9 percent 
increase in the wage index for 2006.  INDEC also announced that the 
basic food basket -- used to measure indigence -- decreased 0.21 
percent m-o-m and the total basic basket -- used to measure poverty 
-- increased 0.25 percent m-o-m in July. 
 
--------------------------------------------- -------- 
BCRA rolls over its maturities and decreases rates for Nobacs. 
--------------------------------------------- -------- 
 
¶18.  The BCRA received ARP 1.9 billion in bids at its August 8 Lebac 
and Nobac auction, compared to ARP 1.1 billion in Lebacs that came 
due during the week.  It accepted ARP 577 million in Lebac bids and 
ARP 533 million in Nobac bids.  The yield on the 168-day Lebac 
remained at 8.50 percent and, on the longest term instrument, the 
364-day Lebac, the yield was 11.90 percent.  Lebacs with a maturity 
of 252-day were withdrawn because of the BCRA's decision to not 
accept the yield proposed by the market, and Lebacs for maturities 
of more than 364 days were withdrawn due to lack of interest.  The 
spread on the one-year Nobac decreased from 2.03 percent to 1.57 
percent and the two-year Nobac from 3.72 percent to 3.43 percent. 
The Badlar rate (the base rate for Nobacs) is currently at 9.6 
percent.  Accepting almost all Lebac bids and rejecting more than 
half of Nobac bids seems to be a new BCRA policy, beginning last 
week. 
 
--------------------------------------------- -------- 
The peso is unchanged against the USD this week, closing at 3.09 
ARP/USD. 
--------------------------------------------- -------- 
 
¶19.  The peso remained flat versus the USD this week, closing at 
3.09 ARP/USD.  The BCRA is not reporting daily transactions in the 
dollar market.  The peso exchange rate has depreciated 1.3 percent 
since the beginning of the calendar year.  The BCRA's reserves stood 
at USD 27.1 billion as of August 9, and have increased USD 8.5 
billion, or 46 percent, since the GOA prepaid its entire IMF debt on 
January 2. 
 
--------------------------------------------- -------- 
Commentary of the Week: "There is a subtle change in monetary and 
exchange rate policy", by Miguel Kiguel, from an article published 
in El Cronista Comercial on July 24. 
--------------------------------------------- -------- 
 
¶20.  The exchange rate in Argentina has remained stable in recent 
months, while interest rates have been increasing very gradually and 
 
 
the Central Bank continues carrying out its monetary program and its 
objective of accumulating reserves.  Is something changing with 
respect to monetary policy?  What can be expected in the coming 
months? 
 
¶21.  At first it would seem the Central Bank has changed its 
exchange policy.  To the surprise of many, the Central Bank of 
Argentina has not allowed the exchange rate to surpass ARP 
3.10/dollar during the period of financial turbulence, and on at 
least five occasions it sold dollars on the market to avoid a 
depreciation of the peso. 
 
¶22.  This change appears to be a side effect of price controls, 
given that in the current context an increase in the exchange rate 
could motivate businesses to request price readjustments in areas 
subject to agreements.  If this interpretation is correct, we would 
expect an adjustment in exchange rate policy from now on, where not 
only is the impact of the peso's depreciation on the level of 
competitiveness evaluated, but also its effect on prices. 
 
¶23.  This change could also complicate the Central Bank's ability to 
accumulate reserves though currency market intervention.  This means 
that a greater part of foreign currency purchases would have to be 
paid through a fiscal surplus or government debt.  A possible 
alternative, which I imagine no one is considering, would be to 
limit controls on the inflows of capital. 
 
¶24.  It would also appear that the Central Bank is adjusting its 
monetary policy, although it continues carrying out to the letter 
the M2 policy targets set for this year.  But to be able to continue 
meeting its goals for all of 2006, it will be necessary to slow down 
the growth of monetary aggregates in the second half of the year, 
coinciding with the period in which demand for money increases for 
seasonal reasons. 
 
¶25.  In fact, the Central Bank is slowly increasing interest rates 
of reverse repos since the beginning of the year, and one-year Lebac 
rates are already at a rate of 12 percent annually.  Short-term 
interest rates in the inter-bank market also reflect the new 
financial situation, given that they are fluctuating around 8 
percent and wholesale fixed-term rates are already at 9 percent, 
almost twice what they were at the beginning of 2005. 
 
¶26.  The new measures taken by the Central Bank - where reserve 
requirements for sight accounts rose by two percentage points and 
fell for CD deposits of more than six months, and where the 
inclusion of cash in banks to meet the reserve requirements is 
limited -- will have a significant contractionary effect.  This will 
surely affect the growth of monetary aggregates, especially 
transaction aggregates, with the objective of ensuring the monetary 
program is met. 
 
¶27.  It is also true that the new measures are expected to raise 
interest rates because they will reduce liquidity in the banking 
system.  What is becoming clearer is that the monetary goals, 
although they were fairly loose for 2006, are beginning to function 
as a limiting element in the handling of monetary policy and unlike 
in previous years, could bring about tensions between different 
monetary objectives 
 
¶28.  Without a doubt, fixing the monetary target on M2 instead of on 
the monetary base has been a significant step in the right 
direction.  In fact, meeting the monetary base goal in 2005 was, in 
a way, less complex, given that it didn't require depending on 
market instruments like interest rates as much as this year, and 
that it could be managed through changes in reserve requirements and 
with the greater use of reverse repos and Lebacs. 
 
¶29.  Everything indicates that we are beginning to see a subtle but 
significant change in monetary and exchange rate policy, which 
appear to head in the right direction.  We also anticipate that the 
Central Bank will fulfill its monetary program for 2006, although it 
will mean a smaller excess of liquidity in the banking system and 
new increases in short-term interest rates.  On the other hand, the 
exchange policy certainly will not change in any significant way in 
the coming months. 
 
¶30.  The Central Bank's next challenge will be the 2007 monetary 
program, which will likely fix new M2 goals. Although this time, if 
 
it continues to maintain its gradual policy, it will be with a 
ceiling under 20 percent.  (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.) 
 
MATERA 
2