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R 291551Z NOV 06
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UNCLAS BUENOS AIRES 002647 
 
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SIPDIS 
 
SENSITIVE 
 
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E FOR THOMAS PIERCE, 
PASS NSC FOR JOSE CARDENAS 
PASS FED BOARD OF GOVERNORS FOR PATRICE ROBITAILLE 
PASS USTR FOR SUE CRONIN AND MARY SULLIVAN 
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USDOC FOR 4322/ITA/MAC/OLAC/PEACHER 
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E.O. 12958: N/A 
TAGS: EFIN ECON AR
SUBJECT: ARGENTINA'S FINANCIAL SERVICE PLAYERS ON CAPITAL MARKETS, 
FINANCIAL INTERMEDIATION 
 
Ref:  Buenos Aires 2598 
 
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Summary 
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¶1. (SBU) Senior Argentine financial sector representatives outlined 
to Ambassador their concerns about lagging development of domestic 
capital markets.  While optimistic about Argentina's medium term 
growth prospects, they questioned whether existing channels of 
financial intermediation can sustain levels of investment required 
to maintain high real GDP growth.  End Summary 
 
¶2. (SBU) On November 27, Ambassador met with representatives of 
Argentina's financial sector at a breakfast hosted by the Center for 
Financial Stability (Centro para la Estabilidad Financiera, CEF) to 
review the development of local capital markets.  A cross section of 
senior representatives of financial services institutions (banks, 
bank chambers, insurance companies and pension funds) corporate 
financial executives, and congress (including the chairman of the 
lower house finance committee) attended. 
 
¶3. (SBU) Discussion focused on participant concerns about the 
lagging development of long term debt instruments in domestic 
capital markets and whether existing formal channels of financial 
intermediation can sustain the levels of investment required to 
maintain high GDP growth rates.  While post-crisis Argentine 
investment levels have recovered to 21-22% of GDP, many questioned 
the quality of such investment; a significant share of new 
investment has been channeled into real estate development that does 
not significantly add to Argentina's productive capacity.  There was 
general agreement that investment at the 25-26% of GDP level will be 
required to underpin sustainable 5-6% medium term real GDP growth. 
 
¶4. (SB) Bank and bank chamber representatives emphasized that, while 
bank balance sheets and overall liquidity have improved considerably 
since the depth of the 2001/2002 economic crisis, they remain highly 
exposed to both currency and maturity portfolio mismatch, with no 
market instruments available to hedge long term exposures.  One 
consequence has been the slow and limited development of a domestic 
mortgage market.  Representatives of insurance companies and private 
pension funds were upbeat, explaining that the concentration of GoA 
bonds in their portfolios was steadily declining and that expanded 
GoA use of fiduciary funds to facilitate energy sector 
infrastructure investment could offer attractive domestic investment 
opportunities (Reftel). 
 
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CEF Background 
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¶5. (SBU) CEF, the Center for Financial Stability, is a financial 
service sector public policy think-tank established in 2002.  Its 
post-economic crisis focus is on the non-partisan analysis of the 
regulatory structure of public finance, a highly politicized area of 
public discourse under the Kirchner administration.  Through a 
program of policy notes, seminars and training, CEF works to 
facilitate the exchange of information and opinions among policy 
makers, regulators, market players and consumers of financial 
services. 
 
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Comment 
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¶6. (SBU) A worthwhile meeting with players in the financial service 
sector.  Think-tanks like CEF play a key role in strengthening 
Argentine civil society by serving as a forum for private-public 
sector discussion of critical economic and social issues, including 
on strengthening institutions.  This is important at a time when 
 
Argentina needs to continue building institutional capacity to pave 
the way to sustainable growth. 
 
¶7. (SBU) Argentina's financial system is recovering, but still 
remains fragile.  Banks are reporting profits but remain 
undercapitalized and subject to systemic risk.  In addition, there 
is still considerable forbearance, allowing banks to deviate from 
generally acceptable international accounting practices. 
Ultimately, financial sector development in Argentina is tied to the 
quality of GoA economic stewardship.  The IMF writes: "... the 
recovery of the banking system will depend critically on continued 
improvements in the macroeconomic environment, the resolution of 
policy-induced losses, and on a return to an institutional 
environment that promotes sound banking practices." 
 
WAYNE