VZCZCXYZ0000
RR RUEHWEB

DE RUEHBU #2726/01 3451825
ZNR UUUUU ZZH
R 111825Z DEC 06
FM AMEMBASSY BUENOS AIRES
TO RUEHC/SECSTATE WASHDC 6731
INFO RUEATRS/DEPT OF TREASURY WASHINGTON DC
RUCPDOC/USDOC WASHINGTON DC
RUEHRC/DEPT OF AGRICULTURE USD FAS WASHINGTON DC
RUEHC/DEPT OF LABOR WASHINGTON DC
RHMFIUU/HQ USSOUTHCOM MIAMI FL
RUEHAC/AMEMBASSY ASUNCION 5794
RUEHMN/AMEMBASSY MONTEVIDEO 6004
RUEHSG/AMEMBASSY SANTIAGO 0006
RUEHBR/AMEMBASSY BRASILIA 5650
RUEHSG/AMEMBASSY SANTIAGO 0007
RUEHLP/AMEMBASSY LA PAZ DEC SAO PAULO 3064
RUEHRI/AMCONSUL RIO DE JANEIRO 2076

UNCLAS BUENOS AIRES 002726 
 
SIPDIS 
 
SIPDIS 
 
SENSITIVE 
 
PASS FED BOARD OF GOVERNORS FOR RKROSZNER, PROBITAILLE 
PASS USTR FOR SUE CRONIN AND MARY SULLIVAN 
WHA FOR WHA/BSC AND WHA/EPSC 
E FOR THOMAS PIERCE, 
PASS NSC FOR JOSE CARDENAS 
TREASURY FOR NANCY LEE AND ALICE FAIBISHENKO 
USDOC FOR 4322/ITA/MAC/OLAC/PEACHER 
US SOUTHCOM FOR POLAD 
 
E.O. 12958: N/A 
TAGS: EFIN ECON AR
SUBJECT: CENTRAL BANK GOVERNOR ON MONETARY POLICY, GROWTH, TERROR 
FINANCE, RE-ENGAGING THE IMF AND U.S. COOPERATION 
 
Ref:  Buenos Aires 2576 
      Buenos Aires 2556 
      Buenos Aires 2486 
 
------- 
Summary 
------- 
 
¶1. (SBU) Central Bank Governor Martin Redrado, in a December 5 lunch 
with the Ambassador, invited a dialogue with USG on GoA monetary 
policy which he called conservative, slightly contractionary and 
generally misunderstood.  Now, five years after Argentina's economic 
crisis, Redrado said Argentina remains an "economy in transition" 
with the adjustment of non-tradable prices incomplete and 
fundamental macroeconomic variables -- including nominal and real 
exchange rates and domestic interest rates - yet to settle to a 
steady state equilibrium.  Redrado called the stabilization of 
Argentina's financial sector a major achievement, noting the 
progressive reduction of bank exposure to public debt; the 
re-opening of bank credit lines to middle market companies; and 
steady improvements in bank capitalization.  On growth, he agreed 
that productive investment to date has been relatively small scale 
and incremental and said investment at the 25-26% of GDP level was 
necessary to ensure a soft economic landing and underpin sustainable 
5-6% medium term real GDP growth. 
 
¶2. (SBU) Redrado called anti-money laundering and counter-terrorism 
finance efforts a central bank priority, asked for additional USG 
bilateral technical assistance in these areas, and commented that 
the GoA's draft counter terrorism finance law would soon be 
submitted to the President's office.  He said Argentina is quietly 
re-engaging with the IMF and hopes to have First Deputy Managing 
Director Lipsky and Western Hemisphere Director Singh visit in late 
January.   Redrado requested Ambassador's support on his invitation 
to have Fed Reserve Governor Kroesner attend the central bank's 
annual conference in June 2007.  End Summary. 
 
--------------------------------------------- --------- 
Argentina's Reserve Accumulation and Currency Strategy 
--------------------------------------------- --------- 
 
¶3. (SBU) Redrado had just returned from an EU/Latin American central 
bank governors' conference in Madrid.  There he presented a BCRA 
research paper "The Economic Policy of Foreign Reserve 
Accumulation," which examines the explosive growth of global 
international reserves largely driven by emerging economies. 
Redrado noted that the paper examined international liquidity 
conditions and individual country demand for reserves and concludes 
that exchange rate flexibility is not a substitute for reserve 
accumulation and that emerging economies have chosen to combine high 
international reserve levels with greater exchange rate flexibility 
as a strategy to face increasing exposure to exogenous shocks. 
 
¶4. (SBU) Argentine reserves, Redrado noted, had increased to $30 
billion at the end of November, surpassing the $28 billion level 
they reached in December 2005 before the GoA paid off its $9.5 
billion debt to the IMF.  He called Argentina's currency policy 
flexible and rejected the "mis-perception" that the currency is 
significantly undervalued.  Now, five years after Argentina's 
economic crisis, Redrado said Argentina remains an "economy in 
transition" with the adjustment of non-tradable prices incomplete 
and fundamental macroeconomic variables -- including nominal and 
real exchange rates and domestic interest rates - yet to settle to a 
steady state equilibrium.  As a consequence, he concluded, BCRA 
policy is not to "fix" the nominal exchange rate at current levels, 
but rather to actively manage the peso's real effective exchange 
rate against a basket of international currencies.  He referred to 
Guellermo Calvo's 2001 paper "The Fear of Floating," which argues 
that countries that say they allow their exchange rate to float 
 
 
 
mostly do not. 
 
¶5. (SBU) In this context, Redrado called the BCRA's monetary policy 
conservative, slightly contractionary and (likely referring to 
recent media criticism by renowned Argentine Economist Miguel Angel 
Broda) generally misunderstood.  He invited a dialogue with USG 
officials on the GoA's monetary policy, explaining that Argentina's 
financial system had not recovered enough to implement an inflation 
targeting regime and arguing that the absence of a reference 
interest rate makes it more reasonable for the BCRA to use broad 
monetary targets to control inflation.  With one-year BCRA paper 
trading in the 10-11% range, Redrado said real interest rates are 
now marginally positive.  He declined, however, to predict how far 
the BCRA will permit rates to rise to control inflation.  The 
central bank, he said, is encouraging banks to raise their CD 
deposit rates, currently in the 8% range, to real positive levels to 
encourage savings and expanded financial intermediation. 
 
--------------------------------------------- -- 
Putting Financial Service Sector House in Order... 
--------------------------------------------- -- 
 
¶6. (SBU) Redrado called the reactivation and stabilization of local 
credit markets one of his major achievements since taking on the 
BCRA governorship in September 2004.  A key accomplishment has been 
the progressive reduction of commercial bank exposure to public 
debt:  While maximum permitted exposure to public debt currently 
stands at 40% of bank assets (to be reduced to 35 % in July 2007), 
current average exposure has dropped to 28%.  A second achievement 
has been the re-opening of bank credit lines to middle market 
companies here:  Bank credit to GDP ratios have risen from 8% in 
2002 to 11% in 2006.  Finally, Redrado noted the steady improvement 
in bank capitalization, with a new debt/equity hybrid instruments 
under development.   The lack of interest reference rates at the 
long end of the yield curve is gradually being addressed, Redrado 
concluded, with gas pipeline companies TGS and TGN soon to issue a 
long term bond that will be purchased by private pension funds. 
 
--------------------------------------------- - 
...And Targeting a Soft Landing: Need Investment 
--------------------------------------------- - 
 
¶7. (SBU) Following four years of GDP growth in the 8-9% range, 
Redrado called the key challenge facing the GoA maintaining 
steady-state medium term GDP growth in the 5-6% range.  While 
post-crisis Argentine investment levels have recovered to 21-22% of 
GDP, he noted that fully 30% of current investment has been 
channeled into real estate development that does not significantly 
add to Argentina's productive capacity.  Redrado agreed that 
productive investment to date has been relatively small scale and 
incremental and said that investment at the 25-26% of GDP level - 
including significant new Greenfield project investment -- will be 
required to underpin sustainable 5-6% medium term real GDP growth 
and so ensure a soft economic landing. 
 
--------------------------------------------- ------ 
Seeks Greater Bilateral Engagement on Terror Finance 
--------------------------------------------- ------- 
 
¶8. (SBU) Redrado said he had made anti-money laundering and 
counter-terrorism finance (AML/CTF)a BCRA priority and had set up a 
specialized bank examination unit (under the BCRA's Banking 
Superintendency Division) devoted to these activities.  (Note: 
Redrado announced this initiative in late 2005 and the BCRA recently 
completed preparations for establishing the unit.  However, it has 
not been authorized to begin audits and bank inspections.  End 
Note). 
 
¶9. (SBU) Redrado appreciated U.S. technical assistance on AML/CTF 
issues via regional GAFISUD initiatives, but asked that the USG put 
this higher on the bilateral agenda for engagement with the GoA. 
Specifically, he suggested the U.S. work with ASBA ("Asociacion de 
Supervisores Bancarios de las Americas," The Association of Bank 
Supervisors of the Americas) and consider offering training programs 
to bank inspectors and supervisors.  He noted that he had raised 
this request with Treasury Assistant Secretary Patrick O'Brien, and 
had also discussed it with IMF and World Bank representatives. 
 
¶10. (SBU) With regards to the GoA's draft counter-terrorism finance 
law, Redrado stated it was on Economic Minister Felisa Miceli's 
desk, after which it would go to Legal and Technical Secretary 
Carlos Zannini, the President's chief legal advisor.  (Note:  Other 
sources within the GoA and BCRA say the Justice Minister has already 
passed the bill to Zannini.  However, there are increasing 
indications that opposition is building to the law, particularly 
from key supporters of the President, and the word on the street is 
that the President may decide not to submit it to Congress before 
its December 29 recess.  Redrado has commented in past meetings with 
Emboffs that failing to present the draft bill to Congress before 
the FATF mid-February 2007 deadline would have negative consequences 
for the Argentine financial sector, particularly if FATF responds by 
issuing a public statement criticizing the GoA for not meeting world 
terrorism finance standards.  See reftels.  End Note). 
 
---------------------------- 
Central Bank June Conference 
---------------------------- 
 
¶11. (SBU) Redrado noted that he is inviting U.S. Federal Reserve 
Governor Kroszner to speak at the central bank's annual conference 
in June.  He asked for the Ambassador's support for this effort, 
calling the conference the most prestigious in South America. 
(Note:  Prior to his 2006 appointment to the Fed, Krozner was a 
member of the President's Council of Economic Advisers from 2001 to 
¶2003. End Note) 
 
------------------------ 
Re-Engaging with the IMF 
------------------------ 
 
¶12. (SBU) Redrado noted that the GoA is working to quietly re-engage 
with the IMF in order to establish more "normal" working relations. 
A first step will be a late January/early February visit by John 
Lipsky, First Deputy Managing Director and Anoop Singh, Director of 
the Western Hemisphere Department on the margins of an already 
planned IMF trip to Brazil, Chile and Uruguay.  Low key meetings for 
the IMF team are being planned with Redrado, Economy Minister Miceli 
and Chief of Cabinet Fernandez. 
 
WAYNE