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E.O. 12958: N/A 
TAGS: ECON EFIN EINV ETRD
SUBJECT: Argentina Economic and Financial Weekly, December 26, 2006, 
to January 5, 2007 
 
 
¶1. Provided below is Embassy Buenos Aires' Economic and Financial 
Review, covering the period December 26, 2006, through January 5, 
¶2007.  The unclassified email version of this report includes tables 
and charts tracking Argentine economic developments.  Contact 
Econoff Chris Landberg at landbergca@state.gov to be included on the 
email distribution list. 
 
----------------- 
Weekly Highlights 
----------------- 
 
-- Argentina's Supreme Court Validates 2002 "Pesification" of Bank 
Deposits. 
-- U.S. Court of Appeals rules in Argentina's favor on frozen 
Central Bank assets. 
-- GoA sends draft terrorism finance bill to Congress, appoints 
Financial Intelligence Unit Director. 
-- CPI inflation ends year in single digits, at 9.8%. 
-- Current account surplus narrows to $1.7 billion, but net capital 
inflows increase to $1.1 billion in Q3 2006. 
-- Tax revenues increase 25% in December, bringing full-year 
revenues to ARP 150 billion. 
 
------------------- 
Banking and Finance 
------------------- 
 
Argentina's Supreme Court Validates 2002 "Pesification" of Bank 
Deposits 
--------------------------------------------- -------- 
¶2.  On December 27, the Argentine Supreme Court handed down a 
long-anticipated ruling declaring constitutional the GoA's 2002 
decree forcing conversion of dollar deposits to devalued pesos 
(known as "pesification").  The Court ruled in the case of a 
depositor whose dollar-denominated bank deposits were frozen in the 
so-called "corralon" in 2001 and later "pesified" in 2002.  The 
Court denied the depositor's claim to recoup his deposits in U.S. 
dollars, ruling instead that his bank must compensate his 
outstanding legal claims at a peso amount equal to the pesified 
deposits he would now hold under the terms of the original decree. 
The restitution formula applies a currency conversion rate of ARP 
1.40 for each dollar, then indexes the balance to inflation and adds 
a further 4% annual interest rate applied retroactively since the 
pesification was implemented.  (Note:  the formula effectively 
converts dollar holdings of plaintiffs at the current 3.08 ARP/USD 
exchange rate, which the Court intended.  End Note).  The ruling 
sets a precedent for the more than 300,000 pending cases in the 
judicial system (of which some 50,000 have reached the Supreme 
Court), and the majority of plaintiffs are expected to accept 
similar deals based on the same formula.  The Court sought to strike 
a balance between what it deemed politically and socially acceptable 
and what it considered financially feasible for banks.  A statement 
issued by the court noted that, "the aim of the ruling is to find 
social peace and show that a consensus is possible over difficult 
questions affecting the community." 
 
U.S. Court of Appeals rules in Argentina's favor on frozen Central 
Bank assets. 
--------------------------------------------- -------- 
¶3.  On January 5, the U.S. Court of Appeals for the Second Circuit 
in New York affirmed the January 2006 order of the U.S. District 
Court for the Southern District of New York (Judge Thomas Griesa), 
which vacated "restraining notices and orders of attachment imposed 
with respect to an account of the Banco Central de la Republica 
Argentina at the Federal Reserve Bank of New York [FRBNY]."  Judge 
Greisa had ruled that these assets were protected from attachment by 
the Foreign Sovereign Immunities Act (FSIA) of 1976.  The appeal 
stemmed from the attempt of plaintiffs EM Ltd. and NML Capital, 
Ltd., both holdouts from Argentina's sovereign debt exchange, to 
 
 
 
recoup losses stemming from Argentina's December 2001 default by 
attaching $105 million of BCRA funds held at the FRBNY.  The 
plaintiffs argued that Argentine President Kirchner had made the 
BCRA funds attachable when he issued decrees that gave the GoA the 
authority to use BCRA funds to repay the IMF. 
 
¶4.  The Second Circuit concluded that the BCRA owned the FRBNY 
funds, and the BCRA was a separate juridical entity from the Go. 
In the ruling, the Second Circuit court argued that the FSIA allowed 
"attachment of a foreign state's 'property in the United 
States...used for a commercial activity in the United States,'" and, 
in the opinion of the court, a government's payment of IMF debt 
could not be considered a "commercial activity."  (Note:  this case 
originates from EM's lawsuit against the GOA, filed in April 2003. 
In January 2004, the U.S. Treasury Department filed a statement of 
interest and the Federal Reserve Bank of New York filed an "amicus 
curiae brief" with U.S District Judge Griesa, backing the motion to 
prevent bondholders seeking to bar Argentina from paying other 
creditors.  The Treasury and New York Federal Reserve argued that a 
broad interpretation of the "pari passu" clause, giving all 
creditors the same proportional right on GoA's sovereign payments 
(as previously ruled by a Belgian Court), would jeopardize debt 
restructuring efforts, payments to the IFIs, and the architecture of 
the world financial system.  End Note).  Press reports quote David 
Rivkin, lawyer for EM Ltd. (the investment vehicle of billionaire 
Kenneth Dart), saying that his client is considering whether to ask 
the full circuit court to reconsider the ruling or instead file an 
appeal to the U.S. Supreme Court. 
 
--------------- 
Economic Policy 
--------------- 
 
GoA sends draft terrorism finance bill to Congress, appoints 
Financial Intelligence Unit Director. 
--------------------------------------------- -------- 
¶5.  On December 20, President Kirchner sent the GoA's draft Counter 
Terrorism Finance (CTF) bill to Congress for review.  The GoA took 
this action in order to comply with Financial Action Task Force 
(FATF-GAFI) requirements, and avoid sanctions (which would likely 
have been a public statement of noncompliance with international CTF 
norms).  The bill is now before three Senate committees (Domestic 
Economics and Investment, Justice and Penal Issues, and Domestic 
Security and Narcotics), after which it will go to the open chamber 
for a vote.  (Note:  following Senate approval, the draft law will 
pass to the Chamber of Deputies.  End Note).  It is likely that the 
President will call for an extraordinary session of Congress in 
February to debate this and other pending legislation. 
 
¶6.  Separately, on December 27, the GoA officially appointed Rosa 
Falduto as the new President of Argentina's Financial Intelligence 
Unit ("Unidad de Investigacion Financiera" or "UIF" in Spanish), 
disregarding questions raised locally about her qualifications. 
Falduto is a relatively unknown accountant, who previously served as 
an advisor to a Congressional committee on money laundering and also 
worked at the Attorney General's Office.  During the nomination 
process, a local NGO, "Centro de Investigacion y Prevencion de la 
Criminalidad Economica," objected to her appointment, citing her 
lack of technical experience and inadequate foreign language skills. 
 (Note: In September 2006, Congress amended the composition of the 
UIF executive structure from a five member directorship with 
rotating presidency to a structure that has a permanent, politically 
appointed President and Vice President.  End Note).  The UIF plays a 
critical role in pursuing money laundering cases in Argentina, and 
will fill a similar capacity with regards to terrorism finance 
investigations and court cases.  It is unclear what impact the GoA's 
decision to appoint a relative unknown as UIF Director will have on 
law enforcement efforts related to money laundering and terrorism 
finance, but some local observers have expressed concern that it 
 
 
 
will result in a weakened UIF. 
 
---------------- 
Economic Outlook 
---------------- 
 
CPI inflation ends year in single digits, at 9.8%. 
---------------------------Q----------------- ---- 
¶7.  The Consumer Price Index (CPI) increased 1% m-o-m in December, 
as expected by the market, bringing 2006 CPI inflation to 9.8% and 
achieving the GoA's goal of containing inflation to single digits. 
The GoA kept the CPI from exceeding 10% largely thanks to its 
pervasive price control agreements, particularly on meat and dairy 
products.  The highest price increases for 2006 were for education 
(+19.9%), clothing (+14.6%), housing (+10.8%), and food and 
beverages (+10.5%).  Local analysts argue that the GoA will use the 
single-digit inflation as a key reference during future wage 
negotiations. 
 
¶8.  Price increases in December were driven by a 1.8% m-o-m increase 
in the sub-index tracking the prices of food and beverages and by a 
2% increase in the sub-index tracking the prices of entertainment (a 
seasonal increase due to the Austral summer holidays).  Price 
increases for remaining goods and services were relatively moderate. 
 BCRA consensus survey forecasts for 2007 CPI inflation are 10%. 
 
Current account surplus narrows to $1.7 billion, but net capital 
inflows increase to $1.1 billion in Q3 2006. 
--------------------------------------------- -------- 
¶9.  The GoA announced balance of payments results for the third 
quarter of 2006, showing a current account surplus of over $1.7 
billion.  This was above the market forecast of $1.4 billion, but 
lower than the $2 billion surplus in the third quarter of 2005.  The 
$277 million decrease in the current account surplus (compared to Q3 
2005) was largely driven by higher imports and remittances of 
dividends.  The merchandise trade surplus in Q3 reached $3.3 
billion, compared to the Q3 2005 trade surplus of $3.8 billion.  The 
BCRA consensus survey forecasts the current account surplus at $6.5 
billion for full-year 2006 and $4.7 billion for 2007, compared to a 
current account surplus of $5.4 billion in 2005. 
 
¶10.  The capital account showed net capital inflows of $1.1 billion, 
versus net capital inflows of $556 million in Q3 2005.  Inflows were 
mainly from the non-financial private sector (FDI and commercial 
financing, totaling $914 million) and the non-financial public 
sector and BCRA (totaling $247 million), which were minimally offset 
by banking sector outflows of just $15 million.  Net outflows to 
IFIs in Q3 reached $131 million, as a result of disbursements of 
$1.1 billion and amortizations of over $1.2 billion.  Official 
Reserves increased $2.5 billion during Q3 of 2006 to $28.0 billion. 
 
Tax revenues increase 25% in December, bringing full-year revenues 
to ARP 150 billion. 
--------------------------------------------- -------- 
¶11.  December federal tax revenue increased 25% y-o-y to ARP 14.1 
billion (approximately $4.55 billion), above expectations of ARP 
13.2 billion, bringing full-year revenues to a record of ARP 150 
billion (up 26% y-o-y), or approximately $48 billion.  This strong 
yearly performance is mainly explained by strong collections of VAT 
(+28% y-o-y), income taxes (+20% y-o-y), labor taxes (also referred 
to as pension taxes) (+42% y-o-y), and export and import taxes (+20% 
and +32% y-o-y, respectively).  During a January 2 press conference, 
Alberto Abad, the head of Argentina's tax authority ("AFIP," or 
"Administracion Federal de Ingresos Publicos," equivalent to the 
U.S. IRS), stated that the record setting revenue collection, 
representing 23.2% of GDP, reflects the strong economic growth rate, 
strong export growth, and improvement in tax compliance.  He noted 
that VAT, labor, and income tax revenues explain 69% of the growth 
in total collections. 
 
 
 
 
¶12. To see more Buenos Aires reporting, visit our classified website 
at:  http://www.state.sgov.gov/p/wha/buenosaires 
 
WAYNE