VZCZCXYZ0000
PP RUEHWEB

DE RUEHBU #1313/01 1872005
ZNR UUUUU ZZH
P 062005Z JUL 07
FM AMEMBASSY BUENOS AIRES
TO RUEHC/SECSTATE WASHDC PRIORITY 8594
INFO RUEHAC/AMEMBASSY ASUNCION PRIORITY 6329
RUEHBR/AMEMBASSY BRASILIA PRIORITY 6194
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RUEHLP/AMEMBASSY LA PAZ JUL 4737
RUEHPE/AMEMBASSY LIMA PRIORITY 2092
RUEHMD/AMEMBASSY MADRID PRIORITY 1864
RUEHMU/AMEMBASSY MANAGUA PRIORITY 0131
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RUEAIIA/CIA WASHINGTON DC PRIORITY
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RHEHAAA/NATIONAL SECURITY COUNCIL WASHINGTON DC PRIORITY
RUCPDOC/USDOC WASHINGTON DC PRIORITY

UNCLAS BUENOS AIRES 001313 
 
SIPDIS 
 
SENSITIVE 
SIPDIS 
 
TREASURY FOR CLAY LOWERY, NANCY LEE, AJEWEL, WBLOCK, LTRAN 
NSC FOR JOSE CARDENAS, ROD HUNTER 
PASS FED BOARD OF GOVERNORS FOR RANDALL KROSZNER, PATRICE 
ROBITAILLE 
PASS EXIM BANK FOR MICHELE WILKINS 
PASS OPIC FOR JOHN SIMON, GEORGE SCHULTZ, RUTH ANN NICASTRI 
USDOC FOR 4322/ITA/MAC/OLAC/PEACHER 
 
E.O. 12958: N/A 
TAGS: EFIN ECON EINV AR
SUBJECT: ARGENTINA ECONOMIC AND FINANCIAL REVIEW, JUNE 28 - 
JULY 5, 2007 
 
REF: BUENOS AIRES 
 
¶1. (U) Provided below is Embassy Buenos Aires' Economic and 
Financial Review covering the period June 28 - July 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.  This document is sensitive 
but unclassified.  It should not be disseminated outside of 
USG channels or in any public forum without the written 
concurrence of the originator.  It should not be posted on 
the internet. 
 
---------- 
Highlights 
---------- 
 
-- Argentina's Country Risk Premium Hits Highest Level in 2007 
-- FDI Flows to Argentina Slows to $624 Million in Q1 2007 
-- Moody's calls on GoA to Adjust its Economic Policies 
-- Survey Highlights Private Sector Concerns about GoA 
Corruption 
 
------------------- 
Banking and Finance 
-------------------- 
 
Argentina's Country Risk Premium Hits Highest Level in 2007 
--------------------------------------------- ------- 
¶2. (SBU) On June 27, Argentina's sovereign risk premium over 
equivalent maturity U.S. Treasuries, as measured by JP 
Morgan's EMBI index (Emerging Market Bond Index), reached 320 
basis points, the highest value during the year.  The index 
has widened by 136 basis points compared to the end of 
January, when it reached a historical minimum of 184 basis 
points.  The increase in the index, reflecting the fall in 
Argentine bond prices, was driven by several internatioal 
and domestic factors.  Internationally, the uncertainty 
around the U.S. economy and FED policy has generated higher 
volatility in capital inflows to emerging markets. 
Domestically, concerns about economic growth due to the 
effect of recent energy shortages are a key factor in 
explaining the poor performance of Argentine bonds.  Other 
areas of concern are the high level of capacity utilization 
of many industrial sectors, increasing inflationary pressures 
(exacerbated by perceived GoA manipulation of inflation 
statistics), declining fiscal surplus (due to high 
expenditures), coupled with the normal uncertainty that 
generally accompanies an election year.  (Note: the EMBI 
index includes only dollar-denominated bonds issued under 
international law.  In the case of Argentina, it includes the 
Par and Discount bonds issued during the 2005 debt 
restructuring.) 
 
---------------- 
Economic Outlook 
---------------- 
 
FDI Flows to Argentina Fall to $624 Million in Q1 2007 
--------------------------------------------- ---- 
¶3. (SBU) The GoA's statistical agency, INDEC, reported June 
22 that preliminary FDI flows to Argentina were $624 million 
in the first quarter of 2007, 54% lower than in the same 
period last year.  Local analysts were cautious to note that 
a three-month performance is not sufficient to identify a 
trend.  However, local think tank Fundacion Mercado considers 
 
that uncertainly related to the October presidential 
elections and the energy shortages are decelerating growth, 
which translates to decelerating investment and FDI.  Another 
prominent think tank, FIEL, explains the decrease in FDI 
flows as a result of the private sector's lack of trust in 
government policies and the constantly changing rules of the 
game in terms of taxes, regulation, and prices. 
 
¶4. (SBU) An economist from Banco Provincia (second largest 
public-owned bank) gives an opposing view, arguing that the 
reduction in FDI is mainly explained by strong dividend 
outflows for $374 million (based on INDEC data).  Similarly, 
an Embassy contact at INDEC explained that the preliminary 
FDI figure for the first quarter was affected by the timing 
in the transfer of dividends to parent companies overseas and 
the payment of inter-company debts.  This official argued 
against projecting that FDI has decreased by half just based 
on first quarter data, and predicted that FDI flows would 
adjust in future quarters.  (Note: the May 18 Review reported 
FDI flows to Argentina of $4.8 billion in 2006, 4% lower than 
in 2005, based on an ECLAC publication.  However, on June 22, 
the GoA revised both 2005 and 2006 FDI numbers upwards, with 
$5.3 billion in 2005, increasing 4% to $5.5 billion in 2006.) 
 
Moody's Calls on GoA to Adjust its Economic Policies 
--------------------------------------------- ------- 
¶5. (SBU) During a July 2 conference in Buenos Aires, Moody's 
VP and Senior Credit Officer Mauro Leos stated that Argentina 
will have to adjust its policies after the October 
presidential elections, given that the post-crisis expansion 
phase is wearing out.  He stated that the next administration 
will face serious challenges with inflation, energy 
shortages, and growing primary expenditures.  In his 
presentation, he argued that Argentina's high growth rate was 
explained mainly by high commodity prices and international 
liquidity, as well as by the severity of the preceding crisis 
(2001/02) and the GoA's expansionary fiscal and monetary 
policies. 
 
¶6. (SBU) Leos acknowledged that Moody's foreign currency 
sovereign rating of B3 (six levels below investment grade) is 
worse than Standard and Poor's B  (four levels below 
investment grade) and Fitch's B (five levels below investment 
grade).  However, he argued that Moody's rating methodology 
takes into account quantitative and qualitative factors 
beyond the normal measurements of the strength of macro 
economic fundamentals.  These include the capacity and 
willingness to pay debts and the country's reaction under 
stress.  As an example, he noted Argentina's breach of gas 
export contracts with Chile as demonstrating that under 
stress the GoA will always favor domestic economic interests 
over those of foreign creditors and consumers, regardless of 
what domestic or international agreements it may have entered 
into, and also heedless of the resulting impact on its 
international reputation.  He also pointed to Argentina's 
refusal to pay its debts to Paris Club member countries, 
despite clear evidence of ability to pay (record-level 
official reserves and strong fiscal surplus), as a reason for 
Argentina's relatively low credit rating (and constraint to 
increasing it). 
 
¶7. (SBU) Daniel Ruas, Moody's Country Manager for Argentina, 
noted the possibility of corporates having higher ratings 
than the sovereign government.  Moody's introduced the 
concepts of ceiling ratings, which are like overall country 
ratings that assess the probability government interference 
 
in the capacity of other economic agents to repay their debt. 
 This is different from the government bond rating, which 
reflects the risk that a government may default on its own 
obligations.  Therefore, Moody's could issue a corporate 
rating -- reviewing a company's financial strength -- that is 
higher than the sovereign debt rating, but equal to or lower 
than the overall country ceiling/guideline.  (As an example, 
in June Moody's rated a local currency bond issued by Banco 
Hipotecario -- a private-owned domestic bank -- at Aa1, 
significantly higher than the B3 local currency rating of the 
GoA.) 
 
Survey Highlights Private Sector Concerns about GoA Corruption 
--------------------------------------------- ------- 
¶8. (SBU) El Observador, a supplement to the Argentine Sunday 
paper Perfil, published a survey of Argentine private sector 
opinions on corruption in Argentina and government 
intervention in the economy.  Out of the 200 executives 
interviewed for the report, six out of ten believe there is a 
high level of corruption in Argentina, and 87% believe 
scandals such as the one involving the Swedish construction 
firm Skanska (over allegations of front companies, fake 
billing, and bribes, related to a state-run pipeline project) 
is "normal" for the current administration.  While most 
surveyed did not consider corruption much worse than during 
President Menem's administration, a strong majority considers 
government intervention in the economy to be worse, and many 
advocated for a significantly smaller government.  Provided 
below are the primary results of the survey. 
 
¶A.  87% believe Skanska-like corruption cases are typical for 
this government, with only 3% considering the Skanska case 
"an exception." 
¶B.  59% believe there is a high level of government 
corruption, and a further 31% believe there is a medium level 
of corruption.  Only 1% thought that corruption was minimal. 
¶C.  51% said the government was responsible for most cases of 
corruption, with 19% blaming companies, 12% blaming the 
Judiciary, and 11% blaming unions. 
¶D.  45% believe that government pressure on the media is the 
main reason why more corruption cases are not made public, 
with another 20% arguing that corruption is the status quo, 
so ignored by the public. 
¶E.  Over 50% argue that the judicial system and media are the 
main actors to combat corruption, with only 15% arguing that 
the government should be the key actor. 
¶F.  70% associate corruption with the style of government in 
Argentina, with 22% arguing it is a cultural characteristic 
(Note:  El Observador considers this figure significant, as 
it indicates that most executives do not believe that 
institutions -- or lack of them -- are to blame, rather the 
"values" of government leaders are the critical ingredient.) 
¶G.  Almost 75% believe that the main factors that influence 
or allow the high corruption levels are lack of controls, 
authoritarianism, structural corruption, and state 
intervention. 
¶H.  In comparison to Menem's administration, over 60% 
considered regulated prices, inflation, international 
relations, investment, and salary negotiations to be worse 
under President Kirchner's government.  Only 19% considered 
corruption worse. 
¶I.  70% considered state intervention, judicial uncertainty 
(lack of rule of law), lack of (GoA) communication, and lack 
of investment to be the largest problems confronting the 
private sector in its relations with the government.  Small 
minorities considered inflation (8%) and corruption (5%) 
 
significant in their relations with the GoA. 
WAYNE