VZCZCXYZ0007
PP RUEHWEB

DE RUEHBU #1347/01 1941909
ZNR UUUUU ZZH
P 131909Z JUL 07
FM AMEMBASSY BUENOS AIRES
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UNCLAS BUENOS AIRES 001347 
 
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, JULY 6 - 
13, 2007 
 
REF: BUENOS AIRES 1313 
 
¶1. (U) Provided below is Embassy Buenos Aires' Economic and 
Financial Review covering the period July 6 - 13, 2007.  The 
unclassified email version of this report includes tables and 
 
SIPDIS 
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 
---------- 
 
-- Central Bank (BCRA) tightens capital controls to avoid 
peso appreciation 
-- BCRA meets its monetary targets for sixteenth consecutive 
quarter 
-- GoA, unions, private sector agree to increase monthly 
minimum wage 22.5% 
-- GoA's intervention in private energy company MetroGas 
 
------------------- 
Banking and Finance 
------------------- 
 
BCRA tightens capital controls to avoid 
peso appreciation 
--------------------------------------- 
¶2. (SBU) On July 5, the Argentine Central Bank (BCRA) issued 
a circular (A 4687) to tighten capital controls in order to 
discourage capital inflows and avoid the peso from 
appreciating.  The measure, which generated much confusion in 
the market due to its complexity, seeks to discourage the so 
called "contado con liquidacion" (AKA "Blue Chip Swap") 
transaction, which investors use to avoid capital controls 
and arbitrage international and domestic exchange rate 
differentials.  The transaction generally begins when an 
investor purchases an Argentine bond (denominated in either 
pesos or dollars, but purchased with pesos at the local 
exchange rate).  The investor then transfers the bond to a 
foreign market (e.g. the U.S. or Europe) through EuroClear or 
some other securities settlement system, and then sells it 
for dollars at the international exchange rate.  The investor 
then gradually transfers the proceeds back to Argentina in 
denominations of less than $2 million -- circumventing the 
30% unremunerated reserve requirement ("encaje") to which 
capital inflows are subject as part of the GoA's capital 
controls -- and then converts the dollars back to pesos at 
the local exchange rate. 
 
¶3. (SBU) The point of this trade is to arbitrage the lower 
international peso exchange rates (caused largely by the 
GoA's existing capital controls) against the higher domestic 
exchange rate.  However, the result is a steady inflow of 
foreign currency, putting upward pressure on the peso.  The 
BCRA's new measure requires proof that the Argentine bond 
used in such a transaction has been held for at least 20 days 
in a foreign account.  In theory, this delay should raise 
exchange rate risks enough to discourage the arbitraging. 
However, in practice the participating banks and brokers are 
scrambling to determine how to demonstrate proof of the 
incoming monies' origins.  Post's market sources argued that 
 
the impact of the measure will be short-term, since investors 
will quickly find creative new ways to circumvent the 
controls. 
 
BCRA meets its monetary targets for sixteenth 
consecutive quarter 
--------------------------------------------- 
 
¶4. (SBU) The BCRA announced July 10 that it fulfilled its 
monetary target for the second quarter of 2007, the sixteenth 
consecutive quarter that it has met its targets.  The 2007 
BCRA Monetary Program targets M2, which is defined as cash in 
circulation plus private and public sector sight-accounts 
(savings and checking).  According to preliminary BCRA data, 
the average M2 level during the quarter was ARP 132.3 
billion, ARP 3.1 billion below the upper limit of ARP 135.4 
billion established in the 2007 Program, and ARP 3.4 billion 
above the lower limit of ARP 128.5 billion.  At the end of 
June M2 was above the upper band, and the average M2 level 
during the month was only ARP 1.0 billion below the upper 
limit. 
 
¶5. (SBU) According to local analysts, the BCRA achieved its 
M2 target by shifting public sector funds from sight accounts 
to time deposits (not counted in M2).  However, the BCRA 
appears to have attempted to disguise the actions it took to 
meet the target.  Its July 10 press release made no mention 
of the transfer of public funds.  Rather, it argued that time 
deposits increased at a faster rate (31%) than sight deposits 
(18%) in response to BCRA policy of increasing short term 
repo rates, which led to an increase of time deposit yields. 
However, the explanation is not consistent with market data, 
which show falling time deposit rates over 2007. 
 
¶6. (SBU) In its release, the BCRA highlighted that during the 
first half of the year it sterilized 80% of the monetary 
expansion generated by its purchases of foreign currency 
inflows (technically part of its reserve-building strategy, 
but in reality done to prevent the peso from appreciating). 
The BCRA faces a difficult task in meeting its M2 targets for 
the remainder of 2007, if it continues to accumulate reserves 
at the current pace.  The problem is that it is becoming 
harder for the BCRA to sterilize its interventions without 
raising interest rates on its main instruments -- Lebacs 
(fixed-rate) and Nobacs (variable-rate).  (Note: in the 
BCRA's July 10 auction, it was able to rollover only 60% of 
its maturities.  The BCRA received bids for ARP 677 million 
and accepted bids for ARP 626 millions, well below its 
maturities for ARP 1.1 billion.) 
 
---------------- 
Economic Outlook 
---------------- 
 
GoA, unions, private sector agree to increase 
monthly minimum wage 22.5% 
--------------------------------------------- 
¶7. (SBU) The Salary Council -- made up of representatives of 
the private sector, the unions and the Labor Ministry -- 
agreed July 10 to increase by 22.5% the monthly minimum wage 
to ARP 980.  The increase will be implemented in three steps: 
 from the current ARP 800 to ARP 900 in August, following by 
an increase to ARP 960 in October, and a final hike to ARP 
980 in December.  The unions had originally sought a minimum 
wage of ARP 1,040, while business sector was offering ARP 
¶930.  According to media reports, GoA intervention convinced 
 
both sides to agree to the ARP 980 level.  The wage increase 
will benefit an estimated 420,000 individuals, roughly 3.8% 
of all wage-earners (including informal sector employees). 
 
¶8. (SBU) With this increase, the monthly minimum wage will be 
close to the total monthly cost of the basic good basket -- 
necessary to maintain a household of two adults and three 
children -- which "officially" (according to GoA statistical 
agency INDEC) reached ARP 923 in June.  However, according to 
Consultora Equis (a local think-tank) the basic good basked 
valued at ARP 923 in June is 10% undervalued and its "real" 
cost is ARP 1,011.  INDEC's undervaluation of the basic foods 
basked is a result of its manipulation of CPI numbers, which 
the GoA has carried out since the beginning of the year to 
avoid showing real inflation.  (Note:  INDEC reported 
inflation of 3.9% through the end of June, compared to 
private sector estimates of 8-10%). 
 
-------------- 
Energy Outlook 
-------------- 
 
GoA's intervention in private energy 
company MetroGas 
------------------------------------- 
¶9. (SBU) On July 6, the Economy Ministry's Secretary of 
Internal Commerce Guillermo Moreno, Argentina's notorious 
price control czar, instructed MetroGas' Director General 
Roberto Brandt, to reverse his decision to cut natural gas 
provision by 35% to MetroGas' industrial clients, including 
those whose contracts with MetroGas only allowed for supply 
interruptions under extreme circumstances ("contratos no 
interrumpibles con ventanas").  Brandt requested a written 
order from Moreno, as the 35% cuts were in line with earlier 
written instructions from the Secretariat of Energy's crisis 
committee, aimed at increasing natural gas deliveries to 
residential consumers.  Moreno responded by "intervening" 
MetroGas (taking it under State control), justifying his 
actions based on the GoA's "Mandatory Supply law" (Law 20680 
or "ley de abastecimiento").  Moreno argued that this law 
allowed him to intervene a company up to 180 days if it does 
not supply enough of a product to meet market demand. 
 
¶10. (SBU) Legal experts question the legality of the Supply 
law, but also argue that the Secretary of Energy and natural 
gas regulatory agency, ENARGAS, should have jurisdiction in 
this area.  Planning Minister Julio De Vido, who oversees the 
Secretary of Energy and ENERGAS, lifted the intervention only 
 
SIPDIS 
a few hours after Moreno had announced it.  MetroGas' stock 
price, traded in both Buenos Aires and New York fell by 
almost 10% following the intervention, but ended the day 
(after Minister De Vido's announcement) down only 4.2%. 
 
¶11. (SBU) While announcing the end of the intervention, the 
Ministry of Planning also announced that MetroGas 
shareholders had subsequently removed Brandt as Director 
General and replaced him with the second-in-command of the 
firm, Vito Camporreale.  (Note:  Consorcio Gas Argentino 
Sociedad Anonima, in which British Gas Group holds almost a 
55% stake, owns 70% of MetroGas, while Repsol-YPF owns the 
remaining 30%.  Brandt is said to have been appointed by 
British Gas, whereas Camporreale is a Repsol man.) 
 
¶12. (SBU) The Argentine press interpreted the MetroGas event, 
as follows: 
 
-- Evidence that the GoA does not have an agreed-upon 
strategy to deal with the energy crisis.  (Note:  on one side 
is Secretary of Energy Daniel Cameron, who supports dealing 
with the crisis with higher user fees.  President Kirchner 
and Minister De Vido (and, therefore, Moreno, De Vido's 
protege) strongly oppose this strategy.  Local analysts 
speculate that President Kirchner believes that having 
Argentine ownership of energy sector firms (e.g., Repsol's 
proposed sale of 25% of YPF to a local investor and 20% on 
the Argentine stock market) will help the GoA limit the 
impact of the energy crisis.  End Note) 
 
-- A struggle for power between the Secretariat of Energy and 
the Secretariat of Internal Commerce.  (Note:  The Argentine 
press has speculated that Energy Secretary Daniel Cameron is 
a possible replacement for Planning Minister De Vido if/when 
Cristina Fernandez de Kirchner is elected President in 
October.  End Note) 
 
-- MetroGas Director Brandt's removal is evidence of 
strengthening ties between the GoA and Spanish-owned Repsol 
(Note:  President Kirchner is rumored to have suggested 
Enrique Eskenazi, President of Banco de Santa Cruz, as the 
local party in the acquisition of 25% of YPF.  End Note) 
 
-- This could also be a means for the GOA to penalize British 
Gas.  (Note:  British Gas has taken Argentina to 
international arbitration under UNCITRAL rules, demanding 
$200 million in damages related to the GoA's 2002 currency 
devaluation.   British Gas rejected a GoA proposal to 
terminate the arbitration case in exchange for a 
re-negotiation of fees.  End Note) 
WAYNE