VZCZCXYZ0001
RR RUEHWEB

DE RUEHBU #1545/01 2202024
ZNR UUUUU ZZH
R 082024Z AUG 07
FM AMEMBASSY BUENOS AIRES
TO RUEHC/SECSTATE WASHDC 8862
INFO RUEHAC/AMEMBASSY ASUNCION 6429
RUEHBO/AMEMBASSY BOGOTA 1611
RUEHBR/AMEMBASSY BRASILIA 6289
RUEHCV/AMEMBASSY CARACAS 1397
RUEHGT/AMEMBASSY GUATEMALA 0304
RUEHLP/AMEMBASSY LA PAZ AUG LIMA 2132
RUEHMU/AMEMBASSY MANAGUA 0146
RUEHME/AMEMBASSY MEXICO 1427
RUEHMN/AMEMBASSY MONTEVIDEO 6642
RUEHOT/AMEMBASSY OTTAWA 0540
RUEHZP/AMEMBASSY PANAMA 0311
RUEHFR/AMEMBASSY PARIS 1306
RUEHQT/AMEMBASSY QUITO 0983
RUEHSG/AMEMBASSY SANTIAGO 0654
RUEHVL/AMEMBASSY VILNIUS 0128
RUEHSO/AMCONSUL SAO PAULO 3462
RUEHGV/USMISSION GENEVA 0654
RUEAIIA/CIA WASHINGTON DC
RUEATRS/DEPT OF TREASURY WASHINGTON DC
RUCPDOC/USDOC WASHINGTON DC

UNCLAS BUENOS AIRES 001545 
 
SIPDIS 
 
SENSITIVE 
SIPDIS 
 
NSC FOR DAN PRICE, DAN FISK 
PASS FED BOARD OF GOVERNORS FOR KROSZNER, 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 ETRD AR
SUBJECT: ARGENTINE GOVERNMENT FAILS CREDIBILITY TEST ON 
INFLATION STATISTICS 
 
REF: BUENOS AIRES 1496 
 
Summary 
------- 
¶1. (SBU) On August 6, the Argentine statistical agency, 
INDEC, reported monthly inflation of 0.5%, once again below 
even the lowest private sector estimates, indicating 
continued GoA manipulation of the data.  This dashed market 
hopes that new Economy Minister Miguel Peirano (reftel) would 
use this first announcement of monthly CPI numbers under his 
mandate to begin the long process of rebuilding the 
credibility of official statistics.  Bond prices reacted 
negatively to the inflation news, and concerns are rising 
about the longer-term impact of unreliable statistics on 
investment, GoA finances, and economic growth.  End Summary. 
 
July Inflation Numbers Disappoint 
--------------------------------- 
¶2. (SBU) INDEC reported that the July month-on-month CPI 
increase was 0.5%, or 8.6% year-on-year.  Most analysts, both 
international (JPMorgan, CreditSuisse, Citigroup) and local 
(Miguel Angel Broda, Miguel Kiguel, Research for Traders) had 
expected a month-on-month increase of at least 0.6 - 0.7%, 
with several noting that the market would interpret an even 
higher number as a signal of new Economy Minister Peirano's 
intention to roll back the GoA's 7-month long campaign of 
manipulating inflation statistics.  (Comment:  The idea was 
not so much "no" manipulation as just "less" manipulation. 
End Comment). 
 
¶3. (SBU) Peirano and other GoA officials have come out in 
force to justify the INDEC report.  These include Secretary 
of Internal Trade Guillermo Moreno, known as the price 
control czar and alleged to be behind the worst of the 
manipulation of INDEC statistics, who argued to the press 
that the inflation number "reflected reality."  However, in 
comments to the press (and to Emboffs) the private sector has 
roundly rejected GoA explanations, demonstrating that at 
least the informed public has completely lost faith in GoA 
officials' pronouncements on the economy. 
 
INDEC Statistics:  "Fantasy and Lies" 
------------------------------------- 
¶4. (SBU) Local papers have reported local economists' 
estimates of "actual" inflation for July of over 1%, while an 
anonymous group of INDEC workers, protesting the Economic 
Ministry's interference, estimated the month-on-month 
increase at 1.6%.  A Citigroup August 6 publication estimated 
that accumulated 2007 inflation through June would be 7.08% 
without the "methodological innovations" that INDEC 
introduced several months ago in its inflation calculations. 
This compares to INDEC's official CPI increase through June 
of 3.9%, which is even lower than the 4.9% accumulated 
inflation for the same period in 2006.  Citigroup also notes 
that the protesting INDEC workers estimate January-June 
inflation at 10.1% (or on a pace to exceed 20% for the year). 
 
 
¶5. (SBU) INDEC's low numbers are also at odds with anecdotal 
evidence of higher inflation, especially as reported by 
consumer groups, who allege much higher food prices, as well 
as in reports from the provinces, some of which are 
reportedly seeing inflation of over 20%.  Without exception, 
 
Post's private sector contacts predict actual 2007 annual 
inflation in the range of 12-15%, and the press is 
increasingly quoting local economists with estimates as high 
as 15-20%. 
 
¶6. (SBU) There are also reports of increasing concern over 
the veracity of INDEC's other statistical reports.  Not only 
are doubts increasing over poverty and indigence numbers, 
which use official inflation statistics in their 
calculations, but there are even questions about GDP growth 
and industrial production data.  Argentine Daily "Clarin" 
quotes one prominent, local economist as calling INDEC 
statistics "fantasy and lies." 
 
Negative Affect on Argentine Bond Prices 
---------------------------------------- 
¶7. (SBU) Local press reports allege that the market's 
disappointment in the INDEC announcement has driven down 
prices of Argentine bonds, especially those linked to 
inflation (which comprise over 50% of total Argentine debt 
outstanding).  Argentine bonds lost an average of two percent 
on August 6 (in anticipation to and following the 4:00 p.m. 
announcement), with the largest hit being the 
peso-denominated bonds that are adjusted by an 
inflation-linked index.  The reality is, however, that 
INDEC's influence on bonds will be statistically difficult to 
prove at this time, given the sudden and severe global flight 
to quality and repricing of risk over the last few weeks. 
Nevertheless, the INDEC debacle clearly has compromised the 
credibility of the GoA and is a key factor in the perception 
of Argentina as an increasingly high-risk market (as measured 
by Argentina's high country risk relative to other similar 
economies in the region). 
 
Comment:  Credibility going, going, gone 
---------------------------------------- 
¶8. (SBU) The fact that no one knows the actual rate of 
inflation complicates not only investor decisions but 
monetary policy and wage negotiations.  Add to this volatile 
mix of Argentine risks price controls, the rapid increase in 
spending in 2007, loose monetary policy, normal election year 
uncertainty, and the President's penchant for blaming 
foreigners for Argentina's problems, and it answers one 
Argentine University Professor's question to his students: 
how could Colombia, with its fiscal deficit and drug and 
insurgency problems, have a lower country risk than 
Argentina? 
 
¶9. (SBU) Private Argentine economists and analysts -- who 
understand that the lack of untrustworthy data will undermine 
the long-term health of the Argentine economy -- are 
clamoring for a restoration of the credibility of official 
statistics.  U.S. and Argentine financiers at this week's 
Council of the Americas seminar expressed serious concerns 
privately to the Ambassador and others that worsening 
inflation and its root causes -- expansionary fiscal and 
monetary policies -- will undermine GoA finances and the 
longer-term health of the economy, if credibility is not 
restored soon.  Unfortunately, new Economy Minister Peirano 
has not yet acted to restore confidence among key actors in 
the economy.  End Comment. 
WAYNE