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PP RUEHCD RUEHGA RUEHGD RUEHHA RUEHHO RUEHMC RUEHQU RUEHTM RUEHVC
DE RUEHBU #2044/01 2851832
ZNR UUUUU ZZH
P 121832Z OCT 07
FM AMEMBASSY BUENOS AIRES
TO RUEHC/SECSTATE WASHDC PRIORITY 9478
INFO RUCNMRC/WESTERN HEMISPHERIC AFFAIRS DIPL POSTS PRIORITY
RUEAIIA/CIA WASHINGTON DC PRIORITY
RUEATRS/DEPT OF TREASURY WASHINGTON DC PRIORITY
RHEHAAA/NATIONAL SECURITY COUNCIL WASHINGTON DC PRIORITY
RUCPDOC/USDOC WASHINGTON DC PRIORITY

UNCLAS SECTION 01 OF 04 BUENOS AIRES 002044 
 
SIPDIS 
 
SENSITIVE 
SIPDIS 
 
TREASURY FOR CLAY LOWERY, NANCY LEE, AJEWEL, LTRAN, MMALLOY 
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, SEPTEMBER 
17 - OCTOBER 5, 2007 
 
 
¶1. (U) Provided below is Embassy Buenos Aires' Economic and 
Financial Review covering the period September 17 - October 
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 
---------- 
 
¶1. Government alleges bank collusion in setting high rates 
¶2. Argentine corporations tapping markets again, but face 
much higher financing costs 
¶3. GoA also reportedly considering bond issue, but faces low 
demand and higher yields 
¶4. Central Bank bans foreign purchases of new debt issuances 
¶5. S and P upholds Argentina's rating, but calls for tighter 
fiscal and monetary policy 
¶6. GoA submits 2008 Budget Bill to Congress in the face of 
opposition criticism 
¶7. Argentina loses ground on Transparency International 
"Corruption" and World Bank "Doing Business" indices 
¶8. September CPI increases 0.8% m-o-m, below estimates of 
"real" inflation; INDEC announces plan to introduce new CPI 
methodology in November 
¶9. Another INDEC scandal:  underreporting of Mendoza Province 
inflation figures 
 
------- 
Finance 
------- 
 
Government alleges bank collusion in setting high rates 
--------------------------------------------- ----- 
¶2. (SBU) In response to the disproportionate impact of global 
financial volatility on the price of Argentine assets, and 
the resulting spike in local interest rates, the GoA accused 
local and foreign banks of colluding in the setting of high 
lending rates.  Beginning late September, the Economy 
Ministry's Internal Trade Secretary Guillermo Moreno (also 
known locally as the price control czar) and the national 
anti-trust commission (Commission Nacional de Defensa de la 
Competencia) demanded detailed information on trading 
activities from major financial sector entities, with the 
ostensible purpose of discovering evidence of collusion in 
setting rates. 
 
¶3. (SBU) The Committee sent comprehensive surveys to the six 
foreign banks operating in Argentina (Citi, JPMorgan, 
Deutschebank, HSBC, BBVA, Santander) on all their trading 
activities dating back to 2002, and then selectively called 
in banks to grill them on their submissions.  The Committee 
also sent similar questionnaires to local pension funds and 
banks, apparently with the added request for identities of 
the local institutions' private consultants. 
 
¶4. (SBU) The local and international banks raised rates 
starting in July in direct response to international market 
volatility and the global flight to quality.  Argentine 
assets were considered especially risky (due to manipulation 
of official statistics, high inflation, falling fiscal and 
trade surpluses, and GoA intervention in the economy), so 
international investment and hedge funds immediately began 
selling Argentine bonds.  This is the reason why the 
worldwide re-pricing of risk had a disproportionate impact on 
Argentina.  The rush to sell GoA and Central Bank bonds 
caused a severe liquidity crunch in the local financial 
system, steeply driving up local interest rates, including 
the interbank rate, and forcing local retail banks to 
compensate by dramatically raising rates across the board. 
The fact that inflation is high and increasing is also a 
factor, but more for medium to long term debt instruments. 
Local financial analysts contend that Guillermo Moreno's 
attack on the banks is just a continuation of the fiction 
 
BUENOS AIR 00002044  002 OF 004 
 
 
perpetrated by GoA leadership that the government's policies 
are not the source of deteriorating economic indicators 
(inflation, sentiment, lack of credit, falling investment). 
 
Argentine corporations tapping markets again, but face much 
higher financing costs 
--------------------------------------------- -- 
¶5. (SBU) Global financial markets appear to be reopening 
again for Argentine borrowers, following two months of 
uncertainty and international market turmoil that began in 
mid-July.  On October 1, Edenor, one of Argentina's largest 
power distribution companies, priced a ten-year bond at a 
yield of 10.5% for $220 million, becoming the first Argentine 
corporate to tap the markets since end-July.  Joint managers 
of the issuance, Deutsche and Citi, raised the offer from 
$200 million in response to higher than expected demand. 
However, the final yield was about 125 basis points higher 
than the pricing expected when the deal was originally 
announced in July (subsequently suspended due to poor market 
conditions), and at least 175 bps higher than the pricing of 
similar private debt issuances in the spring.  Other 
Argentine private companies are planning or considering 
issuances, including IMPSA (Industrias Metalurgicas 
Pescarmona), which has scheduled a seven-year $250 million 
bond placement this week. 
 
GoA also reportedly considering bond issue, but faces low 
demand and higher yields 
--------------------------------------------- -- 
¶6. (SBU) Local daily Cronista Comercial reported October 2 
that the GoA is also considering an issuance, possibly prior 
to the October 20-22 IMF/WB annual meetings.  The Cronista 
article states that the GoA would issue a $500 million bond 
(no details of currency, maturity or pricing), despite 
expectations of much higher yields than for previous GoA 
issuances (given that Argentine bond prices have not 
recovered from the crisis).  An Embassy banking sector 
contact asserted that there is no market appetite for a GoA 
issue at the moment, and speculated that the Cronista report 
may have originated with an investor holding a short-position 
in Bonar X (a ten-year, dollar-denominated bullet bond with a 
7% coupon issued under Argentine law, and maturing 2017). 
This banker suspects that the investor is looking to cover 
the short position, and is therefore sounding out the GoA to 
reopen the bond -- which would make it similar to a private 
issuance.  The GoA last issued the Bonar X in mid-May at a 
yield of 8.44%, compared to current trading levels of 10.05%. 
 
 
¶7. (SBU) The same banker also noted the increasing cost to 
the GoA associated with its inability to issue 
internationally, for fear of attachment by holdout 
bondholders.  The banker estimated that recent global market 
turmoil, which had a disproportionate impact on Argentina, 
had increased the premium that the GoA must pay for only 
being able to issue debt under domestic law to about 100 
basis points (or 1%).  For the sake of comparison, GoA 
officials have argued to Emboffs in recent years that the 
difference between issuing domestically or internationally is 
only about 30-40 basis points.  Given Argentina's estimated 
financing needs for 2008 of $5-7 billion, a 100 bps premium 
costs Argentina in the range of $50-70 million. 
 
Central Bank (BCRA) bans foreign purchases of new debt 
issuances 
--------------------------------------------- - 
¶8. (SBU) Starting with the BCRA's October 2 debt auction, the 
BCRA implemented a change to its internal rules, banning 
foreign entities from buying BCRA debt instruments (mainly 
LEBACs and NOBACs, or letters and notes of the Central Bank). 
 Only local entities (including locally registered foreign 
firms, including the six foreign banks operating here) are 
now allowed to participate in the auctions.  The BCRA took 
this action to block out foreign hedge funds (or "hot 
money").  Hedge funds can still purchase BCRA debt on the 
secondary market, and the BCRA has over $20 billion in 
short-term debt (avg maturity of about 2 years) outstanding. 
 
S and P upholds Argentina's rating but calls for tighter 
 
BUENOS AIR 00002044  003 OF 004 
 
 
fiscal and monetary policy 
--------------------------------------------- -- 
¶9. (SBU) On September 25, Standard and Poor's Ratings Agency 
confirmed its Argentine rating at B  for long term and B for 
short-term sovereign debt, with a stable outlook.  However, S 
and P warned that the ratings could go either way in the 
future, depending on the next administration's ability to 
stabilize inflation and tighten both fiscal and monetary 
conditions.  According to S and P, Argentina's failure to act 
in a timely manner to contain fiscal expenditures could 
result in lower growth and higher inflation.  S and P also 
expressed concerns about institutional and policy risks, 
specifically the allegations of government interference in 
the GoA statistical agency, INDEC.  S and P stated that this 
alleged manipulation has "weakened the credibility of the 
official inflation numbers," with official 2007 inflation 
estimates below 10% while private analysts are forecasting 
15-18% or higher. 
 
---------------- 
Economic Outlook 
---------------- 
 
GoA presents 2008 Budget Bill to Congress in the face of 
opposition criticism 
-------------------------------------------- 
¶10. (SBU) Economy Minister Miguel Peirano presented the 
highlights of the draft 2008 Budget to the Budget and 
Treasury Committee of the Chamber of Deputies on September 
¶19.  His refusal to entertain questions following his 
two-hour presentation angered opposition Deputies and led to 
opposition denunciations in the local press.  As with 
previous years' budgets, the main assumptions of the 2008 
budget are conservative compared to the Central Bank's survey 
of private sector forecasts.  This is the root of most 
opposition criticism, because the conservative assumptions 
for growth and inflation will result in an underestimation of 
revenues of over $3 billion, by some estimates.  Since 
Argentina's so-called "super powers" Act gives the Executive 
authority to reprogram expenditures without subsequent 
Congressional approval, the President has great discretionary 
power over the use of excess revenues.  The Chamber of 
Deputies is expected to debate the bill after the October 28 
presidential elections. 
 
Argentina loses ground on Transparency International and 
World Bank indices 
--------------------------------------------- 
¶11. (U) For the second year in a row, Argentina fell in the 
rankings of both Transparency International's "Corruption 
Perceptions Index 2007" (CPI) and the World Bank's "Doing 
Business" report, each released September 25.  In 
Transparency International's 2007 CPI ranking, Argentina 
ranked 105 out of 180 countries (compared to 93 out of 163 
countries in 2006) in terms of perceived levels of 
corruption, with a 2.9 ranking on a scale of 0 - 10 (with 0 
highly corrupt and 10 highly clean).  Transparency 
International notes that a score below three indicates that 
"corruption is perceived as rampant."  This rating places it 
alongside Mongolia, Albania, Bolivia, and Burkina Faso.  In 
the Americas, Argentina ranked 23rd out of 32 countries. 
Among Latin American nations, Chile (#22 in the global 
ranking) and Uruguay (#25) again led the region in 2007, with 
Venezuela and Haiti lowest ranked in the hemisphere. 
Argentina also fell in the rankings of the World Bank's 
"Doing Business" report.  In the Bank's 2008 composite survey 
on the "ease of doing business," Argentina ranked 109 out of 
178 nations and territories surveyed, alongside Bangladesh, 
Nigeria, Belarus, and Nepal.  It ranked 22nd out of 31 
countries in Latin America and the Caribbean.  For 
comparison, Argentina ranked 101 out of 175 in the 2007 
report, and 93 out of 155 in the 2006 report. 
 
--------- 
Inflation 
--------- 
 
September CPI increases 0.8% m-o-m, below estimates of "real" 
inflation; INDEC announces plan to introduce new CPI 
 
BUENOS AIR 00002044  004 OF 004 
 
 
methodology in November 
--------------------------------------------- ------ 
¶12. (SBU) On October 4, the GoA statistical agency INDEC 
announced that the September CPI increased 0.8% m-o-m, in 
line with market expectations of what INDEC would report, but 
about half of the level of most economists' estimates for 
"true" inflation.  According to INDEC, accumulated inflation 
for the first nine months of the year reached 5.8%, compared 
to the 10-12% rate that most private consultants estimate. 
All nine sub-indexes show increases, with the largest m-o-m 
increases being: equipment and home maintenance (1.8%), other 
good and services (1.1%) and housing (0.9%).  Food and 
beverages, the key sub-index to calculate the basic food 
basket, increased 0.7%.  Food and beverage prices are key 
data used to measure indigence and poverty levels.  The chief 
economist of one of Argentina's largest unions calculates 
that the poverty level would increase by nine percentage 
points if the basic food basket were properly measured. 
Meanwhile, Julio Cobos, the Governor of Mendoza Province and 
also vice-presidential candidate and running mate of 
presidential front-runner Cristina Kirchner, stated October 4 
that INDEC will introduce a new CPI methodology next 
November, based on a U.S. model. 
 
Another INDEC scandal:  underreporting of Mendoza Province 
inflation figures 
--------------------------------------------- 
¶13. (SBU) The GoA Statistical Bureau INDEC announced 
September 24 that the National CPI increased 0.8% m-o-m in 
August.  The National CPI is a weighted average of seven 
provinces, including Buenos Aires (Province and City), 
Mendoza, San Luis, Cordoba, Santa Fe, Tucuman and Catamarca. 
The Director of Mendoza Province's Statistical Agency 
subsequently notified INDEC in writing (with the formal 
endorsement of the province's government) that INDEC had 
incorrectly reported Mendoza's August CPI.  INDEC included a 
1.5% m-o-m increase for Mendoza, whereas Mendoza had 
originally reported monthly inflation of 3.1%.  This error 
created a scandal when it was reported in local papers, with 
local commentators adding it to the list of ways with which 
the GoA has manipulated the CPI since February 2007. 
 
¶14. (SBU) Local analysts say that the overall objective has 
always been to report a low headline inflation figure, and 
the alleged means of achieving this include: underreporting 
items, deleting data, firing professional INDEC staff that 
refused to go along with the manipulation, and strong-arming 
the main grocery chains into holding store-wide sales on the 
days that INDEC staff do pricing surveys.  The GoA has 
repeatedly denied such allegations, which are also the 
subject of a judicial investigation.  Most of these efforts 
(as well as most price controls and subsidies) are focused on 
the greater Buenos Aires area, which makes up roughly 35% of 
Argentine GDP and population.  As reported in the Economic 
Report sent September 9, inflation in the provinces is 
significantly higher than in Buenos Aires.  And many 
economists cite as evidence of GoA statistics manipulation 
the fact that Buenos Aires city CPI increased 0.4% m-o-m in 
August, only half the National CPI.  The Buenos Aires city 
CPI is generally used as the inflation benchmark for the 
whole country, and is also used to build the inflation-linked 
index that is used to adjust the GoA's peso-denominated debt. 
WAYNE