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UNCLAS BUENOS AIRES 002271 
 
SIPDIS 
 
SIPDIS 
SENSITIVE 
 
TREASURY FOR LTRAN AND MMALLOY 
E FOR THOMAS PIERCE 
PASS FED BOARD OF GOVERNORS FOR PATRICE ROBITAILLE 
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USDOC FOR 4322/ITA/MAC/OLAC/PEACHER 
US SOUTHCOM FOR POLAD 
 
E.O. 12958: N/A 
TAGS: AR ECON EFIN ETRD PREL PINR
SUBJECT: Argentina's New Economy Minister Faces Daunting Policy 
Challenges 
 
Ref: (A) Buenos Aires 1360 
     (B) Buenos Aires 1496 
     (C) Buenos Aires 1545 
 (D) 06 Buenos Aires 1732 
 
This cable contains sensitive information - not for internet 
distribution. 
 
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Summary 
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¶1. (SBU) Incoming Economy Minister Martin Lousteau will replace 
Miguel Peirano following the December 10 inauguration of 
President-elect Cristina Fernandez de Kirchner (CFK).  The new 
Minister is a well-regarded 36-year old banker whose poise, 
intelligence and discretion reportedly caught CFK's eye.  However, 
his youth, the subordination of his two predecessors to President 
Kirchner, and the Kirchners' apparent decision to directly appoint 
key second-tier Economy Ministry officials have raised questions 
about the degree of autonomy Lousteau will be granted to tackle 
pressing economic priorities, including accelerating inflation. 
Lousteau has already traveled to Brazil with president-elect CFK and 
was included in a meeting the Kirchners and Cabinet Chief Fernandez 
held with visiting German Economy Minister Michael Glos, but he has 
made no public statements. Nevertheless the youthful and photogenic 
Minister has been the "news" in the incoming cabinet lineup. 
Discussion of a possible Lousteau Economy Ministry agenda has served 
as a proxy for a debate on how and how quickly the CFK 
administration will address inflation and other macro and micro 
policy disequilibria.  It is expected that Lousteau will start out 
by engineering a fiscal adjustment to help cool down the economy; 
negotiating a near-term informal rescheduling of Paris Club arrears; 
taming inflationary expectations via "social pact" negotiations with 
labor and industry; and repairing national statistics agency INDEC's 
tarnished credibility via a gradual normalization of its reporting 
of CPI inflation (though there is much uncertainty about his 
influence over INDEC at present.) 
End Summary. 
 
--------------------------------------------- ---- 
Lousteau: New Economy Minister to Replace Peirano 
--------------------------------------------- ---- 
 
¶2. (SBU) In the aftermath of October 28 elections, it was widely 
speculated that low-key Economy Minister Miguel Peirano, who had 
replaced disgraced Minister Miceli July 17 (Ref A), would be 
retained by CFK.  Peirano was supported by major industrialists to 
whom he had committed to sustain a rigorous domestic industry 
promotion/protection policy (Ref B).  However, during the week of 
Nov 11, media reported that Peirano had conditioned his continued 
tenure on the removal of Internal Commerce Secretary Guillermo 
Moreno, who had frustrated Peirano's attempts to regain Economy 
Ministry control over discredited national statistical agency INDEC 
(Ref C).  While Moreno notionally reports to the Economy Minister, 
he is widely known to answer directly to President Kirchner and to 
Planning Minister Julio de Vido, who have supported Moreno's heavy 
handed enforcement of price controls 
 
¶3. (SBU) Peirano's demand became fodder in a battle between De Vido 
and Cabinet Chief Alberto Fernandez.  This embarrassing cabinet 
fight, along with domestic and international capital market 
nervousness over Argentina's future economic policy direction 
prompted the Kirchners to accelerate the announcement of key cabinet 
positions.  On November 14, Lousteau was chosen from a field of 
candidates that was reported to include national revenue agency 
director Abad, former Central Bank President Blejer, current Central 
Bank President Redrado, Kirchnerist Congresswoman Marco del Pont and 
Investment Promotion Agency Director Nofal. 
 
--------------------------------------------- --- 
 
 
How Much Autonomy Will Kirchners Allow Lousteau? 
--------------------------------------------- --- 
 
¶4. (SBU) At 36, Lousteau will be Argentina's youngest ever Economy 
Minister.  He is considered both academically qualified and 
professionally capable given his prior work as Province of Buenos 
Aires Production Minister and, most recently, as head of Banco de 
Provincia de Buenos Aires (See bio para 12.)  However, Lousteau's 
youth and the involvement of President Kirchner in every aspect of 
Argentine economic policy formulation have caused many to question 
the degree of autonomy he will be granted and his ability to 
influence incoming President CFK.  Moreover, his apparent 
willingness to accept the Kirchners' control over key second-tier 
Secretary-level appointments -- appointments normally made directly 
 
SIPDIS 
by the Economy Minister - have led some local analysts to see 
Lousteau as a subordinate cabinet member who will allow the 
Presidential couple to directly manage key economic policy 
decisions. Others hold out hope for a positive evolution over time. 
 
¶5. (SBU) Embassy contacts report that the key Economy Ministry 
Secretary of Hacienda position (the GoA's OMB-equivalent lead on 
 
SIPDIS 
budget development) has been reserved for Kirchner loyalist and 
current ENARSA president Juan Carlos Pezoa.  The budget process 
remains crucial to what many here see as the Kirchners' intent to 
weaken the traditional federalist autonomy of provincial governors 
and further concentrate political power at the federal level. 
Controversially, over the past four years, Kirchner presidency 
budgets have significantly understated anticipated revenues and so 
allowed the executive to utilize current "superpower" authority to 
directly allocate over-budget revenues without parliamentary 
oversight (Ref D).  These superpower revenues have often been 
allocated to provincial public works projects and to provincial 
budget support in ways many interpret as patronage designed to 
enhance the Kirchners' political influence over provincial 
governors. 
 
--------------------------------------------- -- 
Lousteau's Policy Priorities: Local Speculation 
--------------------------------------------- -- 
 
¶6. (SBU) Lousteau has already traveled to Brazil with 
president-elect CFK November 19 and was included in a meeting the 
Kirchners and Cabinet chief Fernandez held with visiting German 
Economy Minster Michael Glos November 21.  But he has been very 
careful to make no public statements on his policy priorities before 
taking office.  As a result, just what policy views Lousteau will 
bring to the Economy Ministry and just how much room to maneuver he 
will be granted by CFK has been the subject of intense media 
speculation.  In the absence of clearer economic policy signals from 
CFK, discussion of a possible Lousteau agenda has served as a proxy 
for a debate on how and how quickly the CFK administration will 
address inflation and other macro and micro policy disequilibria 
that threaten Argentina's soft landing to sustainable GDP growth in 
the 5-6% range. 
 
¶7. (SBU) For example, shortly after Lousteau was named, considerable 
media attention was given to an economic policy proposal -- 
incorrectly attributed to Lousteau -- that was presented to CFK by 
outgoing Buenos Aires province Governor Sola.  Key components of 
this plan included linking the peso to a trade-weighted basket of 
currencies and offering holders of some $20 billion in "holdout" 
debt a debt for equity option whereby holdouts who agree to invest 
in Argentine fixed productive capital would receive a sweetened 
payout option.  Finally, after a week of silence by Lousteau, the 
plan was attributed to Eugenio Diaz Bonilla, Argentina's IDB 
Executive Director based in Washington. 
 
¶8. (SBU) Most local analysts agree that Lousteau will with an action 
agenda of: (1) engineering a fiscal adjustment to help cool down the 
economy; (2) negotiating a near term informal rescheduling of Paris 
Club arrears; (3) taming inflationary expectations via "social pact" 
 
 
negotiations with labor and industry; and (4) repairing INDEC's 
tarnished credibility via a gradual and politically palatable 
normalization of INDEC's reporting of CPI inflation.  On the fiscal 
adjustment, Lousteau should be able to count on support from CFK: in 
her campaign speeches, she referred a number of times to her intent 
to boost Argentina's primary fiscal surplus from the 3% range in 
2007 (more accurately 2.0-2.5% after discounting one-off factors) to 
the 4% range.  Market players here expect Lousteau to work to 
deliver a 1.3 - 1.5% of GDP fiscal adjustment through a combination 
of reduced subsidy payments (via public utility price adjustments); 
work with the Planning Ministry to slow disbursements on 
non-priority (read non-energy) public works projects; and via 
increased revenues linked to increases in export tariffs on primary 
commodities.  Most local analysts call such fiscal tightening 
welcome given dramatic pre-election increases in public spending 
(public spending rose by over 54% year-on-year in the first nine 
months of 2007 while revenues rose 42% during this period). 
 
¶9. (SBU) On managing Argentina's foreign debt profile, Lousteau is 
expected to work with Central Bank President Redrado to smooth the 
maturity profile of Argentina's foreign and domestic debt portfolios 
and to seek capital market opportunities to obtain the roughly US$ 7 
billion in projected 2008 refinancing needs at the lowest possible 
cost.  Lousteau is also expected to engage early on the Paris Club 
settlement issue, given the prospect of a near-term payback in the 
form of needed official export credit agency financing.  Finally, 
Lousteau is known to be an advocate of a "competitive" (i.e., weak) 
peso, but he is expected to argue against further weakening the 
currency from current levels given the risk of further stoking 
inflation.  In any case, currency management remains under the 
control of Central Bank President Redrado and of President Kirchner, 
and Lousteau is unlikely to be given much weight in deciding how to 
fine-tune exchange rate policy. 
 
¶10. (SBU) Inflation remains a principal challenge for Lousteau. 
Though official INDEC data puts annual inflation at around 9%, 
private estimates suggest that "real" rates are in the 17-20% range. 
Others, including Central Bank experts, estimating true inflation 
somewhere in between official and independent estimates.  Strong 
post-election increases in food, fuel, transport, health care and 
education prices have again raised public concerns over this issue. 
However, CFK's pre-election statements that inflation rates are 
"reasonable" in a context of high growth, her rejection of policy 
criticisms, and the GoA's unwillingness to tighten monetary policy 
make it unlikely that Lousteau will be granted the opportunity to 
initiate any radical change in approach.  Given this, Lousteau's 
inflation fighting efforts will likely focus on implementing CFK's 
"social pact," which are expected to involve sector-by-sector 
negotiations between the GoA, business and trade unions, aimed at 
fixing wage and price rises over a three-year period based on 2007 
inflation.  However, union doubts over official inflation data -- 
expressed regularly in public -- undermine prospects for such a 
deal.  Industry also rejects any fixing of prices for the same 
reason, arguing that their input costs are rising and demanding that 
productivity be factored into any negotiations, a condition rejected 
by labor. 
 
¶11. (SBU) Finally, Lousteau is expected to attempt to improve 
INDEC's statistical reporting gradually and in a way that doesn't 
confront Internal Commerce Secretary Moreno (who reportedly will 
stay on in his position) and provoke the type of political tensions 
that led to Peirano's early resignation.  The current (and 
controversial) head of INDEC's CPI unit, Beatriz Paglieri, who 
recently traveled to Washington to research U.S. CPI methodologies, 
had previously worked for Lousteau as Province of Buenos Aires 
Production Ministry Secretary for International Relations. INDEC 
workers continue to stage public protests with regularity and press 
articles focusing on doubts about IDEC figures continue to appear 
each week. 
 
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Bio Data 
-------- 
 
¶12. (U) Lousteau has served as President of the state-owned Banco 
Provincia de Buenos Aires since December 2005.  Previously, he 
worked as Province of Buenos Aires Minister of Production 
(August-December 2005) and as Chief of Cabinet of the Buenos Aires 
Province Ministry of Economy (July 2004-August 2005) under Governor 
Felipe Sola.  From 2003-4, Lousteau worked at the federal Central 
Bank under Governor Alfonso Prat-Gay and Vice Governor Pedro 
Lacoste.  From 1997-2002, he worked at the APL economic consulting 
firm with Prat-Gay and Lacoste and at the Grupo Unidos del Sur, an 
NGO dedicated to implementing government reforms created by 
Francisco de Narvaez, who in 2007 came in third in the race for 
governor of Buenos Aires province.  While working at Unidos del Sur, 
Lousteau co-wrote "Sin Atajos" (Without Shortcuts) with Javier 
Gonzalez Fraga, former Central Bank Governor during the Menem 
administration and 2007 presidential candidate Roberto Lavagna's 
pick for his own Economy Minister.  The book calls for an end to 
"magic economic formulas" and a focus on developing state economic 
institutions as the best means to address Argentina's historical 
economic volatility.  Lousteau was a Professor of Economics at the 
prestigious Torcuato Di Tella and San Andres Universities.  He holds 
a BA in Economics (Summa Cum Laude) from San Andres University and a 
MA in Economics from the London School of Economics. 
 
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Comment 
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¶13. (SBU) The longer a CFK administration takes to address growing 
economic disequilibria, the more costly -- economically and 
politically -- their correction will be.  CFK is set to begin her 
presidency on the downslope of GDP growth trends at a time when 
foreign and domestic private sector investment needed to sustain 
growth is increasingly constrained by concerns over the economic 
policy environment, and as uncertainty and risk aversion is on the 
rise internationally.  It is encouraging that CFK has turned to a 
technically capable economist/banker to face these challenges, but 
serious questions remain about whether Lousteau will be given free 
enough reign to do the right things. 
 
WAYNE