VZCZCXYZ0001
RR RUEHWEB

DE RUEHBU #0991/01 2002224
ZNR UUUUU ZZH
R 182224Z JUL 08
FM AMEMBASSY BUENOS AIRES
TO RUEHC/SECSTATE WASHDC 1568
INFO RUEATRS/DEPT OF TREASURY WASHINGTON DC
RUEHRC/DEPT OF AGRICULTURE WASHINGTON DC
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC
RHMFIUU/HQ USSOUTHCOM MIAMI FL
RUCNMER/MERCOSUR COLLECTIVE
RUEAIIA/CIA WASHINGTON DC
RHEHNSC/NSC WASHINGTON DC
RUEKJCS/SECDEF WASHINGTON DC

UNCLAS BUENOS AIRES 000991 
 
SENSITIVE 
SIPDIS 
 
Ref: Buenos Aires 980 
 
E.O. 12958: N/A 
TAGS: EAGR ECON EFIN ETRD PREL PGOV AR
SUBJECT:  GoA Repeals Export Tax Resolution, Ending Farm Crisis 
 
Summary 
------- 
¶1. (SBU) Late July 18, the GoA repealed the March 11 decree that set 
off the 129-day battle with the rural sector by imposing sliding 
scale export taxes on grains and oilseeds exports.  This decision, 
which follows the Argentine Senate's July 17 failure to pass the 
resolution into law, returns export taxes to their previous levels 
and has been widely welcomed by agricultural and opposition leaders. 
 The immediate economic impact will likely be a surge of up to $3 
billion in exports of hoarded grains and soybeans.  The fiscal 
impact of the decision is less clear, but the GoA will likely lose 
in the range of $2 billion in potential 2008 revenues.  Markets have 
reacted positively, albeit cautiously, to the decision.  While the 
Senate vote and repeal of the March decree are clear victories for 
the agricultural sector, there is still a great level of uncertainty 
over how the GoA will react.  Will it try to win approval for a new 
tax package?  Will it reinitiate dialogue with the agricultural 
sector as its leaders are calling for?  Right now, the government is 
probably still regrouping.  But the widespread feeling in the 
country seems to be that democracy is at work in ways not seen in 
the memory of most Argentines.  End Summary. 
 
¶2. (SBU) Argentine Chief of Cabinet Alberto Fernandez announced this 
afternoon the repeal of the Economy Ministry's Resolution 125, 
imposed March 11, which established sliding scale export taxes on 
grains and oilseeds exports and provoked a 129-day farm strike that 
hollowed out support for the Kirchner administration and accelerated 
the deterioration of the Argentine economy.  This decision, to be 
published July 21 as Decree 1176, follows the dramatic July 17 vote 
in the Senate to reject the government's bill that would have 
sanctioned the March Resolution (Reftel).  In announcing the 
decision, Fernandez emphasized the government's respect for 
institutions and said the repeal would allow the continuation of 
discussions over export taxes in a more pressure-free and 
"democratic" atmosphere. 
 
¶3. (SBU) Decree 1176 repeals Resolution 125/2008 and the resolutions 
that later modified it and returns export taxes from their current 
levels (e.g., 45 - 50% for soybeans) to their previous fixed levels 
prior to March 11 (Soybeans 35%; Soybean oil 32%; Soybean meal 32%; 
Sunflower seed 32%; Sunflower oil 30%; Sunflower meal 30%; Corn 25%; 
and Wheat 28%).  Although this is a definitive victory for the 
agricultural sector and should bring an end to the chronic protests, 
there are numerous other agricultural sector complaints that the GoA 
has yet to address, including tight control of the export 
registration process and outright export bans on products such as 
beef and milk. 
 
¶4. (U) PUBLIC REACTION:  Agricultural leaders welcomed the 
revocation of Resolution 125.  Luciano Miguens, head of the 
Argentine Rural Society (SRA) termed it "extremely positive" and 
called on the GOA to engage in a "real dialogue" with the 
agricultural sector.  Eduardo Buzzi, head of the Argentine Agrarian 
Federation (FAA) welcomed the announcement but called on the GOA to 
lower the export levies for small and medium producers to the 20-25% 
range, and he urged rapid consideration and approval of new 
legislation for leaseholders.  Other farmers called for discussion 
of broader agricultural policies to support the farming sector.  The 
political opposition applauded the end of Resolution as "late but 
welcome," many of them lamenting the four months it took to resolve 
the conflict.  Elisa Carrio, the leader of the Civic Coalition (CC) 
who finished second in the October 2007 presidential election, 
thought the President's reversal was "very good since it will 
resolve the conflict, and it allows society and the government to 
take up the long-delayed agenda of how to deal with inflation, the 
energy situation and the plight of retirees."  Leader of the Radical 
Party (UCR) Gerardo Morales said the GOA had no choice but to strike 
down Resolution 125 and called for a new, broader agricultural 
policy.  Mauricio Macri, mayor of Buenos Aires and leader of the 
center-right opposition (PRO), welcomed the GOA's announcement but 
called on it to establish a dialogue with the agricultural sector. 
 
¶5. (SBU) ECONOMIC IMPACT:  The early impact will likely be an 
initial surge in exports of hoarded grains and soybeans, which 
private analysts estimate at as much as $3 billion in total sales. 
This will provide a liquidity boost to the economy, with the 
Argentine Central Bank likely reverting to its pre-crisis position 
of purchasing incoming foreign currency on the spot market to 
maintain a stable exchange rate.  This should result in lower 
domestic interest rates and a reversal of the capital flight of 
recent months, which in turn should slow the deceleration of the 
economy and lower high levels of uncertainty that have led to 
deposit withdrawals and the stagnation of investment.  Argentine 
Central Bank officials privately estimate total potential exports 
pending resolution of the farm strikes of $8-10 billion, and it has 
quietly sought assistance from banks and pension funds to help 
purchase the incoming foreign exchange.  In the short term, at 
least, the peso should remain relatively strong, near the current 
level of 3 pesos/USD. 
 
¶6. (SBU) FISCAL IMPACT:  Also unclear is the possible fiscal impact 
of this decision.  At today's world prices, the annual revenue from 
the now repealed GoA increase in the export taxes would have been in 
the broad range of $2.5 to $3.5 billion.  Subtracting the roughly $1 
billion in subsidies and other forms of compensation plans the GoA 
has developed to appease smaller farmers, the result is that the GoA 
will lose in the approximate range of $2 billion in potential 2008 
revenues by repealing the tax.  Many local analysts are concerned 
that the reduced revenues will lead to a deterioration of the GoA's 
fiscal balance if the GoA either does not reduce the pace of 
expenditure growth (currently running at about 40% per year) or is 
unable to find alternative sources of funding.  This in turn could 
exacerbate inflation, which aside from the farm strike has been the 
other main source of instability in the Argentine economy this 
year. 
 
¶7. (SBU) MARKET REACTION:  Markets have reacted positively, albeit 
cautiously, to the Senate vote and today's decision to repeal the 
March Resolution.  The Argentine stock market has increased 1.3% 
since the Senate vote, and bond prices have increased in the 2-4% 
range, depending on the instrument.  Argentine risk levels, as 
measured by the 10-year Credit Default Swap (CDS) and sovereign risk 
premium (JP Morgan's Emerging Market Bond Index - EMBI), have fallen 
significantly.  After hitting a post-default high of 806 basis 
points on July 14, the 10-year CDS fell to 718 basis points by close 
of markets on July 18.  Likewise, the EMBI country risk measure for 
Argentina fell to 598 at markets' close July 18, after hitting 668 
bps on July 15, the highest level since the GoA's 2005 debt 
restructuring.  Nevertheless, there is clearly a wait-and-see 
mentality, and few investors seem to be ready to allocate capital to 
Argentina before it becomes fully clear how the GoA will react to 
its Senate defeat. 
 
Comment 
------- 
¶8. (SBU) The combination of the Senate rejection and the GoA's 
repeal of the March decree is a clear victory for the Argentine 
agricultural sector, and sure to have a short-term positive effect 
in the form of increased exports of agricultural commodities. 
However, there is still a great level of uncertainty over how the 
GoA will react, and also over what medium-term impact this decision 
will have on GoA finances and the economy.  There is an opening for 
the GoA to take a more accommodating stance, working with the 
farmers and Congress to fashion a more acceptable export tax regime. 
 Nevertheless, given President Cristina Fernandez de Kirchner's low 
approval ratings, she is likely feeling pressure to increase 
spending to consolidate support among low-income voters and rebuild 
support in the middle class.  The open question is whether to fund 
this increased spending the Kirchners will look to re-impose the 
higher export taxes via another potentially damaging battle in 
Congress, thereby kicking off the next chapter in the battle with 
the agricultural sector, or will try to put together some 
alternative income package. 
 
¶9. (SBU) The GOA's revocation of Resolution 125 or its timing was 
not a sure thing, so the announcement made by Cabinet Chief Alberto 
Fernandez was a welcome relief (after a day of complete silence from 
Casa Rosada on the Senate vote) as it instantly calmed the public by 
suggesting the Kirchner administration may take the high road in 
moving past this conflict.  The conflict with the "campo" has been a 
watershed for the Kirchners, and the staggering setback in the 
Senate may be the opportunity for Cristina Kirchner to re-launch or 
re-invent her government.  Like the rest of Argentina, CFK and her 
inner circle may still be absorbing the implications of the 
political dynamics unleashed by the government's 129-day 
confrontation with the agricultural sector. 
 
¶10. (SBU) On the broader scale, we have run into numerous Argentines 
whose eyes well up with tears as they recount the events of this 
week and how for the first time in their memory the Congress has 
seriously debated such a vital topic.  There is a clear feeling of 
pride and hope that perhaps a new quality of democracy can emerge 
from this tumultuous series of events. 
WAYNE