VZCZCXRO2090
OO RUEHCD RUEHGA RUEHGD RUEHHA RUEHHO RUEHMC RUEHMT RUEHQU RUEHTM
RUEHVC
DE RUEHBU #1220/01 2422101
ZNY CCCCC ZZH
O 292101Z AUG 08
FM AMEMBASSY BUENOS AIRES
TO RUEHC/SECSTATE WASHDC IMMEDIATE 1928
INFO RUCNMRC/WESTERN HEMISPHERIC AFFAIRS DIPL POSTS IMMEDIATE
RUEHSO/AMCONSUL SAO PAULO IMMEDIATE 3769
RUEAIIA/CIA WASHINGTON DC IMMEDIATE
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC IMMEDIATE
RUEATRS/DEPT OF TREASURY WASHINGTON DC IMMEDIATE

C O N F I D E N T I A L SECTION 01 OF 03 BUENOS AIRES 001220 
 
SIPDIS 
 
E.O. 12958: DECL: 08/28/2013 
TAGS: ECON EFIN ETRD EAGR PREL AR
SUBJECT: GOA ECONOMIC OFFICIALS DEFEND MODEL, PROMISE TO 
PAY DEBT AT HIGH-PROFILE CONFERENCE 
 
Classified By: Ambassador E. Anthony Wayne for Reasons 1.5 (b and d) 
 
------- 
Summary 
------- 
 
¶1. (C) A Buenos Aires Council of the Americas (CoA) 
conference convoked key members of the GoA's economic team, 
including new Chief of Cabinet Sergio Massa, Central Bank 
President Martin Redrado, and Economy Minister Carlos 
Fernandez.  To an audience of domestic and international 
business leaders, these GoA ministers delivered a spirited 
defense of the GoA's economic policy mix: the model of twin 
fiscal and trade surpluses, undervalued currency and reserve 
accumulation works, allowing the central bank to easily 
reverse an April/May episode of deposit flight; the GoA 
intends to continue on the same policy path with only minor 
adjustments; financial markets that continue to over-price 
Argentine risk underestimate the economy's strong 
fundamentals; and the GoA has the wherewithal to meet its 
debt obligations and will do so.  Neither Massa nor Fernandez 
mentioned domestic inflation (currently estimated in the 25% 
range), while Redrado briefly noted that inflation rates need 
to be lowered via a coordinated monetary, fiscal, 
competition, salary, and income policy response.  On the bond 
"holdout" settlement issue, Massa said the GoA had "no offer 
to make the bondholders."  Business leaders had hoped the GoA 
would use the CoA conference as a vehicle to announce budget 
rationalization measures, including tariff increases to 
reduce subsidies and cuts in fiscal expenditures, along with 
initiatives to restructure Paris Club arrears and re-open the 
bond "holdout" issue.  None of these expectations were met. 
End Summary. 
 
--------------------------------------------- ---- 
Chief of Staff Massa: No on New Offer to Holdouts 
--------------------------------------------- ---- 
 
¶2. (U) In a Council of the Americas (CoA) August 27 
conference in Buenos Aires on the impact of global volatility 
on emerging markets, senior members of the GoA economic 
cabinet addressed 300-plus senior domestic and international 
business representatives and media.  Following opening 
remarks by CoA President Susan Segal and Argentine Chamber of 
Commerce President Carlos de la Vega, Chief of Cabinet Sergio 
Massa offered a spirited defense of the GoA's economic and 
social policy mix.  Referring to dire media reports on the 
state of Argentina's economy following recent rating agency 
downgrades, he said "If you look at the (GoA's healthy 
economic) statistics, it's entirely another economy." 
 
¶3. (U) Massa described five GoA social and economic policy 
priorities: (1) education, with a goal of dedicating 6% of 
GDP to education in the medium term; (2) social security, 
expanding and making more transparent current unemployment 
and pension re-distribution programs; (3) public investment, 
with the state helping where the private sector will not go 
and emphasizing primary infrastructure, including water and 
sewage facilities; (4) taxes, with an emphasis on fairly 
funding redistributive income transfers; and (5) creating 
jobs, the GoA's single most important priority and one on 
which it the NK and CFK administrations have delivered.  "Of 
course, the State will continue to intervene to deliver 
needed services," Massa concluded. 
 
¶4. (U) On 2008/09 sovereign debt maturities, Massa argued the 
GoA remains solvent, with adequate fiscal tools. "No 
well-intentioned person can doubt that Argentina is going to 
meet each and every one of its commitments."  In a follow-on 
discussion with journalists, and in response to recent media 
speculation that the GoA is considering a Barclays Bank 
proposal to re-open the bond "holdout" settlement issue, 
Massa said the GoA had "no offer to make the bondholders." 
Returning to the CoA conference theme of the impact of global 
volatility on emerging markets, Massa said that "in a world 
of changes, Argentina has an opportunity," noting that of the 
nations in South America, Argentina is one of the top three 
for investment destinations.  "Argentina is a friendly 
country to people who want to come and invest.  It is even 
more friendly for those who've put in a dollar and want to 
keep putting in more dollars because that generates work for 
Argentines."  He concluded that it would be an error for 
Argentina to resign itself to being a country that just 
exports services (sic - he likely meant primary commodities) 
and asked the numerous company reps present to target their 
investment budgets here. 
 
¶5. (C) Comment: As a new Chief of Cabinet making his mark, 
 
BUENOS AIR 00001220  002 OF 003 
 
 
Massa's comments had been much anticipated by the domestic 
and international business community as an signal of possible 
CFK administration economic policy modifications.  From what 
we heard, they went away disappointed: Massa spoke in very 
broad terms defending the GoA's interventionist economic 
model and gave no indications that the CFK administration 
would acknowledge inflation and official statistics 
credibility issues as an important concern, or deal soon with 
outstanding Paris Club and bond holdout issues.  Press 
commentary welcomed his remarks about repaying the debt, but 
lamented that he had no agreement from his President to go 
farther on key issues.  End Comment. 
 
--------------------------------------------- --- 
Central Bank:  System is Sound, Need to tackle Inflation 
--------------------------------------------- --- 
 
¶6. (U) In a 40-minute address replete with voluminous 
statistical references, Central Bank President Redrado 
defended his central bank's (BCRA) management of monetary and 
currency policy.  Noting that he had recently returned from a 
U.S. Federal Reserve Bank conference in Jackson Hole, Wyoming 
on global financial market volatility, Redrado said that 
Argentina, while not at the center of the global market 
crisis, is not immune from its secondary impacts.  Redrado 
quoted President Truman's "The buck stops here" motto, and 
argued that his BCRA took all necessary measures to contain 
domestic market jitters that saw significant deposit flight 
from the banking system April 23 - May 26 this year.  A 
"professional and surgical" BCRA response included the sale 
of dollar reserves and intervention in currency futures 
markets, resulting in a reversal of deposit outflows and an 
appreciation of the nominal exchange rate.  "We've been 
successful" and the evidence for that, Redrado said, is that 
Argentine individuals and businesses remain willing to 
operate in Pesos rather than in Dollars. 
 
¶7. (U) On GoA debt policy, Redrado noted the GoA's current 
3.5% average primary fiscal surplus (PFS) and said a 1.3% PFS 
would be adequate to sustain a Debt/GDP ratio at its current 
53% level.  The weight of debt maturity payments had declined 
to 1.8% of GDP and 7% of tax collection in June 2008, 
compared with 3.7% of GDP and 22% of tax collection in 2001, 
he said.  Argentina has also cut its foreign currency debt to 
50% of the total this year, down from a historical average of 
80% and a full 97% in 2001.  Only in a rushed final closing 
sentence did Redrado utter the word inflation, saying that 
inflation rates must be lowered and that this will require a 
coordinated monetary, fiscal, competition, salary, and income 
policy response. 
 
¶8. (C) Comment: Redrado's performance was true to form -- a 
statistics-laden paean to the BCRA's responsible management 
and successful containment of April/May 2008 market jitters. 
His talk ended with the briefest acknowledgement that 
inflation is a concern and his call for "coordinated" fiscal 
and monetary policy was taken by conference attendees as 
laying the blame for high levels of inflation squarely on the 
GoA's profligate fiscal policy.  End Comment. 
 
------------------------------------------- 
Economy Minister Fernandez: The Model Is Sound/Sustainable 
------------------------------------------- 
 
¶9. (U) In contrast to the largely extemporaneous 
presentations by Massa and Redrado, Economy Minister Carlos 
Fernandez read 15 minutes of prepared remarks which 
emphasized the GoA's efforts to reduce unemployment and 
income inequality while maintaining investment growth.  With 
Argentina's 8 % growth rate since 2003 comparable to that of 
China and India, Fernandez said the GoA continues to make 
income re-distribution its "primary concern."  Argentina's 
20% investment growth rate is "not only explained by the 
sound macroeconomic situation, but also by the active 
policies the GoA has made to promote investment."  These 
measures include an investment promotion law making its way 
through Congress, as well as a software development promotion 
law and a biofuels law that are already in place. 
 
¶10. (C) Comment:  As in earlier public remarks defending the 
GoA's economic model, Carlos Fernandez declined to even 
mention the issue of high inflation that has bedeviled the 
administration of Christina Fernandez de Kirchner.  His 
tightly scripted comments, his decision not to address 
credibility concerns surrounding INDEC, the GOA statistics 
agency under his Ministry's nominal control, and his refusal 
to answer more than a few perfunctory questions from the 
press after his remarks were widely commented on at the 
 
BUENOS AIR 00001220  003 OF 003 
 
 
conference.  "Today Fernandez again proved himself a shadow 
of Nestor Kirchner, who is Argentina's true Economy Minister. 
 Such a shame," said the the head of Fiat's Argentine 
subsidiary (PROTECT) on the margins of the conference. End 
Comment. 
 
--------------------------------------------- --- 
Ambassador Timerman:  Bilateral Agricultural Frictions on GoA 
Agenda 
--------------------------------------------- --- 
 
¶11. (U) Following Ambassador Wayne's remarks highlighting the 
scope and depth of U.S. Argentine bilateral relations (posted 
on Embassy website), Argentine Ambassador to the U.S. Hector 
Timerman highlighted an active bilateral engagement agenda 
and expanding congressional relations between our two 
countries.  The U.S. is Argentina's third largest export 
market (with 14% of Argentine exports entering duty-free 
under U.S. GSP unilateral trade benefits) and second largest 
source of imports, Timerman noted, as well as being 
Argentina's single largest source of investment since 2005. 
He highlighted common U.S./Argentine strategic interests in 
human rights, counter-terror, anti-drug, environmental and 
trafficking-in-persons issues.  He emphasized that four 
substantial agreements on alternative energy, nanotechnology, 
educational exchanges,and cultural exchanges had been signed 
during senior plenary bilateral consultations held in Buenos 
Aires July 2008. 
 
¶12. (U) On congressional relations, Timerman noted recent 
visits by two high-level U.S. Congress delegations headed by 
U.S. Representative Engel and Senator Dodd.  He noted the 
planned visit of Representative Peterson, Chairman of the 
House Agriculture Committee, in early September, and 
pointedly noted that the GoA hoped to use this visit to 
address longstanding GoA complaints on U.S. restrictions on 
the import of Argentine beef and citrus products. 
 
---------------------------------- 
Doha Development Round: Next Steps 
---------------------------------- 
 
¶13. (U) In a taken question on the July 2008 failure of the 
WTO Doha Development Round, Ambassador Wayne noted common 
U.S. and GoA interests during Doha Round negotiations in 
limiting agricultural safeguards but differences in our 
approach to reducing emerging market industrial tariffs. 
Ambassador Wayne noted USTR Schwab's recent appeal that 
developed and emerging market nations build on common ground 
gained in seven years of negotiations to date and return to 
multilateral negotiations.  Timerman noted the GoA's intent 
to protect its domestic industry and contrasted the USG's 
final offer to cap agricultural subsidies at the US$ 14 
billion level with current USG agricultural subsidies in the 
US$8 billion range. 
 
-------------------------- 
Comment:  Opportunity Lost 
-------------------------- 
 
¶14. (C) With advance ads in newspapers highlighting 
participation of key members of the GoA's economic cabinet, 
the Council of Americas conference was widely anticipated as 
a platform for the Kirchner administration to clarify and 
re-launch its economic policy agenda.  Local and 
international business community players hoped the GoA would 
use the CoA conference as a venue to announce further budget 
rationalization measures, including tariff increases to 
reduce subsidies and cuts in fiscal expenditures and to 
initiatives to restructure Paris Club arrears and re-open the 
bond "holdout" issue.  Some speculated that the Kirchner 
administration could use the CoA conference to announce a 
recession of GoA "Superpower" authority to discretionally 
direct over-budget revenues. 
 
¶15. (C) These expectations were not very realistic, and they 
were not met.  The GoA line expressed by Massa, Redrado and 
Fernandez was in essence: the model works, the GoA will 
continue on the same policy path with minor adjustments, 
financial markets that continue to over-price Argentine risk 
underestimate the economy's strong fundamentals, and the GoA 
has the wherewithal to meet its obligations in the medium 
term.  The consensus of international business community 
members present: another opportunity lost to regain investor 
and financial market confidence. 
WAYNE