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RUEHSO/AMCONSUL SAO PAULO IMMEDIATE 3772
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RUEATRS/DEPT OF TREASURY WASHINGTON DC IMMEDIATE

UNCLAS SECTION 01 OF 04 BUENOS AIRES 001236 
 
SIPDIS 
 
TREASURY FOR O"NEILL,TRAN, MALLOY 
 
E.O. 12958: N/A 
TAGS: EFIN ECON PREL AR
SUBJECT: ARGENTINA'S PARIS CLUB ANNOUNCEMENT PROMPTS 
ACCLAIM AND RESERVATIONS 
 
REF: A. BUENOS AIRES 1224 
     ¶B. BUENOS AIRES 1233 
 
------- 
Summary 
------- 
 
¶1. (SBU) The local reaction to the Argentine President's 
surprise September 2 announcement to pay Paris Club debt has 
been mildly positive.  The GoA is promoting the action as 
part of a larger "debt reduction, development, and growth" 
initiative.  GoA officials expressed satisfaction with the 
positive USG statement, although local media interpreted part 
of the statement as a call for paying holdout bondholders as 
well. 
 
¶2. (SBU) Argentine industry has been most vocal in praising 
the initiative, emphasizing the expected positive outcomes: 
restoring Argentina's image, gaining confidence in the 
economy, and accessing lower-cost financing.  Spain, Italy, 
Germany, and France also are reported to have issued positive 
statements, and the Paris Club secretariat's statement 
attracted much attention (septel).  Many normally critical 
media commentators, opposition politicians, and farming 
groups also complimented the decision, while some of the 
GoA's most leftist supporters criticized the move.  However, 
the garlands of praise were accompanied by reservations about 
paying in a lump-sum with official reserves and arguing that 
it does not address the real problems facing the country. 
 
¶3. (SBU) Markets have reacted cautiously to the announcement, 
with investors waiting for clearer signals of change. 
Argentine and foreign economists and financial analysts, 
especially those associated with Menem-era economic policies, 
have been among the most skeptical of the decision's impact. 
Septels will cover Central Bank, Finance Secretariat, and 
Paris Club Secretariat reactions, as well as questions 
related to legal aspects of the decision and the timeframe 
for implementation.  End Summary. 
 
--------------------------------------------- 
President Shocks Country with Paris Club Plan 
--------------------------------------------- 
 
¶4. (SBU) Argentines have responded positively to Argentine 
President Cristina Fernandez de Kirchner's (CFK) announcement 
(Reftel) that she had signed a decree instructing the Economy 
Ministry to pay Paris Club debt using Central Bank reserves. 
GoA officials were out in force following the announcement, 
promoting the decision to the media and underscoring the 
positive repercussions that would come of it, including 
restoring confidence in Argentina.  Chief of Staff Sergio 
Massa told local media that the GoA took the action in order 
to continue reducing debt to multilateral organizations and 
bilateral creditors (a logical follow-on to the January 2006 
payment to the IMF), break the vicious cycle of constant 
Paris Club debt restructurings since 1983, and open access to 
credit for the government and Argentine firms.  According to 
leading daily Clarin, Massa also claimed that CFK had 
consulted on the issue with the Heads of Germany, Italy, 
France, Spain, and also with WHA A/S Tom Shannon during his 
recent visit.  (Comment: We believe these "consultations" may 
refer to nothing more than a general discussion of the Paris 
Club issue and the need to resolve it.  End Comment.) 
 
¶5. (SBU) Central Bank President Martin Redrado, in his 
closing speech at the Central Bank's annual monetary and 
banking conference, threw his full support behind the 
announcement, even though he is rumored to have been kept out 
of the loop on the decision until the last minute. 
(According to press reports, CFK and her husband, 
ex-President Nestor Kirchner, kept a close-hold on the 
initiative, involving only close advisors Oscar Parilli, 
General Secretary to the President, Carlos Zaninni, Legal and 
Technical Secretary, and -- possibly -- Chief of Cabinet 
Sergio Massa.)  Redrado has long opposed using reserves to 
pay the Paris Club but, playing the good soldier, argued that 
the payment was "part of an integral strategy" to regain 
access to markets and "reinsert Argentina into the 
international financial community." 
 
---------------------------------- 
Roll-Out as Part of Larger Package 
---------------------------------- 
 
BUENOS AIR 00001236  002 OF 004 
 
 
 
¶6. (SBU) The GoA is promoting the proposed payment as part of 
a larger "debt reduction, development, and growth" 
initiative.  It took out full-page advertisements in all 
local papers to introduce the initiative, and announced in 
addition to the Paris Club payment the signing of an 
agreement with Brazil's development bank (BNDES), new credits 
from state-owned Banco de la Nacion to Argentine exporters 
and small- and medium-size businesses, and stronger 
anti-dumping measures, all with the apparent goal of 
increasing jobs, local production, and "social mobility," and 
emphasizing the role of the state in "development and 
growth."  Details on this broader initiative are still 
lacking. 
 
------------------------------------- 
Positive U.S. Statement Reassures GoA 
------------------------------------- 
 
¶7. (SBU) GoA officials were quoted in the press expressing 
satisfaction with the USG statement, issued late September 2, 
with press reports highlighting the U.S. comment that the 
announcement was a positive step.  Press reports also 
indicated supportive statements from Spain, Italy, France, 
and Germany.  While the two main papers -- Clarin and La 
Nacion -- highlighted the encouraging tone of the U.S. press 
release, both stated in front-page headlines that the USG had 
also called for the normalization of financial relations with 
all external creditors.  Both papers interpreted this as a 
reference to untendere debt holders (the so-called "holdout" 
bondholders that did not participate in the 2005 debt 
exchange.) 
 
-------------------------------------------- 
Argentine Industry Accentuates the Positives 
-------------------------------------------- 
 
¶8. (SBU) Argentine private sector representatives, including 
leaders of the main industry associations, were most vocal in 
supporting the decision.  The Presidents of the Argentine 
Business Association and the Argentine Chamber of Commerce 
(CAC) pledged support and emphasized that the move would lead 
to investment and improved access to credit.  They and other 
local business representatives highlighted the expected 
positive outcomes of the initiative, including restoring 
Argentina's tarnished image in the world and regaining 
confidence in the economy. 
 
¶9. (SBU) CAC President Carlos de la Vega asserted that paying 
Paris Club creditors would allow Argentina to access 
lower-cost financing, particularly via official Export Credit 
Agencies, such as U.S. EXIM, France's COFACE, and Germany's 
HERMES.  He specified that such credits would enable the 
country to modernize its economic and social infrastructure. 
Juan Carlos Lascurian, the head of the powerful Industrial 
Union, agreed with this sentiment, adding that this was "a 
fundamental step and important signal to the world, and would 
help Argentina to recoup the confidence of developed 
countries." 
 
--------------------------------------------- 
Opposition Supports Payment, Criticizes Means 
--------------------------------------------- 
 
¶10. (SBU) Many normally critical media commentators, 
opposition politicians, and farming groups also made 
complimentary statements regarding the decision to pay Paris 
Club members.  These included opposition leaders Elisa Carrio 
(second place finisher in the 2007 Presidential election) and 
Buenos Aires Mayor Mauricio Macri, both of whom emphasized 
the importance of complying with Argentina's debt obligations 
and reintegrating with world capital markets.  Estranged Vice 
President Julio Cobos applauded the decision, noting it would 
help create better conditions for future investment.  Another 
striking feature of the reaction came from leftist leader 
Luis D'Elia, the street activist who was one of the 
government's most unqualified supporters during the recent 
farm strike.  D'Elia criticized the announcement, saying 
that, "Cristina Fernandez surprised us with her decision to 
write off the now nearly chronic debt with the Paris Club." 
 
¶11. (SBU) Leaders of three of the four main farming groups -- 
until recently in a battle with the GoA over export taxes -- 
echoed these arguments. (Eduardo Buzzi, leader of the 
 
BUENOS AIR 00001236  003 OF 004 
 
 
Agrarian Federation, which represents small- and medium-size 
farmers, questioned the origin of the debt and recommended 
restructuring it.)  Luciano Miguens, President of the 
large-holders association, Sociedad Rural, made the strongest 
case for clearing Paris Club debt, arguing that "it will 
surely have positive effects on the economy, in particular 
with regards to access to international credit, increased 
investment, recuperation of bond prices, and diminution of 
country risk." 
 
¶12. (SBU) Nevertheless, most of these commentators qualified 
their statements, and in particular disagreed with the GoA's 
decisions to pay the Paris Club in a lump sum using official 
reserves.  Macri argued the GoA should have tried to 
restructure the debt.  Carrio noted that the payment was 
late, did not form part of an overall financial restructuring 
plan, and demonstrated weakness on the part of the government 
(due to its need to rely on reserves).  Macri's PRO 
opposition party chimed in via a press release on September 
3, stating that complying with external obligations is 
fundamental, but using reserves was unnecessary.  Many other 
Argentine observers agreed, highlighting the possible 
detrimental impact on the Central Bank and also arguing that 
the payment does not address the real problems facing 
Argentina: high inflation, statistics manipulation, lack of 
access to capital markets, and overall crisis of confidence. 
 
------------------------------------ 
Markets Flat Pending Clearer Signals 
------------------------------------ 
 
¶13. (SBU) Investors have reacted cautiously to the news, and 
the marginal gains in Argentine peso and dollar bonds and in 
Argentina's main stock market (Merval) following the 12:00 
p.m. announcement on September 2 mostly eroded on September 3 
and 4, amidst low volume.  Argentina's country risk rating, 
as measured by JP Morgan's Emerging Market Bond Index Plus, 
widened to 693 basis points on September 3, after closing at 
678 basis points September 2 (and down from a recent high of 
741 on August 8).  Argentina's Credit Default Swaps (CDS) 
tightened about 20 basis points following the announcement 
and gave up the gains on September 3 and 4 (at market close 
on September 4, five-year and ten-year CDS were trading at 
769 and 841 basis points, respectively).  The peso has only 
slightly depreciated since the announcement, despite market 
concerns that the Central Bank may decide to increase dollar 
purchases to build back reserves.  Local analysts are mostly 
quoted stating that the market is waiting for clearer signals 
on what further actions the government will take, 
particularly with regards to restoring confidence in 
government statistics and slowing spending growth in order to 
reduce the rate of inflation. 
 
--------------------------- 
Analysts Remain Unconvinced 
--------------------------- 
 
¶14. (SBU) As reported Reftel, the initial reaction of many 
local economists has been negative, albeit with some open to 
the possibility that the decision could be net-positive if it 
turns out to reflect a change of course in GoA economic 
policy.  Several local analysts have also noted that it is 
better for the GoA to use reserves to pay down debt than to 
finance increased spending (which some GoA supporters have 
called for in the past).  Nevertheless, most local analysts' 
view is that the move unwisely uses reserves; reflects GoA 
desperation to find sources of financing; raises concerns 
about Central Bank solvency and the stability of the exchange 
rate; and could empower the GoA to finance huge, 
white-elephant infrastructure projects, such as the $4 
billion proposal by the French company Alstom to build a 
bullet train between Buenos Aires and Rosario. 
 
¶15. (SBU) Foreign Bank analysis is broadly similar.  Goldman 
Sachs' assessment is that the payment is "a welcome and 
positive step to regularize Argentina's financial standing 
with the world...but does not resolve the main macroeconomic 
problems currently facing Argentina, namely high inflation 
and a high fiscal and financial dependence on commodity 
prices."  JP Morgan sees it as positive that "authorities are 
no longer able to overlook the binding financial constraints 
that market spreads are signaling," but argues that "the 
one-off nature of the Paris Club payment reveals Argentina's 
preference for maintaining the current policy mix." 
 
BUENOS AIR 00001236  004 OF 004 
 
 
 
¶16. (SBU) Citi and Lehman commentaries are more critical, 
noting that the decision erases any notion of Central Bank 
independence, opens the door to further litigation from 
holdouts, and undermines the Central Bank's balance sheet. 
Lehman's Guillermo Mondino, an Argentine who is a long-time 
critic of the Kirchners, notes that despite supporters' 
assertions that the act demonstrates GoA willingness to meet 
debt obligations, the Paris Club payment reduces available 
Argentine assets and therefore actually raises doubts about 
the GoA's capacity to pay future debts.  (Mondino worked for 
Domingo Cavallo when he was Economy Minister in 2001. 
Cavallo has also criticized the decision, for the same 
reasons listed above.) 
 
¶17. (SBU) Almost all analysts consider it negative that the 
GoA will avoid the IMF by clearing all Paris Club debt. 
Barclay's view is typical: "this solution to the Paris Club 
issue is inferior to the more conventional negotiated 
rollover and reflects both the intention to reassure the 
market of its willingness to pay and the decision to avoid 
the required surveillance program with the IMF.  The cash 
payment is a costly choice since it is unlikely to lower the 
elevated risk premium that the country will face to roll over 
short-dated debt or to provide much relief for next year's 
financing needs -- the focus of recent market stress...While 
(it) should open the door for bilateral infrastructure and 
trade credits...the opportunity cost of liquid reserves 
ultimately casts doubt on the effectiveness of the message." 
 
------- 
Comment 
------- 
 
¶18. (SBU) While overall reaction may be more mixed than the 
GoA expected, the surprise of the announcement was complete 
and shocked both the political establishment and markets. 
This is the first time that the CFK administration has 
proactively set the agenda -- getting out ahead of the press 
and public opinion -- in contrast to its record over the last 
eight months of constantly reacting to events.  If the 
Kirchners thought they needed a big event to shake up the 
political/economic system in Argentina, they got it -- along 
with everyone's attention.  The GoA now has an opportunity to 
expand on this announcement to demonstrate a shift towards 
more rational economic policies.  The question is whether 
this populist, market-skeptical government will seize the 
day. 
WAYNE