VZCZCXYZ0004
OO RUEHWEB

DE RUEHBU #1442/01 2951819
ZNR UUUUU ZZH
O 211819Z OCT 08
FM AMEMBASSY BUENOS AIRES
TO RUEHC/SECSTATE WASHDC IMMEDIATE 2279
RUCNMER/MERCOSUR COLLECTIVE
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC
RUEATRS/DEPT OF TREASURY WASHINGTON DC
RUEHRC/DEPT OF AGRICULTURE WASHINGTON DC

UNCLAS BUENOS AIRES 001442 
 
SIPDIS 
SENSITIVE 
 
E.O. 12958: N/A 
TAGS: EFIN ECON EINV PGOV AR
SUBJECT: Argentina: Cash-Strapped GoA to Nationalize Private Pension 
System 
 
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Summary 
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¶1. (SBU) The GoA will announce formally October 21 its plans to 
submit a bill to Congress to "rescue" future retirees by 
nationalizing Argentina's private pension system.  Argentina's 
social security system was partially privatized in 1994, with 
workers given the right to choose between affiliating with a 
"pay-as-you-go" public pension system and a "fully funded" private 
pension system.  Over nine million workers, some 39% of the active 
labor force, have opted for the private pension fund system, which 
controls assets of roughly US$ 30 billion and is Argentina's main 
institutional investor.  Nationalizing the private pension system 
would allow the GoA to: 1) tap billions in private pension fund 
cash; 2) roll over additional billions in interest and principal 
payments on GoA securities held in private pension fund portfolios; 
and 3) absorb an estimated US$ 4 billion (approx. 1% of GDP) in 2009 
worker social security contributions into current, spendable tax 
revenue. 
 
¶2. (SBU) The nationalization initiative reportedly originated with 
Chief of Cabinet Sergio Massa - who previously ran the public social 
security administration - in response to a request for new revenue 
ideas by former president Nestor Kirchner.  A number of local 
economists criticized the GoA action, calling it an asset grab and 
clear evidence that is unable to meet upcoming 2009 financial 
obligations with current resources in light of a deteriorating 
global economic environment, profligate spending plans linked to 
upcoming interim legislative elections, and spiking 2009/2010 
sovereign debt maturities.  Local equity markets reacted negatively 
to the rumored move on Monday, bucking an international rally to 
drop 3.3%, and Argentina's country risk premium widened to over 
1,400 basis points.  Opposition leaders are accusing the government 
of grabbing new money to fund its current patronage system at the 
expense of future retirees.  In counterpoint, union leaders 
supporting the Kirchner administration praised the move.  Local 
analysts are split over whether obtaining Congressional support for 
the nationalization will be difficult.  Some argue that the 
initiative will appeal to the ruling coalition in Congress who 
support populist measures; others expect an outcry from those 
invested in the private system will lead to a fight in Congress.  A 
number of local analysts are portraying this nationalization as yet 
another improvised, top-down decision to address immediate financial 
needs with little thought given to possible social and legal 
considerations or to its impact on Argentina's domestic financial 
markets.  End Summary. 
 
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GoA to Nationalize Private Pension Funds 
---------------------------------------- 
 
¶3. (U) President Christina Fernandez de Kirchner (CFK) is planning 
to announce October 21 that her administration will submit a bill to 
Congress to nationalize Argentina's private pension system.  A 
formal rollout detailing the proposed nationalization is scheduled 
for the evening of October 21. 
 
¶4. (U) State-owned news agency Telam reported that the GoA had 
decided to "reform" the social security system because, according to 
Amado Boudou, head of public social security system ANSES, the 
current financial crisis had demonstrated that the private pension 
system is "conceptually flawed."  Given recent significant losses in 
the market value of private pension fund portfolios due to the 
global financial crisis, Boudou said, the GoA would "have to rescue 
in one way or another the future retirees that contribute to the 
system."  Another senior GoA official is reported saying: "Just as 
the United States rescued the banks, we are going out to rescue the 
people."  Media reports that Boudou spent the afternoon of October 
20 with Chief of Cabinet Sergio Massa and Legal and Technical 
Secretary to the President Carlos Zannini drafting the initiative 
and the legislative proposal. 
 
--------------------------------------------- ---- 
Private Pensions: 14-Year Old Fully Funded System 
--------------------------------------------- ---- 
 
¶5. (U) Argentina's social security system was partially privatized 
in 1994, with workers given the right to choose between affiliating 
with a "pay-as-you-go" public pension system and a "fully funded" 
private pension system.  As of August 2008, 9.5 million workers (39% 
of the Country's working age population) had elected to belong to 
the private pension fund system.  Of this 9.5 million, only 3.6 
million are active contributors, compared to roughly 5 million 
active contributors in the state system. 
 
¶6. (U) Receiving annual inflows of approximately ARP 13 billion (US$ 
4 billion) in worker contributions, the private pension system is 
 
Argentina's main institutional investor.  As of September 30, 2008, 
private pension fund system assets totaled ARP 94.4 billion (US$ 30 
billion, 9.4% of GDP).  A full 60% of these assets are invested in 
federal government securities, which, according to news reports, 
have lost up to 40% of their value in the past year.  The private 
system is currently managed by ten independent fund administrators, 
known as AFJPs.  The top four funds that control roughly 60% of the 
local private pension fund market are: Consolidar, run by 
Spanish-owned BBVA Banco Frances; Maxima, run by HSBC Bank; Met 
AFJP, run by U.S.-owned MetLife; and Origenes, run by the 
Dutch-owned ING Group. 
 
 
¶7. (SBU) In what many now see as an interim step towards full 
nationalization, in 2007 the GoA gave private pension fund members 
the option to transfer out of their AFJPs and to return to a 
state-run defined payment system.  The vast majority of AFJP members 
chose not to convert to the public system.  At that time, the GoA 
also determined that new entries into the workforce were to default 
to the state plan if they did not specifically elect AFJP 
membership. 
 
--------------------------------------------- -- 
AFJP Nationalization - Financial Relief for GoA 
--------------------------------------------- -- 
 
¶8. (SBU) The nationalization initiative reportedly originated with 
Chief of Cabinet Sergio Massa - who previously ran the public social 
security administration - in response to a request for new revenue 
ideas by former president Nestor Kirchner.  According to local 
analysts, nationalizing the private pension system would allow the 
GoA to tap between US$ 2.5 and 4 billion that AFJPs currently hold 
as cash and time deposits in the banking system.  It would also 
allow the GoA to roll over the US$3 billion the GoA would have had 
to pay AFJPs in 2009 in interest and principal payments on GoA 
securities held in AFJP portfolios.  In addition, AFJP 
nationalization into a pay-as-you-go system implies that workers' 
social security contributions of an estimated US$ 4 billion (approx. 
1% of GDP) in 2009 would be accounted as tax revenue, allowing the 
GoA to spend additional funds ahead of October 2009 mid-term 
congressional elections. 
 
---------------------------- 
Economists, Pundits Negative 
---------------------------- 
 
¶9. (SBU) A large number of local economists criticized the GoA 
action, calling it an asset grab and clear evidence that the GoA 
sees itself unable to meet upcoming 2009 financial obligations with 
current resources in light of a deteriorating global economic 
environment, robust spending plans linked to upcoming interim 
legislative elections, and spiking 2009/2010 sovereign debt 
maturities.  Aldo Abram of think-tank Exante called the GoA move 
"another swindling of future retirees."  Alberto Bernal, head of 
macroeconomic strategy at Bulltick Capital Markets, argued 
"Argentina is moving back 20 years in terms of capital market 
development via this decision."  Juan Llach, former Secretary of 
Economic Programming in 1994 (when the private pension system was 
created), called the nationalization a negative development. "It 
would be quite bad if (any GoA action) impeded the ability of AFJPs 
to save, since they are an important part of the little market 
demand for GoA securities today." And constitutionalist Gregorio 
Badeni directly questioned GoA motives: "The AFJP system was 
implemented precisely to guard against the state appropriating 
(private) resources, because this is what it has traditionally done. 
 But evidently, the GoA needs fresh money that it can't get from 
other sources." 
 
--------------------------------------------- - 
Markets Drop on Pension Nationalization Rumors 
--------------------------------------------- - 
 
¶10. (SBU) Markets echoed negative economist sentiments on Monday. 
As rumors of the scope and impact on the domestic financial system 
swirled, Argentina's Buenos Aires Stock Exchange Merval equity index 
lost 3.3% (and 7.1% for a more restrictive Argentine-only index), 
countering a global rally that was led by +/- 4% jump in major U.S. 
indices and an 8.3% gain in Brazil's Bovespa.  Argentine financial 
sector stocks were particularly hard hit: Grupo Financiero Galicia, 
which owns the country's biggest bank, dropped 15%; Banco Macro 
dropped 13.4%, and Banco Frances lost 9.8%.  Argentine bonds fell an 
average 1.7% (with the GoA sovereign Peso Discount Bond dropping 
12%) and Argentina's J.P. Morgan Emerging Market Bonds Index country 
risk premium widened to more than 1,400 basis points.  (Note: On 
October 21 as of mid-day trading, the market continued its downward 
descent, the Merval equity index dropping 12%, the JPMorgan country 
risk widening almost 200 basis points to 1,593 basis points, 
benchmark bonds such as the ARP Discount, ARP Par and Boden 2012 
 
falling 16%, 7%, 9%, respectively.) 
 
--------------------------------------------- --- 
Opposition Condemns Nationalization, AFJPs Quiet 
--------------------------------------------- --- 
 
¶11. (SBU) Opposition leaders panned the government's nationalization 
plans, accusing the government of exploiting domestic angst over 
recent international market volatility.  They charged that the GoA 
was seeking to obtain a massive pool of new money to fund its 
current patronage system at the expense of future retirees.  Radical 
party Chairman Gerardo Morales called it "an outright and desperate 
grab for pensioners' savings" by the GoA.  PRO congressman Esteban 
Bullrich called it "a violation of private property."  Elisa Carrio, 
Civic Coalition opposition leader, said "the measure is not to 
improve the pension system but to raid retirement funds and raise 
funds." 
 
¶12. (U) Representatives of the 10 individual AFJPs and the head of 
the AFJP union (and former Under Secretary of Finance) Sebastian 
Palla all maintained a studied silence October 20 in the face of 
growing speculation on details of the GoA's nationalization 
initiative.  Local media reports that these representatives were 
seeking audiences with Chief of Cabinet Massa and confirmed 
privately that they had been neither consulted nor given any early 
notice of the GoA's plans. 
 
---------------------- 
Union Leaders Euphoric 
---------------------- 
 
¶13. (SBU) Left-wing union leaders supporting the Kirchner 
administration were uniformly upbeat and described the 
nationalization as all but a done deal.  Hugo Moyano, leader of the 
General Confederation of Labor (CGT - Teamsters), called the move 
positive for Argentina's union workers and said the nationalization 
"will expose the great swindle that was the creation of the AFJPs." 
Leonardo Fabre, Secretary General of APOPS, the union associated 
with state-run social security system ANSES, said "God willing, the 
president will announce tomorrow a return to the state-run system. 
The private system does not work.  It loses money.  You can't have a 
system in which people lose their retirement benefits."  The only 
union sour notes are coming from representatives of the 10,500 
private pension funds employees who are worried their jobs would be 
lost in a nationalization exercise. 
 
------------------------------------ 
Prospects for Congressional Approval 
------------------------------------ 
 
¶14. (SBU) Local analysts are split over whether the GoA will 
encounter difficulty in obtaining Congressional support for the 
nationalization of the AFJPs.  Some argue that a nationalization of 
the AFJPs would likely be supported by the 61% of the working 
population who currently belong to the public pension system, and so 
will appeal to the ruling coalition in Congress, who tend to support 
populist measures.  Other analysts argue that the popular outcry 
from those invested in the private system will lead to a fight in 
Congress.  The Kirchners' coalition in Congress, while weakened 
after the Senate's earlier vote against variable agricultural export 
tariffs, still commands simple majorities in both legislative 
chambers. 
 
¶15. (SBU) The abrupt and vague nature of the nationalization plan 
may well spark enough public concern that even ruling party-aligned 
deputies and senators will show caution.  The push-back may come not 
over "nationalization" in principle but over details, including what 
entity controls contributions and funds, whether the resources are 
held in trust or are made available to the government, and what sort 
of payouts are guaranteed under a new system.  If public criticism 
grows, then Senate approval may be harder to obtain, just as it was 
over the government's ill-fated legislation raising export tariffs 
on agricultural commodities.  As Senators are more easily 
recognizable in their provinces (three Senators per province) than 
the numerous congressional deputies, they may be less inclined to 
vote for legislation that does not have their constituencies' 
support. 
 
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Comment 
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¶16. (SBU) A senior industrialist close to former President Nestor 
Kirchner told us Kirchner recently confided to him that "I need to 
control all the money" to address economic pressures linked to the 
global financial crisis.  This private pension fund nationalization 
will flow considerable new cash resources to GoA coffers -- an 
estimated extra US$ 4 billion a year (1% of GDP) in worker 
 
contributions.  The  counterpoint deterioration in long-term debt 
dynamics linked to expanded retirement payment obligations is a 
problem future governments will have to address.  These new monies 
certainly will be welcomed by the Kirchner administration given 
domestic spending imperatives tied to upcoming mid-term October 2009 
elections.  Signs of an expansionist offensive are already apparent. 
 On October 20, the GoA announced it will restore natural gas 
subsidies for residential users.  Three days earlier, Planning 
Minister De Vido announced the GoA would launch a large 
infrastructure program to offset the negative impact on the economy 
of the global financial crisis. 
 
¶17. (SBU) A number of local analysts say they view this private 
pension fund nationalization initiative as a page out of a 
now-standard CFK administration playbook: an improvised, top-down 
decision to address immediate needs (in this case financial), with 
the details to be worked out later and the longer term consequences 
(in this case the potential social and legal implications and the 
impact on Argentina's domestic financial markets) given little 
thought.  Septel will analyze these potential consequences, which 
will likely be significant: for the past 14 years, private pension 
fund investments have been an important source of liquidity in 
domestic financial markets, and their nationalization will 
substantially reduce the size of Argentina's capital market by 
eliminating its main institutional investor. 
 
WAYNE