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UNCLAS SECTION 01 OF 04 BUENOS AIRES 001466 
 
C O R R E C T E D  C O P Y - (PARA NOS.) 
 
SENSITIVE 
SIPDIS 
 
E.O. 12958: N/A 
TAGS: EFIN ECON PREL PGOV AR
SUBJECT: Pensions Nationalization Proposal Prompts Financial Panic, 
 Market Crash in Argentina 
  
 Ref: BUENOS AIRES 1442 
  
 BUENOS AIR 00001466  001.2 OF 004 
  
  
 ------- 
 Summary 
 ------- 
  
 ¶1. (SBU) The Argentine government appears to have been completely 
 unprepared for the plunge in Argentine stock and bond prices 
 following its announcement that it would nationalize the nation's 
 private pension system.  GoA officials clearly did not think through 
 the possible negative consequences of this decision, and have 
 struggled to respond to the crisis, with both the GoA Treasury and 
 Central Bank intervening heavily in markets to sustain equity and 
 debt prices, bolster the peso, and prevent massive capital outflows 
 from the banking sector.  The President apparently also had to call 
 her Spanish counterpart to reassure him, given the negative impact 
 on the Spanish stock market, and to address rumors of deciding to 
 end negotiations with the Spanish company Marsans over the 
 nationalization of Aerolineas Argentinas.   . 
  
 ¶2. (SBU) There is a heightened sense of fear and uncertainty in the 
 country, with increasing talk of recession in 2009, concerns about 
 GoA finances and default risks, and a growing sense that no economic 
 sector is immune from GoA intervention.  Although the GoA is 
 optimistic about Congressional approval of the bill, Post is hearing 
 of rising opposition to the measure, particularly in the Senate. 
 The GoA may have a larger fight on its hands than it originally 
 expected, and at an incredibly sensitive time for both international 
 and domestic economies.  Septel provides additional details about 
 the GoA plan, market reactions, and the increasingly negative 
 outlook for the Argentine economy.  End Summary. 
  
 --------------------------------------------- --------- 
 Financial Panic Sparked by GoA Pension Nationalization 
 --------------------------------------------- --------- 
  
 ¶3. (SBU) The freefall in stock and bond prices October 21-22 in 
 reaction to the GoA's October 21 announcement that it intended to 
 nationalize the private pension funds (AFJPs) (reftel) appears to 
 have caught the GoA completely unprepared.  With the Buenos Aires 
 Stock market dropping over 20% in two days and the country risk 
 premium spiking to over 2,000 basis points, GoA officials struggled 
 to find ways to halt the market panic they clearly had not 
 anticipated.  A high-level source close to the Casa Rosada told DCM 
 October 23 that the markets reaction hit the government ""like 
 Hurricane Katrina.""  Cabinet Chief Sergio Massa is apparently being 
 pulled in a thousand directions at once as he tries to manage both 
 the fallout and demands from the Kirchners, and he is apparently 
 being ""overwhelmed"" by the multiple challenges the administration is 
 facing. 
  
 ¶4. (SBU) Several other sources told Ambassador that the small circle 
 that made the pension decision had not anticipated the negative 
 market reactions, but had only considered that the public did not 
 like the private pension system and thus would likely support the 
 GoA's move.  As the financial storm mounted, the Kirchners 
 reportedly responded with anger and vigorous efforts to calm the 
 markets, without going back on the decision. 
  
 ¶5. (SBU) According to press reports (confirmed in general terms by 
 central bank contacts), the GoA reacted October 22 by buying both 
 local bonds and stocks.  This intervention seems to have succeeded 
 in halting some of the panic-selling in the stock market, although 
 short-term bond prices continued to fall on October 23.  The Central 
 Bank has also intervened heavily in currency markets, selling 
 dollars to bolster the peso and  limit incentives for capital 
 outflows from the banking sector.  While the BCRA has succeeded in 
 maintaining the peso relatively stable, banks report deposit 
 withdrawals and dollar purchases at rates up to five times higher 
 than normal (albeit still below the worst days of the farm crisis). 
 Argentine media speculates that the GoA is considering further 
 ""market-friendly"" actions to counteract the negative perceptions of 
 the AFJP nationalization, and Post's contacts among private banks 
 expect this to focus on large scale bond repurchases. 
  
 --------------------------------------------- -------- 
 GoA Motivated by Financial Concerns, but Ignored Unintended 
 Consequences 
 --------------------------------------------- -------- 
  
 BUENOS AIR 00001466  002.2 OF 004 
  
  
  
 ¶6. (SBU) Although President Cristina Fernandez de Kirchner has 
 billed this as a ""rescue of future retirees from a failed system,"" 
 Post's contacts (including at the central bank) uniformly agree that 
 the GoA's primary motivation for nationalizing the AFJPs is 
 financial.  Facing increasing financing needs in coming years, no 
 access to international credit markets, plummeting commodity prices, 
 and growing fears of recession in 2009, the GoA was clearly 
 desperate for a source of funding to sustain debt payments and keep 
 from having to cut spending in the run-up to the mid-term 2009 
 elections.  While there is disagreement over the actual financial 
 benefit to the GoA, in addition to taking possession of the AFJPs' 
 $30 billion in assets, it is likely to realize inflows of $8-10 
 billion in 2009 (including contributions, free deposits, and reduced 
 interest and principal amortization on GoA bonds held in AFJP 
 portfolios, see Reftel).  This should fortify GoA finances 
 sufficiently to enable it to meet debt payments in 2009. 
  
 ¶7. (SBU) However, according to a wide range of sources, the 
 President, ex-President, Cabinet Chief and Public Pensions Chief did 
 not appear to have taken into consideration the importance of the 
 private pension system to the financial sector.  Not only are the 
 AFJPs the largest purchaser of GoA bonds (which comprise roughly 60% 
 of AFJP portfolios), but they also hold significant equity positions 
 in all the major local companies and banks, are a key source of new 
 financing for companies, and also are the largest source of 
 short-term trade financing.  Therefore, by announcing the 
 nationalization (followed by a judicial order prohibiting AFJPs from 
 making any financial transactions in the near term), in one fell 
 swoop the GoA succeeded in cutting off a main trader in the stock 
 exchange and bond markets, eliminating a main source of financing 
 for companies and trade financing for exporter and importers, and 
 raising alarm among companies who now will have a highly 
 interventionist government as a major shareholder and potential 
 board member.  The GoA also seems not to have considered that the 
 AFJPs own large stakes in foreign companies, and these positions 
 could be subject to attachment by holdout bondholders after the GoA 
 takes possession of AFJP assets. 
  
 ¶8. (SBU) The immediate and negative impact on the Spanish stock 
 market also caught the GoA by surprise and set off a series of 
 consultations.  These reportedly included a call from President 
 Cristina Fernandez de Kirchner to Spanish President Zapatero to 
 reassure him about Goa objectives on the pension moves and on the 
 nationalization of Aerolineas Argentinas, where press reported a GoA 
 decision to break off negotiations with the Spanish owners 
 (Marsans). 
  
 -------------------------- 
 Fear and Uncertainty Reign 
 -------------------------- 
  
 ¶9. (SBU) Most local and foreign analysts were already concerned 
 about weakening GoA finances in the face of plummeting global 
 commodity prices and a rapidly decelerating economy.  The consensus 
 among Post's banking sector contacts even prior to the October 21 
 announcement was that Argentina was facing recession in 2009, and 
 default risks were on the rise.  While agreeing that the AFJP 
 nationalization most likely reduces the risk of default over the 
 next few years, Post's contacts worry about its medium term impact 
 on the economy.  Their main concern now is whether this latest 
 crisis will result in large-scale capital outflows from a now 
 significantly less liquid financial system.  However, they also note 
 that AFJPs are the main source of financing in Argentina, and 
 scarcer credit without them could exacerbate the economic downturn, 
 and could enhance the GoA's leverage over the private sector.  In 
 the face of this probable credit crunch and expanding GoA presence, 
 Banks now worry they may be the GoA's next target, as the GoA seeks 
 to ensure availability of credit (possibly through old-school 
 Peronist techniques, such as capped interest rates and forced 
 lending).  Broadly, there is growing fear that no sector is immune 
 from GoA intervention.  (Septel analyzes these issues in more 
 detail.) 
  
 --------------------------------------------- --- 
 Rising expectations of a tough fight in Congress 
 --------------------------------------------- --- 
  
 ¶10. (SBU) The Ambassador, DCM, and EconOffs have consulted widely 
  
 BUENOS AIR 00001466  003.2 OF 004 
  
  
 with economists, journalists, bankers, Central Bank (BCRA) 
 officials, and AFJP executives this week, and the initial consensus 
 was that the Argentine Congress would approve the measure relatively 
 easily, albeit possibly with some modifications.  The sense was that 
 this issue does not resonate the same as the farmers strike with 
 either Argentine society or Congressional representatives, and also 
 that there is broad dissatisfaction in Argentine society with the 
 retirement system writ large, and the common perception is that the 
 AFJP system (with only 3-5 million mostly white collar regular 
 contributors), was poorly conceived, expensive to administer, and 
 has generally not met expectations.  Certainly the GoA is publicly 
 optimistic that it has the votes necessary to get the bill through 
 both houses of Congress. 
  
 ¶11. (SBU) However, the mood has shifted during the last 36 hours, 
 and there are increasing signs that many political leaders are 
 having doubts.  At minimum, it appears that the Senate will push for 
 modifications to the GoA's bill, such as greater controls and 
 transparency with regards to GoA management of the funds.  There are 
 increasing calls in Congress for guarantees that no funding from the 
 AFJPs will be used to finance expenditures or make debt payments. 
 Given the assumption that the GoA's primary motivation is to get 
 funds for these purposes, it appears the GoA may have more of a 
 fight on its hands than it bargained for. 
  
 ¶12. (SBU) Opposition Congressman Esteban Bullrich told the 
 Ambassador October 24 that many opposition Radical party Deputies 
 and Senators, who initially supported the measure, are now leaning 
 towards opposing it.  More significantly, Bullrich alleged that 
 during Senate Majority Leader Miguel Angel Pichetto's October 23 
 meeting with former President Nestor Kirchner (in which Chamber of 
 Deputies Majority leader Agustin Oscar Rossi also was present), 
 Pichetto insisted that he needed ""flexibility to make significant 
 modifications"" to the law, in order to get it through the Senate. 
 Kirchner is reported to have rejected this plea, but Pichetto's 
 concern is indicative of how strong opposition to the bill -- at 
 least as currently drafted -- may be in the Senate. 
  
 ¶13. (SBU) Bullrich further notes that opponents are trying to 
 highlight how costly this measure will be to the Argentine society, 
 a tact that was highly successful during the July Senate vote over 
 the GoA's bill to raise export taxes.  Finally, the reactions of the 
 Governors will be key, because Senators are much more responsive to 
 their Provincial constituencies than are lower house Deputies who 
 normally vote party lines.  Many Governors are unhappy right now 
 with the GoA, not least because the GoA is said to be broadly 
 delaying both non-discretional and discretional funds transfers to 
 the provinces. (Septel will detail Argentina's co-participation 
 federal/provincial revenue sharing system.) 
  
 ¶14. (SBU) Post's contacts until recently have also been relatively 
 sanguine regarding concerns about the possible social outcry.  For 
 the same reasons stated in Para 6 above, most observers do not 
 expect social protests of the kind that could block the initiative 
 or destabilize the government.  While there are efforts (mostly via 
 mass emails) to organize ""cacerolazos"" (pot-banging) protests, there 
 were doubts about how effective these calls for protest would be. 
 (There are emails calling for a cacerolazo at 8:00 p.m. local time 
 tonight.)  That is also changing, according to Deputy Bullrich.  He 
 pointed out that he set up a section of his website opposing the 
 AFJP nationalization, and within a day had received 4,000 comments 
 from outraged citizens (most likely AFJP contributors).  This was a 
 much faster reaction than he saw during the spring farm strikes, 
 according to Bullrich, and he sees it as evidence that opposition 
 may be building in the public. 
  
 ------- 
 Comment 
 ------- 
  
 ¶14. (SBU) During an October 22 lunch, several highly connected 
 journalists and bankers told Ambassador that some in the private 
 sector had initially characterized the GoA's move as a ""brilliant"" 
 way to get more funds flowing into the GoA Treasury.  However, as 
 the implications set in, most analysts now are portraying it as a 
 blow to Argentina's ability to attract investment, as it provides 
 further evidence of the GoA's willingness to change the rules of the 
 game at whim.  It will thus likely reinforce the idea that Argentina 
 is an unpredictable place to invest, and will also undermine GoA 
  
 BUENOS AIR 00001466  004.2 OF 004 
  
  
 efforts to entice Argentines to repatriate capital back from 
 overseas.  This is the overwhelming buzz in elite circles.  Most 
 distressing to many in Argentina is the manner in which the GoA 
 concocted this scheme, originating and developing it within a small 
 group, not consulting the AFJPs or the broader financial sector, and 
 disregarding the probable negative consequences that were obvious to 
 most of Post's contacts.  Once again the GoA has taken a bad 
 situation and made it worse through its own doing.  To paraphrase 
 noted Argentine commentator Eduardo van der Kooy, in his October 23 
 column in Clarin, the impact of the global crisis on Argentina was 
 the equivalent of a light drizzle, a shower that Cristina and Nestor 
 Kirchner managed to turn into a downpour. 
  
 WAYNE 

 =======================CABLE ENDS============================