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UNCLAS SECTION 01 OF 05 BUENOS AIRES 001475 
 
SENSITIVE 
SIPDIS 
 
E.O. 12958: N/A 
TAGS: EFIN ECON PREL PGOV AR
SUBJECT: Blow-by-Blow on Argentina's Nationalization of Pensions and 
Resulting Financial Panic 
 
REF: (A) BUENOS AIRES 1466,  (B) BUENOS AIRES 1442 
 
------- 
Summary 
------- 
 
¶1. (SBU) Argentine President Cristina Kirchner de Fernandez has 
justified the GoA's nationalization of Argentina's private pension 
system as a "rescue of retirees," although local analysts agree that 
the real reasons are financial.  Under Judicial order, the pension 
funds were raided and blocked from making any transactions last 
week.  They resume operations today, under close surveillance of the 
Superintendency of Pension Funds, and amid expressions of concerns 
that the funds' foreign assets may become attachable by holdout 
bondholders and reports that the GoA may order them to bring foreign 
assets home.  The Argentine Congress begins deliberations on the 
nationalization October 29, and the GoA has expressed hopes of 
pushing it through by the end of November, if not sooner.  Local and 
foreign economists and analysts have criticized the measure, calling 
it a blatant asset grab and a sign of GoA desperation for funds in 
order to meet spiking 2009 and 2010 debt maturities.  The GoA 
intervened heavily in the markets last week to halt panic selling of 
Argentine stocks and bonds.  The Central Bank (BCRA) also intervened 
heavily, selling dollars to bolster the peso.  Nevertheless, the 
banking sector remains concerned about the possibility of 
large-scale capital outflows.  Bank contacts expect greater GoA and 
BCRA intervention in the weeks to come.  They argue that the markets 
read the GoA's action as a sign of dangerous fiscal weakening in the 
face of plummeting commodity prices and a rapidly decelerating 
economy, with some economists predicting recession in 2009.  End 
Summary. 
 
¶2. (U) This is a companion piece to Ref A, providing added detail 
about the GoA's decision to nationalize the private pension funds 
(known in Argentina as AFJPs), the market's fiercely negative 
reaction, and increasing concerns about economic and financial 
stability in Argentina going forward. 
 
--------------------------------------------- ------- 
President moves to nationalize private pension funds 
--------------------------------------------- ------- 
 
¶3. (SBU) In their October 21 formal announcement of plans to 
nationalize private pension funds (known locally as AFJPs), 
President Cristina Kirchner de Fernandez (CFK) and Amado Boudou, 
head of Argentina's Social Security System (ANSES), declared the 
"end of the failed private system," and characterized their 
initiative as "the rescue of future retirees from uncertainty and 
bad management."  Playing to traditional Peronist/statist 
supporters, Boudou noted that "some countries decide to rescue banks 
and companies, but the President chose to rescue regular people and 
retirees."  Both he and CFK promised "predictability and 
sustainability" for future pensioners, and assured Argentines the 
GoA would use the nationalized funds responsibly. 
 
--------------------------------------------- -------- 
In the works for long time; global crisis gave excuse 
--------------------------------------------- -------- 
 
¶4. (SBU) Ambassador and EmbOffs have heard from contacts that the 
nationalization of AFJPs' $30 billion in assets has long been on the 
Kirchners' "to-do" list, but recent international market 
developments, and increasing concerns about the GoA's lack of access 
to sufficient funds to cover spiking debt payment obligations during 
2009 and 2010, pushed it up on their agenda.  Cabinet Chief Sergio 
Massa (who was head of ANSES from 2002 to 2007) and his close 
associate, current ANSES Director Amado Boudou, originated and 
developed the specific idea to nationalize the private pension 
system.  However, former President Nestor Kirchner is reputed to 
have focused GoA attention on the nationalization concept by 
regularly asking for ideas to get more money into the public coffers 
to meet financing needs over the next several years, both for debt 
payments and to continue subsidies and public works in advance of 
the 2009 midterm elections.  While Boudou, in recent interviews with 
media, stated that the GoA plans to use AFJP resources for public 
works and not directly for debt payments, budget monies are 
fungible. 
 
------------------ 
 
BUENOS AIR 00001475  002 OF 005 
 
 
Weak AFJP response 
------------------ 
 
¶5. (SBU) As reported in Ref B on the concerns of the only 
U.S.-controlled AFJP (MetLife), the AFJPs as a group have not 
reacted strongly against the initiative.  Indeed, AFJP contacts tell 
Post that there is a fierce debate ongoing between those few AFJPs 
that want to pursue a confrontational approach and the majority that 
are worn down by GoA interference in their businesses and just want 
to negotiate an acceptable exit.  This resignation has been 
compounded by the aggressive judicial raids an Argentine judge 
ordered last week on all the AFJPs (reportedly at the request of the 
Casa Rosada). 
 
¶6. (SBU) The ostensible purpose of the raids was to secure computer 
systems and information and check for fraudulent practices. 
However, MetLife officials note that the Superintendency of Pension 
Funds already had all of the information available, and numerous 
AFJP sources allege to Post that the real reason is to intimidate 
the AFJPs and their employees.  The Judge also ordered a seven day 
freeze on AFJP transactions.  (Comment:  The AFJPs will likely all 
sue the GoA, if only to meet their fiduciary responsibilities.  Many 
contributors will also likely file lawsuits.  Moreover, the four 
foreign-owned AFJPs may eventually decide to seek redress under 
their countries' Bilateral Investment Treaties with Argentina. 
MetLife and HSBC, which runs the AFJP "Maxima," informed Econoffs 
that they will consider the advisability of ICSID arbitration after 
Congress passes the nationalization law and the GoA has clarified 
the compensation - if any - it is willing to pay.) 
 
--------------------------------------------- --- 
Concerns about Asset Repatriation and Attachment 
--------------------------------------------- --- 
 
¶7. (SBU) The AFJPs resume activity today under tight surveillance 
from the Superintendency of Pension Funds, headed by ANSES Director 
Boudou.  Boudou has limited AFJP trading in currency and Argentine 
bonds until Congress passes the bill, and is also strictly 
controlling the AFJPs over USD 2 billion in term deposits in the 
local banking system.  The AFJPs' ownership of billions in foreign 
stocks, mutual funds, bonds, and other securities (including holding 
significant equity positions in dozens of U.S. companies) has raised 
questions about whether these foreign assets might be open to 
attachment by the so-called "holdout bondholders."  Local media 
report that the GoA will require the AFJPs to repatriate their 
foreign assets.  While this will imply billions in capital inflows, 
helping the BCRA to bolster the exchange rate, it is unclear whether 
foreign lawsuits could block these transfers (since AFJPs are still 
in private hands, but clearly following GoA instructions).  The 
AFJPs also hold significant stakes in many local companies 
(including U.S.-origin companies), which has raised fears about 
increased GoA influence and perhaps direct intervention in the 
private sector.  GoA sources have sought to downplay these fears, 
and Boudou has also stated that since ANSES is prohibited from 
holding more than 10% in any company, it will divest these excess 
shares over 4-5 years to meet the limit. 
 
----------------------------------------- 
GoA Hopes for Quick Congressional Passage 
----------------------------------------- 
 
¶8. (SBU) MetLife officials tell Post they are currently preparing to 
participate in the initial deliberations of the GoA's AFJP 
nationalization bill, beginning October 29 before the Chamber of 
Deputies' Budget committee.  The AFJPs' Union (of which Met is a VP) 
will present the industry's view.  According to October 27 press 
reports, the GoA is hoping to get the bill through the full Congress 
in November, despite growing signs of opposition (Ref A).  Local 
media is reporting increasingly combative exchanges between GoA 
officials and opponents in Congress, with the GoA rejecting many of 
the changes to the bill that opponents in Congress are demanding. 
Most press commentators still seem to believe that at most the 
bill's opponents in Congress will only succeed in delaying it, and 
possibly modifying it somewhat, although the fight will clearly be 
tougher than GoA officials expected.  (Comment:  The Ambassador 
heard from sources over the weekend that the President instructed 
her Ministers Friday afternoon to get the AFJP bill passed as soon 
as possible and through the Chamber of Deputies by October 31.  She 
and Nestor Kirchner are apparently worried about a drop in the value 
 
BUENOS AIR 00001475  003 OF 005 
 
 
of AFJP holdings, which is why they pushed for the judicial system 
to impose the restraining order on AFJPs' trading activities.  They 
had originally hoped to get the bill through Congress in two weeks. 
Realizing that will not happen, they have imposed new restraints on 
AFJP operations from now on.  End Comment). 
 
--------------------------------------- 
Economists and Analysts highly critical 
--------------------------------------- 
 
¶9. (SBU) In contrast to the AFJPs' relatively muted response, local 
and foreign economists and analysts have loudly criticized the 
measure, calling it a blatant asset grab and sign that the GoA is 
desperate to raise funds to pay 2009 and 2010 debt obligations and 
also to avoid cutting spending as the economy deteriorates and the 
2009 mid-term elections near.  The GoA's problem is twofold: lack of 
access to financing and expectations of lower revenues, both 
coinciding with a period of increasing financing needs.  Argentine 
bond yields have skyrocketed in response to the global financial 
crisis, dashing the GoA's hopes of raising new cash through a debt 
deal with holdout bondholders or smoothing out the spike in 
amortizations during 2009-2011 through a mini-debt swap of bonds 
coming due during this period (see septel).  (Current Argentine bond 
yields of well over 20% also likely eliminate the possibility of 
placing GoA debt with Venezuela anytime soon.)  These circumstances, 
along with expectations of lower revenues going forward, lead all of 
Post's contacts (including at the BCRA) to conclude that the GoA's 
primary motivation for nationalizing the AFJPs is financial (and not 
to "rescue" retirees). 
 
--------------------------------------------- ------- 
GoA fumbles to respond to markets' negative reaction 
--------------------------------------------- ------- 
 
¶10. (SBU) The freefall in stock and bond prices October 21-22 in 
reaction to the GoA's announcement has created the most serious 
financial crisis since the 2001-02 financial meltdown.  The Buenos 
Aires stock market (Merval) dropped 20% between the open of trading 
October 21 and close of trading October 22, and at one point on 
October 22 hit a low 26% below the October 20 close.  Argentina's 
country risk premium, as measured by JPMorgan's EMBI+, widened 575 
basis points during the two days, closing on October 22 at 1,970 bps 
-- at one point exceeding 2,000 bps.  The 5-year Credit Default Swap 
(CDS) for Argentina spiked up several thousand basis points to over 
50% on October 22, as reported by Bloomberg.  (Other estimates for 
CDS are in the 30% to 40% range, but the fact is that no one is 
closing CDS contracts at these levels, so the percentage is 
immaterial.) 
 
¶11. (SBU) The BCRA maintained the peso at 3.24/dollar on October 22 
through heavy selling of dollars on the spot and futures markets. 
Traders estimate spot market sales of $400 million on October 21 and 
$130 million on October 22.  For the week, the peso depreciated 2%, 
closing at 3.29/dollar, despite continuing, strong BCRA 
intervention.  Traders estimate that the BCRA sold more than $1 
billion in reserves from October 20-24.  There are strong signals 
that the market is expecting a significantly weaker peso going 
forward.  The one-year NDF (non-deliverable forward contract, traded 
outside of Argentina) increased from 4.35 pesos/dollar on October 17 
to 5.50 pesos/dollar on Oct 24, while the one-month NDF increased 
from 3.38 to 3.75 for the same period.  In local currency trading, 
which the BCRA is able to manipulate by selling dollars forward, the 
one month contract is for 3.34 pesos/dollar and the one-year is 3.81 
pesos/dollar. 
 
¶12. (SBU) Local analysts believe that the GoA was caught completely 
off guard by the intensity of the adverse market reaction, and has 
since struggled to cobble together a coherent response.  BCRA 
contacts confirm that 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.  The Merval was mostly flat 
October 23-24, and country risk tightened 185 basis points near the 
end of the week.  (The Merval closed down 27% for the week, for an 
accumulated loss of almost 60% for year to date.  The EMBI+ finished 
the week at 1,832 bps, still the highest point since the 2005 debt 
restructuring.)  However, short-term bonds continued their free 
fall.  In fact, Argentine Bonds had their worst week since the 2005 
debt restructuring.  USD bond prices dropped on average 35% from 
October 20-24, and benchmark bonds such as the Boden 2012, NY USD 
 
BUENOS AIR 00001475  004 OF 005 
 
 
Discount and NY USD Par decreased 28%, 39% and 11%, respectively 
(giving them yields of 60%, 30% and 17%, respectively). 
 
¶13. (SBU) According to the press, the GoA is considering further 
"market-friendly" actions to counteract the negative perceptions of 
the AFJP nationalization.  Banco Galicia's Chief Economist told 
Econoff October 23 that he expects the main thrust to be further GoA 
bond repurchases, but on a large scale.  For HSBC's Chief Economist, 
GoA bond purchases are actually the "acid test" of whether the GoA 
is ready to prove its "willingness to pay" its debts.  With bond 
prices at almost record lows, he believes it would be insane for the 
GoA not to buy back bonds (rather than wait until maturity).  Both 
economists believe that done on a large scale, these repurchases 
would go a long way to calming market concerns about possible 
default during 2009 or 2010. 
 
--------------------------------------------- --- 
The specter of Recession in 2009 raises its head 
--------------------------------------------- --- 
 
¶14. (SBU) Markets are extremely nervous about expectations that the 
GoA's fiscal situation will weaken in the face of sharply lower 
prices for Argentina's main commodity exports and the rapid 
deceleration of the economy.  For the first time, Post is starting 
to hear economists predict recession in 2009.  Even before the GoA's 
decision to nationalize AFJPs, both Banco Galicia and HSBC lowered 
predictions for 2009 in response to falling commodity prices, 
expecting a 1-2% contraction in GDP.  (Septel reports that BCRA 
President Redrado still expects economic output to stay positive in 
2009.) 
 
¶15. (SBU) Their main concern now is whether this latest crisis will 
result in a large-scale capital outflows from the financial system. 
As of October 24, banks surveyed by Post report much higher than 
normal "dollarization" (conversion of peso deposits to dollar 
deposits and dollar purchases), but still below the worst days in 
April and May during the farm crisis.  BCRA contacts insist that 
they can handle current levels of retail withdrawals.  Large deposit 
withdrawals by institutions, though, would be cause for alarm, but 
are not a problem at present. 
 
¶16. (SBU) Post's contacts contend that markets are also responding 
to the growing fear that anything is possible now and no sector is 
immune from GoA intervention.  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.  AFJPs collectively have been the largest 
institutional investor in Argentina.  Without them, competition will 
increase for scarce bank lending and GoA lines of financing, 
potentially crowding out SMEs from credit markets, further 
concentrating lending under state-owned banks (the two largest 
state-owned banks already provide over 20% of total credit to the 
market), and exacerbating the economic downturn. In the face of this 
probable credit crunch, banks now worry they may be the GoA's next 
target.  Sourcing many of Post's closest banking sector contacts, an 
October 22 Cronista article raises the concern that the GoA may 
respond to the unavailability of credit by relying on traditional 
Peronist interventionist policies (of the 1970s), e.g., capping 
interest rates, forcing lending, putting sharper controls on capital 
flows, and having official and parallel exchange rates. 
 
------- 
Comment 
------- 
 
¶17. (SBU) Several private sector contacts have argued to Ambassador 
that, in many ways, the global economic crisis has helped the 
Kirchners: 1) inflation is moderating; 2) energy use is not growing 
and will likely stay flat with lower economic activity, thus helping 
to avoid energy cuts to consumers and allowing the GoA to reduce 
energy subsidies; 3) unions have backed off demands for wage 
increases; 4) the GoA has a plausible excuse to pursue policies that 
please its political base (e.g., protectionist trade measures, 
nationalization of AFJPs); and 5) the crisis gives the government a 
nationalistic rational with which to slap out at criticism from the 
opposition.  However, such relief comes at a price: a potentially 
steep recession just prior to mid-term legislative elections.  The 
GoA's ill-considered decision to nationalize AFJPs will only 
accelerate the likelihood of a precipitous downturn, even if many in 
 
BUENOS AIR 00001475  005 OF 005 
 
 
the GoA relish the possibilities of launching big new public works 
programs given extra cash.  Banco Galicia's Chief Economist told 
Econoff that Cabinet Chief Sergio Massa initially was considering 
using a sharp devaluation of the peso as the means to maintain 
competitiveness and protect the fiscal surplus (and avoid default in 
2009), and he consulted numerous economists and bankers on this 
policy option.  However, former President Nestor Kirchner reportedly 
nixed the deal, worried that the devaluation would lead to a spike 
in inflation and renewed union demands for wage increases, which in 
his mind was unacceptable prior to the 2009 mid-term elections. 
This led Massa to pursue Option 2:  AFJP nationalization. 
 
WAYNE