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UNCLAS SECTION 01 OF 03 BUENOS AIRES 001529 
 
SIPDIS 
 
ARGENTINE MARKETS RECOVER, BUT WITH RISING APPREHENSION 
ABOUT DEPOSIT OUTFLOWS AND WEAKENING OF THE PESO 
 
E.O. 12958: N/A 
TAGS: EFIN ECON ETRD PREL AR
SUBJECT: ARGENTINE MARKETS RECOVER, BUT WITH RISING 
APPREHENSION ABOUT DEPOSIT OUTFLOWS AND WEAKENING OF THE 
PESO 
 
REF: BUENOS AIRES 1521 
 
¶1. (U) This document is sensitive but unclassified.  It 
should not be disseminated outside of USG channels or in any 
public forum without the written concurrence of the 
originator.  It should not be posted on the internet. 
 
------- 
Summary 
------- 
 
¶2. (SBU) After two weeks of financial market turmoil 
following the Argentine government's October 21 proposal to 
nationalize Argentina's private pension funds, local stock 
and bond prices have stabilized and even rebounded in recent 
days, in part due to GoA and Central Bank direct intervention 
in the markets.  However, the level of uncertainty remains 
high, as investors await the outcome of the Congressional 
debate over the GoA's initiative and concerns mount over 
worrisome levels of deposit withdrawals and the peso's 
continued weakness (despite increasingly aggressive GoA and 
BCRA tactics to fortify the currency).  End Summary. 
 
------------------------- 
Argentine Markets Recover 
------------------------- 
 
¶3. (SBU) Local stock and bond prices have stabilized and even 
rebounded somewhat in recent days, in line with the global 
rebound, after plummeting precipitously following the GoA's 
October 21 announcement regarding its plans to propose to 
Congress the nationalization of the country's private pension 
funds (reftel).  After closing down 27% for the week ending 
October 24, the Buenos Aires Stock Market (MERVAL) rebounded 
roughly 36% from its low between October 29 and November 4 
(including a 6% jump on November 4).  The Merval is still 
down roughly one-third from a month ago and is about 50% 
below its 2008 high. 
 
¶4. (SBU) Bond markets have also recovered dramatically, 
particularly during the last few trading days.  Yields on 
benchmark dollar denominated 2033 Discount and Par bonds 
(issued under New York law as part of the 2005 debt exchange) 
fell 24.4% and 10%, respectively, from their October 29 highs 
through market close November 3.  JPMorgan uses these two 
bonds to calculate its Emerging Markets Bond Index (EMBI ) 
country risk premium for Argentina.  After peaking at over 
2,000 basis points (20%) following the pension 
nationalization announcement, Argentina's EMBI  rating fell 
to about 15% at mid-day trading November 4.  Short-term peso 
and dollar bonds were still trading on November 4 at 
phenomenal yield levels of 45-70%, but were down from yields 
between 60 and 90% on October 29. 
 
--------------------------------------------- ----------- 
With a Helping Hand from the Government and Central Bank 
--------------------------------------------- ----------- 
 
¶5. (SBU) Official intervention has likely played a role in 
buoying both Argentine bond and equity markets since October 
¶20.  According to Post's banking sector contacts, the GoA and 
possibly the BCRA are reputed to have intervened directly in 
equity markets in recent weeks, with the aim of halting the 
slide in stock prices.  The GoA's intervention was reportedly 
heaviest last week, when through government-owned Banco 
Nacion it intervened (buying or posting buy offers on stocks) 
in local equity markets on a daily basis (generally in the 
afternoon), with the goal of capping broad market declines in 
the range of market movements in Brazil and other neighboring 
countries. 
 
¶6. (SBU) The GoA and Central Bank (BCRA) have also reportedly 
both intervened to buy GoA debt instruments in recent weeks 
in order to take advantage of bargain-basement prices to 
retire expensive debt prior to maturity (reaping enormous 
fiscal savings in the process) and also to support prices and 
counter the massive loss of confidence in Argentina's debt 
markets.  The BCRA, in particular, has intervened heavily by 
purchasing dollar-denominated GoA bonds, particularly the 
Boden 12, the GoA's shortest maturity dollar bond.  (This is 
in contrast to the BCRA's purchases of roughly $2 to 2.5 
billion in peso Discount bonds during the farming conflict 
earlier this year, which hit peso-denominated bond prices 
much harder than the GoA's dollar bonds.)  While the BCRA's 
 
BUENOS AIR 00001529  002 OF 003 
 
 
interventions from October 20-31 aimed to prevent further 
bond price declines, BCRA Boden 12 purchases this week have 
just reinforced an upward trend that was already in play. 
 
-------------------------- 
But High Anxiety Continues 
-------------------------- 
 
¶7. (SBU) Despite Argentine financial assets gains of the last 
few days, Post's financial sector contacts report that there 
is great uncertainty and fear about the direction of the 
Argentine economy.  While most observers expect the Argentine 
Congress to pass the GoA's pension nationalization bill 
fairly rapidly with only minor modifications, local markets 
will stay highly volatile as long as final Congressional 
approval remains pending.  Furthermore, there is increasing 
apprehension that the Argentine economy will decelerate 
faster than expected, with many economists and financial 
sector analysts predicting a recession in 2009, and even 
optimistic real growth assessments in the range of 2-4%. 
 
¶8. (SBU) Post's contacts among local and foreign banks are 
extremely worried about the levels of peso-denominated 
deposit outflows from the financial system.  The chief 
economist of one of the largest private Argentine banks told 
Econoff October 31 that the top 10 or so banks operating in 
Argentina did an informal poll on deposit outflows in 
October, which resulted in an estimate of a 7-8% outflow for 
the month.  This is about the same level or slightly worse 
than in May, the worst month of the March-July farm strike, 
and the outflow accelerated during the second half of the 
month after the GoA announced its initiative.  (The Argentine 
Central Bank reports deposit numbers with a 7-10 day lag, so 
the exact figures for the month are not yet available. 
However, through October 24, the Central Bank reported about 
a 6% decline in peso deposits.) 
 
¶9. (SBU) Demand for dollars has increased in tandem, causing 
the peso to depreciate by about 7-8% during October, despite 
heavy intervention (selling dollars) by the BCRA.  According 
to press reports, in addition to BCRA activity in the futures 
market, the BCRA sold over $1 billion spot during the week of 
October 20-24, and an additional $1 to 1.5 billion last week, 
succeeding in keeping the peso just below 3.4 pesos/USD.  At 
one point, on Wednesday, October 29, pressure on the peso 
grew so intense that the BCRA responded with an unprecedented 
offer to sell $1 billion in the spot market.  While the BCRA 
ended up selling in the range of $400 million that day 
(followed by similar or slightly higher amounts on October 30 
and 31), this demonstration of its preparedness to defend the 
peso helped stabilize the nominal exchange rate in the 
3.37/3.38 peso/USD range on November 3. 
 
--------------------------------------------- -- 
BCRA and GoA Unveil New Tactics to Support Peso 
--------------------------------------------- -- 
 
¶10. (SBU) The peso actually strengthened November 4 from 3.38 
to 3.28 pesos/USD.  However, this seems to have been the 
result of an all-court-press by the BCRA and various GOA 
regulatory agencies (including tax authority AFIP, 
Argentina's equivalent of the SEC -- the CNV -- and infamous 
Internal Trade Secretary Guillermo Moreno, who is reputed to 
be behind enforcement of the GoA's price controls and 
manipulation of inflation statistics.)  According to press 
reports and anecdotal reports from Post's contacts among 
banks and the private sector, BCRA and GoA inspectors 
descended on banks and currency exchange houses, forcing them 
to reduce their listed exchange rates under threat of audits 
for tax evasion. 
 
--------------------------------------------- -------- 
Comment: Hard Currency Market Numbers Hard To Come By 
--------------------------------------------- -------- 
 
¶11. (SBU) Post's contacts point out that no level of BCRA 
reserves is sufficient to counter a full-blown run on the 
peso if the situation eventually deteriorates to that point. 
As for Post's analysis of BCRA market interventions, it is 
important to clarify that the BCRA publishes data on changes 
to reserve levels with a 7-10 day delay and does not publish 
any data on its dollar sales (which it does through blind 
trades), so Post's estimates of BCRA currency trading volumes 
come from our informal contacts with bank traders.  While 
 
BUENOS AIR 00001529  003 OF 003 
 
 
these contacts have proven generally reliable, their 
estimates are guesswork based on trading patterns and known 
BCRA methods and objectives. 
KELLY