VZCZCXYZ0020
PP RUEHWEB

DE RUEHBU #1696/01 3502035
ZNR UUUUU ZZH
P 152035Z DEC 08
FM AMEMBASSY BUENOS AIRES
TO RUEHC/SECSTATE WASHDC PRIORITY 2689
INFO RUEATRS/DEPT OF TREASURY WASHINGTON DC
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC
RUEHRC/DEPT OF AGRICULTURE USD FAS WASHINGTON DC
RUEHC/DEPT OF LABOR WASHINGTON DC
RHMFIUU/HQ USSOUTHCOM MIAMI FL
RUCNMER/MERCOSUR COLLECTIVE

UNCLAS BUENOS AIRES 001696 
 
SIPDIS 
SENSITIVE 
 
E.O. 12958: N/A 
TAGS: ECON EFIN ETRD EINV AR
SUBJECT: Argentina: Lavagna Decries GoA Crisis Initiatives, Projects 
Stagflation in 2009, Warns on Money Laundering 
 
Ref:(A) Buenos Aires 1682 
    (B) Buenos Aires 1667 
    (C) Buenos Aires 1653 
 
This cable contains sensitive information - not for internet 
distribution. 
 
 
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Summary 
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¶1. (SBU)  Former Economy Minister and Presidential Candidate Roberto 
Lavagna in a December 11 meeting with Ambassador projected 
stagflation in 2009, with zero percent GDP growth but with real 
inflation not falling below 20%, and warned about money laundering 
concerns related to GoA legislation; see para 3 action request. 
Lavagna said the GoA will command sufficient resources to remain 
current on debt principal and interest payments coming due in 2009. 
Lavagna doubted there would be an economic crisis in 2010 so long as 
the GoA sustains "minimally rational" policies and can sustain 
adequate foreign currency reserves.  The international financial 
crisis' impact on Argentina has been limited relative to its impact 
on globalized Brazil given this country's isolation from 
international capital markets.  Nevertheless, Argentina would have 
been in better shape to confront this crisis had the Kirchner 
administration not abandoned the anti-cyclic fund Lavagna had 
established in October 2005.  Accumulating rainy day savings would 
have done much to sustain business confidence and stem capital 
flight in current uncertain times, but Lavagna called such prudence 
incompatible with the Kirchner administration's vast appetite for 
public spending. 
 
¶2. (SBU) Lavagna called unworkable the recently announced GoA 
package of public works and consumer/industrial credit stimulus 
measures.  As an alternative, he recently proposed a six-month 
reduction in Argentina's 21% VAT tax to broadly stimulate 
consumption and to address the regressive nature of the VAT on 
poorer consumers suffering from the decline in economic activity. 
Lavagna called the nationalization of the private pension funds 
(AFJPs) another example of the GoA's penchant to interfere with 
private sector players, including the GoA's recent tilting against 
U.S. energy major AES's Edelap electricity distribution affiliate 
and its just-announced intent to buy out Lockheed Martin's Cordoba 
aviation facility. 
 
¶3. (SBU) Lavagna called the GoA's capital repatriation proposal 
"misguided."  Over US$28 billion in capital flight over the past 
three years left because of the Kirchner administration's failure to 
create and sustain confidence in its economic management and because 
of the GoA's regulatory and tax policy gamesmanship.  Lavagna feared 
that the only flight capital that would return to Argentina given 
the program's limited safeguards on investigating fund sources under 
this minimally supervised program would be "dark" money.  A group of 
prominent economists, politicians, and ex-GoA officials had joined 
his blog appeal against this GoA proposal.  Comment: Post would very 
much appreciate immediate guidance/input from Washington on 
GoA-supported legislation to allow the penalt-free return of 
capital to Argentina that is likely to pass this week.  Many 
commentators have highlighted the chances of much dirty money 
flowing in via this legislation.  End Comment. 
 
¶4. (SBU) Finally, Lavagna argued that the opposition will have a 
hard time uniting in advance of October 2009's mid-term elections 
given the spoiler role played by Elisa Carrio.  "Carrio and Nestor 
Kirchner are useful to each other," Lavagna argued, since both are 
trying to destroy the center to ensure that no "rational" opposition 
can coalesce. 
 
End Summary 
 
----------------------------------------- 
Stagflation in 2009 But No Funding Crisis 
----------------------------------------- 
 
¶5. (SBU) Ambassador met December 11 with former Economy Minister and 
2007 opposition presidential candidate Roberto Lavagna to review 
Lavagna's views on Argentina's current economic performance, the 
impact the international financial crisis has had here, upcoming 
mid-term 2009 elections, the private pension fund nationalization, 
the GoA's stimulus package and Lavagna's alternative VAT tax 
reduction proposal, and Lavagna's vocal opposition to the GoA's 
capital repatriation proposal. 
 
¶6. (SBU) With the U.S. economy's recession now officially dated to 
 
December 2007, Lavagna said that Argentina's economic downturn will, 
in retrospect, be seen to have begun in the second trimester of 
¶2006.  He projected stagflation in 2009, with zero percent GDP 
growth but with real inflation hovering around 20%.  Despite the 
significant drop in federal tax revenues that such decline in growth 
implies, the GoA will, he said, command sufficient resources to 
remain current on debt principal and interest payments coming due in 
¶2009.  This is due to the cushion provided by the nationalization of 
private pension funds (which allows both the automatic rollover of 
GoA government debt they held along with roughly US$ 4 billion per 
year in contributor inflows) as well as to new budget law provisions 
that allow the GoA access to an increased share of central bank 
(BCRA) reserves and to (state-owned) Banco de la Nacion (BNA) 
resources (Ref A).  (Comment: Economists estimate that having access 
to AFJP funds will reduce GoA annual financing needs by US$ 4-5 
billion, with potential new lending from the BCRA and BNA topping 
US$ 6 billion.) 
 
¶7. (SBU) Lavagna doubted there would be an economic crisis in 2010 
so long as the GoA sustains "minimally rationale" policies. 
Maintaining adequate foreign currency reserves will be a key medium 
term challenge for the GoA, since ongoing capital flight ("to 
Uruguay, safety deposit boxes and to mattresses") is draining 
central bank coffers and the 2007 and projected 2008 US$12 billion 
trade surplus will "evaporate" in 2009 with the decline in 
agricultural commodity prices. 
 
--------------------------------------------- ---- 
VAT Reduction Alternative to GoA Stimulus Package 
--------------------------------------------- ---- 
 
¶8. (U) Ambassador noted recent media coverage on Lavagna's doubts 
about the efficacy of the recently announced (Ref B) GoA package of 
public works and consumer/industrial credit stimulus measures.  On 
December 7, in an interview with Argentina's largest circulation 
daily Clarin, Lavagna called these stimulus measures unworkable.  As 
an alternative he had recommended a six-month, two percentage point 
reduction in Argentina's 21% VAT, with an additional one percentage 
point VAT reduction for primary consumption basket products, 
targeted at poor consumers.  In that interview he called his 
proposal the best way to broadly stimulate consumption and to 
address the regressive nature of the VAT consumption tax on poorer 
consumers impacted by the decline in economic activity. 
 
¶9. (SBU) Lavagna noted that, as Economy Minister in the aftermath of 
the 2001/2 economic crisis, he had implemented a similar two 
percentage point reduction in the VAT in 2002.  He said it had had 
an immediate and significant psychological impact on the populace, 
booting overall consumption and reducing headline prices on a number 
of consumer goods.  The GoA's automotive and consumer durable 
stimulus packages won't be effective, Lavagna said; their 
implementation rollout has been slow and painful with squabbling 
between Kirchner administration officials (principally between new 
Production Minister Debra Giorgi and Internal Commerce Secretary 
Guillermo Moreno) over their structure already receiving 
high-profile media attention.  Lavagna offered little hope his 
alternative proposal would be adopted, saying "I don't talk to 
Nester Kirchner any more, though I know he looks at my suggestions 
on my website." 
 
--------------------------------------------- - 
Lack of Counter-cyclic Funds Exacerbate Crisis 
--------------------------------------------- - 
 
¶10. (SBU) The crisis is having a major impact on Brazil's globalized 
economy, Lavagna said, but less of one on Argentina, which is 
relatively isolated from international capital markets.  The 
Kirchner administration's worst mistake, he said, was in abandoning 
the anti-cyclic fund Lavagna had established in October 2005 shortly 
before his departure from government, with a goal of accumulating 
some US$15 billion.  Chile established a similar fund years ago and 
has accumulated US$23 billion to date.  The idea of accumulating 
rainy day savings, which would have done much to sustain business 
confidence and stem capital flight in these uncertain economic 
times, were simply incompatible with the Kirchner administration's 
insatiable appetite for public spending, he said.  Such public 
spending had increased 50% in both 2006 and 2007 and had increased 
roughly 41% to date in 2008.  (Lavagna cautioned that changes in GoA 
budget calculation methodology were understating the rate of 
expansion of public spending and that the increase in 2008 public 
spending to date has in fact been closer to 50%.)  Lavagna said that 
he had also proposed a reduction in taxes for employment-generating 
small business in October 2005, but both this and his anti-cyclic 
fund proposals were abandoned following the subsequent December 2005 
cabinet shuffle, where Lavagna was relieved of his position. 
 
 
--------------------------------------------- ---- 
AFJP Nationalization: Standard GoA Modus Operandi 
--------------------------------------------- ---- 
 
¶11. (SBU) Lavagna called the AFJP nationalization just one more 
example of the GoA's penchant to interfere with private sector 
players.  He called the GoA's recent tilting against U.S. energy 
major AES' Edelap electricity distribution affiliate (Ref C) and its 
just announced intent to buy out Lockheed Martin's Cordoba aviation 
facility are only the latest in a string of GoA meddling that 
included actions to expropriate Spanish-owned flag air carrier 
Aerolineas Argentina and to ensure friendly local hands hold an 
equity stake in energy major Repsol/YPF. 
 
--------------------------------------------- ---- 
Blog on "Misguided" Capital Repatriation Proposal 
--------------------------------------------- ---- 
 
¶12. (SBU) Lavagna said he had been focusing his attention and 
blog-writing over the past few weeks on the GoA's "misguided" 
capital repatriation proposal (Ref A).  US$28-odd billion in capital 
flight over the past three years ($3 billion in 2006, $8.8 billion 
in 2007 and $16.5 billion to date in 2008) had left because of the 
Kirchner administration's failure to create and sustain confidence 
in its economic management, he said, and more specifically, because 
of the GoA's serial regulatory and tax policy gamesmanship.  Lavagna 
feared that the only flight capital that would return to Argentina 
under this minimally supervised program would be "dark" money. 
"Good businesses want confidence, not easy repatriation fixes," he 
added, noting that Mexican President Calderon (presumably referring 
to his own experience with narco-traffickers) had earlier warned 
about allowing such funds easy entry. "Once you let them in, you'll 
never get them out," he quoted Calderon as saying. 
 
¶13. (SBU) Lavagna said that a number of prominent economists, 
politicians and ex-GoA officials had joined his blog appeal against 
the GoA proposal to facilitate capital repatriation with only 
limited safeguards on investigating fund sources.  These include 
former tax administration director Alberto Abad, former Economy 
Minister Martin Lousteau, opposition PRO politicians Federico Pinedo 
and Esteban Bullrich, former Cordoba governor Jose Manuel de la 
Sota, former Menem Vice Economy Minister Juan Jose Llach and former 
Buenos Aires province governor Felipe Sola.  Lavagna said that these 
officials had agreed that, if/when they returned to public office, 
they would take steps to thoroughly investigate the sources of funds 
entering Argentina under this repatriation proposal.   Comment: 
Many commentators have, in the press, made similar warnings about 
dirty money flowing in, but the measure is set to be voted on by the 
Senate this week.  Post would appreciate Washington guidance on this 
issue.  End Comment. 
 
------------------------------------------ 
Weak Opposition in 2009 Mid-Term Elections 
------------------------------------------ 
 
¶14. (SBU) The opposition will have a hard time uniting against the 
GoA in advance of October 2009 mid-term elections given the spoiler 
role that opposition figure (and his fellow rival in last year's 
presidential campaign) Elisa Carrio is playing, Lavagna said.  He 
noted that she had declined to join the large group of opposition 
figures who supported Lavagna's anti-capital repatriation blog. 
"Carrio and Nestor Kirchner are useful to each other," Lavagna 
argued, since both are trying to destroy the center to ensure that 
no "rational" opposition can coalesce. 
 
¶15. (SBU) In the Province of Buenos Aires, Lavagna said that his own 
votes in the 2007 presidential elections had been limited by Nestor 
Kirchner's decision not to allow a single ballot law (on the model 
of one in Cordoba province) to move forward.  (Lavagna lost the 2007 
presidential elections with 16.9% of the popular vote, vs. 23.0% for 
Elisa Carrio and 45.3% for Cristina Fernandez de Kirchner). Kirchner 
operatives paid people ARP 100 (roughly US$ 30) to remove opposition 
party ballots from voting booths, Lavagna said, noting "we just 
weren't ready for these tactics." 
 
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Comment 
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¶16. (SBU) Following his presidential election defeat in December 
2007, Lavagna has maintained a low profile, engaging on specific 
policy issues and defending his 2002-5 tenure as Economy Minister 
under President Duhalde and Nestor Kirchner.  Predictably, Lavagna 
has been largely silent on two still-controversial economic 
 
initiatives he championed during this tenure: the increased reliance 
on new taxes that primarily accrue to the federal government that 
substantially augmented the president's power and control over 
provincial governors, and sustaining an undervalued currency that 
has contributed substantially to domestic inflation.  Lavagna had 
been written off by some analysts as hopelessly politically naive 
following a highly publicized February 2008 post-election 
reconciliation meeting with Nestor Kirchner during which Lavagna 
endorsed Kirchner's efforts to lead and reorganize the Peronist 
party.  Lavagna's subsequent public interventions have been limited 
to critiques of GoA economic initiatives, where his experience and 
reputation for seriousness have sustained his image as a voice of 
sober reason. 
 
WAYNE