VZCZCXYZ0000
OO RUEHWEB

DE RUEHBU #0168/01 0491231
ZNR UUUUU ZZH
O 181231Z FEB 09
FM AMEMBASSY BUENOS AIRES
TO RUEHC/SECSTATE WASHDC IMMEDIATE 3059
RUCNMER/MERCOSUR COLLECTIVE
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC
RUEATRS/DEPT OF TREASURY WASHINGTON DC
RUEHRC/DEPT OF AGRICULTURE WASHINGTON DC

UNCLAS BUENOS AIRES 000168 
 
SIPDIS 
SENSITIVE 
 
E.O. 12958: N/A 
TAGS: EFIN ECON EINV PREL KSUM PGOV AR
SUBJECT: Argentina: Finance Secretary on GoA Crisis Response and 
G-20 Positions 
 
Ref: (A) 08 Buenos Aires 1520 
     (B) 08 Buenos Aires 1495 
 
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Summary 
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¶1. (SBU) GoA Finance Secretary Hernan Lorenzino told a visiting 
Senate staffdel February 16 that Argentina's lack of access to 
international capital markets has insulated it from the impact of 
the global financial crisis, with Argentina thus far avoiding much 
of the "social fallout" evident in more developed economies. 
Lorenzino remains optimistic that the overall impact of the crisis 
on Argentina will be limited, arguing that Argentina has built up a 
"cushion" of economic productivity that will allow it to recover 
quickly from declines in domestic consumption and in international 
demand for Argentine products.  In the near term, the GoA will focus 
its crisis response on fiscal pump-priming (including via recently 
announced public works programs and by programs to encourage car and 
home appliance purchases), on protecting domestic manufacturing 
competitiveness (especially in the face of newly competitive 
Brazilian imports), and on preserving domestic employment by 
"intervening as an arbiter" in union/company labor disputes.  He 
called the GoA's debt burden "manageable," with resources available 
to cover medium-term maturities without seeking additional 
international financing.  Secretary Lorenzino's upbeat assessment of 
Argentina's relative insulation from the impact of the global 
financial crisis stands in contrast to assessments by independent 
economists, many of whom project zero or negative 2009 GDP growth 
and the prospect of significant increases in Argentine unemployment 
and poverty levels in the coming months. 
 
¶2. (SBU) On the upcoming mid-March G-20 Finance Ministers' meeting, 
Lorenzino called a key Argentine priority working to "re-focus" the 
IMF on providing minimal-conditionality short-term liquidity lines 
to allow emerging markets to confront exogenous crises.   Argentina 
has no/no intent to "formalize" any like-minded G-20 sub-group on 
IMF reforms, he said. "Our goal now is to see emerging markets as a 
group gain significantly greater representation."  Lorenzino called 
Argentina's position on broad global financial architecture reform 
generally in line with those of the majority of G-20 members.  He 
highlighted the need for relevant G-20 committees to focus on (1) 
rating agency reform/oversight; (2) the need to systematically 
address the "scourge" of tax havens; (3) the need for broad 
international oversight on the ability of multinational bank 
headquarters to make "liquidity decisions" on behalf of local bank 
affiliates that impact emerging market economies; and (4) the need 
to better regulate the non-transparent credit-default swap market. 
On multilateral development bank reform, Lorenzino argued that the 
World Bank has adequate resources to fulfill its development 
mandate, but that the Inter-American Development Bank needs 
additional resources.  End Summary. 
 
¶3. (SBU) On February 17, Economy Ministry Secretary of Finance 
Hernan Lorenzino met with Jessica Lewis, Senior Foreign Policy 
Advisor to Senate Majority Leader Harry Reid; Caroline Tess, 
Professional Staff Member, Senate Select Committee on Intelligence; 
Lieutenant Colonel Richard Root, Office of Congressional Legislative 
Liaison; and EconCouns to review the GoA's response to the 
international financial crisis and, in the run-up to the April 2 
second G-20 summit in London, to discuss the role the Economy 
Ministry is playing in G-20 subcommittees on IMF and MDB reform. 
 
--------------------------------------------- --- 
Crisis Impact Ameliorated by Argentine Isolation 
--------------------------------------------- --- 
 
¶4. (SBU)  Notwithstanding the severity of the global financial 
crisis, Lorenzino called its impact to date on Argentina less 
pronounced than that of other recent crises, including the '94 
Tequila crisis, the '98 Russia/Asia financial crisis, the '99 Brazil 
devaluation, and the market turmoil that followed the 2001 9/11 
attacks.  "Our isolation (from international capital markets) has 
helped us," Lorenzino said, insofar as the crisis' initial 
transmission to emerging markets was largely through financial 
sector channels.  Credit markets have never worked in Argentina, he 
argued, with less than 30% of the population holding bank accounts 
and mortgage markets underdeveloped and limited.  "This is not a 
virtue of our financial system by any means," he added, "but merely 
the reality."  As a consequence, Argentina has not experienced the 
"social fallout" the crisis has had in more developed economies, 
including via union and anti-immigration demonstrations, Lorenzino 
argued.  The central bank has succeeded in maintaining a gradualist 
approach to the peso's devaluation and the local financial system is 
in "good shape," with no Argentine banks at risk of failing, he 
noted.  Although decelerating inflation will impact consumption tax 
receipts, Lorenzino said, the recent increase in public utility 
tariffs (via cutbacks in GoA subsidies) will allow the GoA to 
 
maintain a fiscal balance. 
 
¶5. (SBU) While fourth quarter 2008 GDP numbers showed a substantial 
decline and first quarter 2009 GDP performance will be 
"complicated", Lorenzino said he remains optimistic that the 
medium-term impact of the crisis will be limited.  (Note:  According 
to official GoA statistics, Q4 GDP grew 4.9% y-o-y.  In sharp 
contrast, private analysts estimated that Q4 GDP contracted about 
1-1.5% y-o-y.)  He argued that the past five years of strong GDP 
growth have built up a "cushion" of economic productivity that will 
allow the economy to recover quickly from declines in domestic 
consumption and in international demand for Argentine products.  He 
called the GoA's debt burden is "manageable," with resources to pay 
medium-term maturities without access to additional international 
financing.  On Argentina's fiscal balance, Lorenzino said that years 
of maintaining a positive primary fiscal surplus have given the GoA 
a base from which to "put pesos into people's pockets" via recently 
announced public works programs and by programs to encourage car and 
household appliance purchases. 
 
¶6. (SBU) Beyond fiscal pump-priming to ameliorate the sharp drop in 
consumer demand, the GoA is also focused on protecting domestic 
manufacturing competitiveness.  February 17-18 bilateral talks in 
Brazil (in which Economy Minister Carlos Fernandez and Production 
Minister Debora Giorgi are participating) are focused on limiting 
any surge in Brazilian imports made very competitive by the 
substantial crisis-linked depreciation of the Real vs. the Peso. 
Finally, the GoA will work to preserve domestic employment by 
"intervening as an arbiter" in union/company labor disputes to 
ensure that formal sector employment levels are sustained. 
 
¶7. (SBU) In response to Lewis' question on the regional impact of 
the global financial crisis, Lorenzino called Argentina's biggest 
concern the health and well-being of Brazil.  If the economy of 
Argentina's single largest trading partner founders, Lorenzino said, 
Argentina will feel it.  "Other countries in the region don't worry 
me," Lorenzino said, including Chile, which he called better 
prepared than most in terms of fiscal solvency but highly exposed to 
the sharp drop in mineral commodity prices.  In response to 
Lorenzino's question on the notable lack of bi-partisan consensus in 
the recent Congressional vote on the stabilization package, both 
Lewis and Tess stressed the open dialogue between Democratic and 
Republican Senators and Congressmen and the quality of debate which 
helped improve the final stimulus/stabilization package. 
 
------------------------ 
Argentina's G-20 Posture 
------------------------ 
 
¶8. (SBU)  Argentina is well aware of its relative size in the G-20, 
Lorenzino said, and sees the upcoming mid-March Finance Ministers 
meeting and April 2 Heads of StateG-20 Summit as "a great 
opportunity for a small country like Argentina."  Lorenzino note 
that he personally is representing the GoA in the two G-20 
sub-committees on IMF and MDB reforms.  Argentina has no/no intent 
to try and "formalize" any G-20 sub-group of like-minded players on 
IMF reform, Lorenzino emphasized, but is pleased to see that "others 
are moving towards Argentina's proposals for IMF reform at the first 
November 2008 G-20 Crisis Summit in Washington.  A key Argentine 
priority at upcoming G-20 meetings will be to work towards consensus 
on re-focusing the IMF to "creatively" provide 
minimal-conditionality short term liquidity lines in order to better 
allow emerging markets to confront exogenous crises. 
 
¶9. (SBU)  Lorenzino recalled that Argentina had, in the face of 
overwhelming member nation support, voted against a 2007 proposal to 
reform the IMF quota and voting share system.  (In this April 2008 
IMF vote, 175 member countries favored of the reform and only three 
member nations - Argentina, Angola, and Palau - voted against it.) 
"We didn't want this 'set-up' that resulted in Argentina losing both 
IMF quota and voting share," he explained.  "Our goal now is to see 
emerging markets as a group gain significantly greater 
representation."  On the question of Fund resources, Lorenzino said 
that Argentina favors giving the Fund more resources, but not 
without a concomitant change in the way the Fund allocates its money 
to member nations in need. 
 
¶10. (SBU) The Argentine Central Bank, Lorenzino confirmed, is taking 
the GoA lead on the other two G-20 working groups ("the working 
groups most important to the G-7") on enhancing sound regulation and 
strengthening transparency and on reinforcing international 
co-operation and promoting integrity in financial markets.  He 
called Argentina's position in these committees in line with those 
of the majority of G-20 members, albeit with some difference in 
emphasis.  Lorenzino highlighted Argentina's view on the need for 
these committees to focus more on (1) rating agency 
reform/oversight; (2) the need to systematically address the 
"scourge" of tax havens; (3) the need for broad international 
 
oversight on the ability of multinational bank headquarters to make 
"liquidity decisions" that impact local bank affiliate emerging 
market economies; and (4) the need to better regulate the 
non-transparent credit default swap (CDS) market.  Highly leveraged 
"speculation" in the CDS market against Argentina, Lorenzino said, 
had been damaging to Argentina's interests. 
 
11.(SBU) On multilateral development bank reform, Lorenzino argued 
that the World Bank has adequate resources to fulfill its 
development mandate but needs to spend its funds more efficiently 
(Argentina, too, he added, needs to become more efficient in its 
execution of MDB projects.). In contrast, he said that the 
Inter-American Development Bank does need additional resources to 
make additional project funding availale to members. 
 
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Comment 
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¶12. (SBU) Secretary Lorenzino's upbeat assessment of Argentina's 
relative insulation from the impact of the global financial crisis 
stands in sharp contrast to assessments by independent economists, 
many of whom of whom project zero or negative 2009 GDP growth and 
the prospect of significant increases in Argentine unemployment and 
poverty levels in the coming months.  Lorenzino did, however, 
acknowledge that sharp drop in fourth quarter GDP that official GoA 
statistics deny. 
 
¶13. (SBU) On IMF reform, Lorenzino's comments tracked with the 2008 
position paper originally submitted by the GoA to the IMF's 
International Monetary and Financial Committee on behalf of 
Argentina, Bolivia, Chile, Paraguay, and Peru.  This paper called 
for the Fund to revisit its "excessive" focus on inflationary risks 
and its standard recipe for more flexible exchange rates and full 
capital account liberalization in emerging market economies. 
Instead, the paper argues that the Fund should focus more on 
promoting growth in developing countries and support income 
redistribution policies aimed at boosting consumption.  On specific 
IMF reforms, the paper calls for the IMF to strengthen its policy 
guidance oversight of developed country economies and to develop an 
"early warning" system aimed at preventing the recurrence of 
periodic financial crises.  It calls for more emerging market 
country input into IMF decision-making and the development of a 
multilateral insurance scheme to better shield developing country 
members from exogenous shocks.  Further, the statement calls for a 
streamlining of IMF conditionality and a review of access limits and 
financing terms to bring them into line with developing members' 
actual potential needs to borrow.  The paper concludes that the 
voice and representation of developing countries within the IMF 
needs to be expanded beyond the "modest" steps taken in the recently 
approved quota increase.  This includes revisiting the size and 
composition of the IMF Executive Board, which it characterizes as 
under-representing developing countries. 
 
¶14. This cable has been cleared by Staffdel Lewis. 
 
Kelly