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DE RUEHBU #1176/01 3032018
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P 302018Z OCT 09
FM AMEMBASSY BUENOS AIRES
TO RUEHC/SECSTATE WASHDC PRIORITY 4540
INFO RUEHWH/WESTERN HEMISPHERIC AFFAIRS DIPL POSTS PRIORITY
RUEHSO/AMCONSUL SAO PAULO PRIORITY 0009
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UNCLAS SECTION 01 OF 03 BUENOS AIRES 001176 
 
SIPDIS 
SENSITIVE 
 
E.O. 12958: N/A 
TAGS: EFIN ECON EINV ETRD ELAB EAIR AR
SUBJECT:  ARGENTINA ECONOMIC AND FINANCIAL REVIEW, OCTOBER 22-29, 
2009 
 
¶1. (U) Provided below is Embassy Buenos Aires' Economic and 
Financial Review covering the period October 22-29, 2009.  The 
unclassified email version of this report includes tables and charts 
tracking Argentine economic developments.  Contact Econ OMS Megan 
Walton at WaltonM@state.gov to be included on the email distribution 
list.  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. 
 
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GOA WORKING TOWARD FORMAL OFFER TO HOLDOUTS 
------------------------------------------- 
 
¶2. (SBU) In a press conference on October 22, Minister of Economy 
Amado Boudou announced that the GoA intends to proceed with a formal 
offer to reopen the 2005 debt exchange.  The Minister said that the 
GoA will seek 'fresh cash' via a new bond for 10% of the face value 
of the defaulted debt, and that the offer will be "worse" than the 
2005 debt restructuring, which it is legally required to be 
according to the terms of the original exchange.  Boudou stated that 
characteristics of the new bond are still under study but noted that 
the GoA is looking to pay a single- digit interest rate.  There was 
no indication of the exact timing for the offer, but the GoA has 
already initiated some of the steps needed for regulatory approval 
by SEC, Italian, and German regulators.  The approval process can 
take several weeks or longer. 
 
¶3. (SBU) The Minister indicated that an acceptance rate of 60% of 
the USD 20 billion debt and USD 10 billion in accumulated interest 
would be positive, and claimed that the banks involved in the 
process -- Barclays, Deutsche, and Citibank -- have already secured 
about 50% participation (or about USD 10 billion of the defaulted 
debt).  While it is not clear that there is any particular threshold 
that will suffice to enable the GoA to gain access to the 
international credit markets, the GoA is likely to view a high 
participation rate as boosting its efforts to normalize its 
relations with the credit market.  Indeed, a 60% participation in 
the re-opening would imply a 90% participation of the original 
defaulted debt.  On October 24-25, Minister Boudou stated that the 
GoA could return to international capital markets even before 
completing the expected offer to the holdouts. 
 
¶4. (SBU) On October 27, the GoA sent to Congress a bill to abrogate 
the so-called "Bolt Law" (Ley Cerrojo), approved in 2005 as part of 
the original debt restructuring.  The law prevents the GoA from 
making additional offers to holdouts who did not participate in the 
2005 debt restructuring without prior authorization from the 
Congress.  The new bill submitted to Congress does not contain any 
details about the upcoming offer but states that the financial terms 
and conditions of any new offer cannot be the same or better than 
those offered to creditors in the 2005 operation. 
 
¶5. (SBU) On October 28, Minister Boudou explained the details of the 
law to reopen the exchange to the Lower House Budget and Finance 
Committee.  According to the president of this committee, Deputies 
would vote on the bill on November 3 at the committee level.  A 
floor vote in the full Lower House would follow on November 4. 
Afterwards, the bill will go to the Senate for approval.  Meanwhile, 
according to press reports, GoA officials will begin a road show 
during the week of November 2 to meet investors in the U.S. and 
several key European cities. 
 
--------------------------------------------- ------ 
CAPITAL FLIGHT DECELERATES SHARPLY IN THIRD QUARTER 
--------------------------------------------- ------ 
¶6. (SBU) Capital flows out of Argentina's financial system (by the 
non-financial private sector) were USD 3 billion in the third 
quarter of 2009, according to the BCRA's quarterly foreign exchange 
report, released on October 27.  This compares to outflows of USD 
5.8 billion in QIII 2008 and USD 5.5 billion in QII 2009.    In its 
report, the BCRA explains that its stabilization policy along with 
the improved international financial environment were responsible 
for the improved situation.  Some private analysts argue that the 
post-election uncertainty and receding fears of a fiscal financing 
crisis were behind the slowdown in private sector capital outflows. 
Third quarter capital outflows from the non-financial private sector 
bring accumulated outflows for the year to date to USD 14.2 billion, 
compared to USD 16.4 billion in the same period last year. 
Other highlights of the Foreign Exchange Balance report include: 
-- A surplus of USD 2.1 billion for the current account of the 
Foreign Exchange Market for the third quarter, and an accumulated 
surplus of  USD13.4 billion for the year (this is the net inflow of 
FX from all trade transactions, including merchandise, services, and 
investment income), explained mainly by a trade surplus of USD 3.2 
 
BUENOS AIR 00001176  002 OF 003 
 
 
billion; 
-- A deficit of USD 2.9 billion for the capital account in QIII, 
generated by the USD 2.3 billion capital outflow from the 
non-financial private sector and the USD 2.2 billion in payments 
(considered an "outflow") by the public sector (GoA and BCRA -- 
mainly interest and principal payments on the Boden 2012).  This 
outflow was partially compensated for by roughly USD 1.8 billion in 
inflows.  Year-to-date, the capital accounts accumulated a deficit 
of USD 10.7 billion. 
-- BCRA reserves dropped $678 million to $45.3 billion in the third 
quarter, mainly due to the USD 2.2 billion Boden 2012 payment in 
August, paid for with Treasury funds deposited at the BCRA. 
However, this fall in reserves was partially compensated for by net 
BCRA purchases of USD 850 million during the quarter.  The peso 
depreciated 1.3% to 3.84 ARP/USD in QIII. 
Note: the Foreign Exchange Balance (FEB) and the Balance of Payments 
(BOP) report have a similar format.  However, the former reports 
purchase and sales of foreign currency without considering the 
residency of the parties, while the latter reports economic 
transactions focusing on the residency of the intervening parties. 
Also, the FEB uses a cash basis methodology, while the BOP uses 
accrual accounting. End Note. 
---------------------------------------- 
SEPTEMBER PRIMARY SURPLUS DOWN 94% Y-O-Y 
---------------------------------------- 
 
¶7. (SBU) The GoA announced October 22 that the September primary 
fiscal surplus declined 94% y-o-y to ARP 223 million from ARP 3.7 
billion and was also much lower than private analysts' estimate of 
ARP 966 million.  The surplus dropped 41% m-o-m, even though August 
was already very weak, with an 85% y-o-y decline.  According to RSH 
consulting, the September primary surplus would have dropped to a 
deficit of ARP 594 million if the BCRA had not transferred its 
earnings of about ARP 817 million to the Treasury. 
 
¶8. (SBU) September's poor performance was the result of 
weaker-than-expected tax revenues, which increased only 6% y-o-y to 
ARP 20.7 billion, and higher primary expenditures, which increased 
29% y-o-y to ARP 20.5 billion.  Taking interest payments into 
account, the overall fiscal balance for September is a deficit of 
ARP 2.2 billion.  According to the GoA, expenditures were mainly 
driven by an increase in capital expenditures, both in direct real 
investment as well as capital transfers.  Year-to-date, the primary 
surplus stands at ARP 8.7 billion, the result of revenues of ARP 179 
billion, which increased only 11% in the first nine months of the 
year and expenditures of ARP 171 billion, which jumped 30% during 
the same time period.  In a press conference, Minister of Economy 
Amado Boudou attributed the weak fiscal result to the implementation 
of a counter-cyclical fiscal policy to alleviate the effects of the 
global crisis.  He identified the objectives of the GoA's fiscal 
policy as strengthening the domestic market, sustaining private 
economic activity, increasing infrastructure investment, and 
transfering funds to the provinces and a variety of social programs. 
 
 
--------------------------------------------- - 
SPAIN'S TELEFONICA SA WITHDRAWS ITS ICSID CASE 
--------------------------------------------- - 
 
¶9. (SBU) Spain's Telefonica SA withdrew its case against Argentina 
before the International Center for Settlement of Investment 
Disputes (ICSID), the World Bank's international arbitration 
tribunal. A Telefonica spokesman said to the press on October 21 
that pulling the complaint was "a better strategy for the firm," and 
that this decision would not rule out appealing to the ICSID on the 
same issue in the future.  Telefonica claimed USD 2.8 billion to 
compensate for the damages caused by economic policies implemented 
during the 2001/2002 crisis, which converted all contracts from 
dollars into pesos, devalued the peso, and froze public utility 
fees. Telefonica's ICSID case against Argentina was suspended in 
2006, when the parties launched negotiations over price adjustments. 
 Earlier this year, Telefonica signed a letter of intent with the 
GOA offering to make new investments in Argentina in exchange for a 
commitment to renegotiate prices in the future.  The parties reached 
an agreement on September 24, according to which the GOA committed 
itself to unfreeze fixed-line fees.  Telefonica then decided to 
terminate the ICSID case. 
 
----------------------------------------- 
Industrial production index up 3.1% y-o-y 
----------------------------------------- 
 
¶10. (SBU) INDEC announced October 28 that industrial production 
increased 3.1% y-o-y in September, better than the market's forecast 
of a 1.3% contraction.  According to INDEC, during the first nine 
 
BUENOS AIR 00001176  003 OF 003 
 
 
months of the year, industrial production declined 1.3% y-o-y.  This 
figure stands in sharp contrast to private estimates such as that of 
the FIEL think-tank, which pegs the y-o-y decline in industrial 
production from January-September at 8.9%.  In September, the 
fastest growing industries were automotive (+14% y-o-y), paper and 
cardboard (+8% y-o-y), and food (+4% y-o-y), while the oil refining 
and chemicals, and rubber and plastics sub-indices decreased 8% and 
0.5% y-o-y, respectively. 
 
MATINEZ