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Viewing cable 08BUENOSAIRES430, CODEL SHELBY DISCUSSES AGRICULTURAL STRIKE, GLOBAL

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Reference ID Created Released Classification Origin
08BUENOSAIRES430 2008-04-07 13:50 2011-08-25 00:00 UNCLASSIFIED//FOR OFFICIAL USE ONLY Embassy Buenos Aires
VZCZCXYZ0003
RR RUEHWEB

DE RUEHBU #0430/01 0981350
ZNR UUUUU ZZH
R 071350Z APR 08
FM AMEMBASSY BUENOS AIRES
TO RUEHC/SECSTATE WASHDC 0647
INFO RUEATRS/DEPT OF TREASURY WASHINGTON DC
RUCPDOC/USDOC WASHINGTON DC
RUEHRC/DEPT OF AGRICULTURE USD FAS WASHINGTON DC
RUEHC/DEPT OF LABOR WASHINGTON DC
RHMFIUU/HQ USSOUTHCOM MIAMI FL
RUEHAC/AMEMBASSY ASUNCION 6860
RUEHCV/AMEMBASSY CARACAS 1774
RUEHMN/AMEMBASSY MONTEVIDEO 7059
RUEHSG/AMEMBASSY SANTIAGO 1114
RUEHBR/AMEMBASSY BRASILIA 6752
RUEHLP/AMEMBASSY LA PAZ APR SAO PAULO 3677
RUEHRI/AMCONSUL RIO DE JANEIRO 2452
UNCLAS BUENOS AIRES 000430 
 
SIPDIS 
 
SIPDIS 
SENSITIVE 
 
E.O. 12958: N/A 
TAGS: ECON EFIN OREP AR
SUBJECT: CODEL SHELBY DISCUSSES AGRICULTURAL STRIKE, GLOBAL 
FINANCIAL CRISIS, BOND HOLDOUTS WITH FINANCIAL INSTITUTIONS 
 
Ref: (A) Buenos Aires 422 
 
     (B) Buenos Aires 425 
 
------- 
Summary 
------- 
 
1. (SBU) Representatives of U.S. commercial banks, investment banks, 
insurance companies, and rating agencies told CODEL Shelby March 25 
that the GoA's interventionist tendencies has scared off foreign 
direct investment (FDI) -- except from Brazil -- and long-term 
lending from the private sector, both crucial to sustainable growth. 
 They called the ongoing agricultural sector strike the worst crisis 
the Kirchners have faced since 2003, and a direct challenge to their 
heterodox economic model.  End Summary. 
 
2. (SBU) Senator Richard Shelby (R-AL), Senator Judd Gregg (R-NH), 
Senator Bob Corker (R-TN), Senator Mike Crapo (R-ID), and 
Congressman Bud Cramer (D-AL) visited Buenos Aires March 23-26, 
meeting with the Justice Minister and Central Bank President 
(reftels), in addition to having lunch with representatives of all 
nine U.S. financial institutions operating in Argentina: CitiGroup, 
JP Morgan, Goldman Sachs, Prudential Financial, Merrill Lynch, 
Standard and Poor's, Moody's, Fitch Rating, and American Express. 
Highlights are provided below. 
 
--------------------------------------------- -- 
Changing Face of FDI; Lack of Long-Term Lending 
--------------------------------------------- -- 
 
3. (SBU) Participants agreed that GoA intervention in the economy 
and high inflation were both major constraints to both FDI and 
long-term lending in Argentina, and predicted this would limit 
Argentina's capacity to grow at high rates in the future.  Fitch's 
rep commented that when there is no long-term macro planning by the 
government, it is difficult for businesses to look beyond the short 
term or access long-term financing.  Goldman Sachs' rep argued that 
regular GoA market interventions have led directly to reduced 
interest from foreign investors.  He added that such regular 
interventions have also encouraged both foreign and domestic 
investors to prioritize shorter-term projects, where the investor 
can recoup the investment within only a few years.  Alternatively, 
investors are putting their money into real estate or other assets 
that will hold their value in a high-inflation environment. 
 
4. (SBU) CitiGroup's rep reported that there is a similar situation 
with bank lending.  Although private sector credit is growing 
rapidly, at about 40% per year, it is still low as a percentage of 
GDP and is increasingly dominated by short-term consumer credits. 
The Citi rep added that, because of high inflation and negative real 
interest rates, bank deposits average only 30-days.  The combination 
of high inflation and short-term deposits precludes long term 
fixed-rate lending from banks to the private sector.  He commented 
that, in any case, the banks are reluctant to take on the risk of 
long-term fixed rate loans, whereas companies do not want to risk 
long-term, variable rate loans.  The compromise is that companies 
are rolling over short-term, fixed-rate loans, which limits their 
growth opportunities.  In sum, Citi's rep commented, the banking 
sector's exclusive focus on short-term financing limits its ability 
to support continued economic growth.  (Private sector credit in 
Argentina is approximately 14% of GDP, compared to over 20% prior to 
the 2001/2002 financial crisis, and compared to an average of almost 
30% in Latin American and over 80% in developed economies.) 
 
5. (SBU) JPMorgan noted that many smaller Argentine companies are 
financing themselves, either through retained earnings or by 
repatriating capital held abroad.  (Estimates of Argentine capital 
held abroad are as high as $150 billion, including investments and 
capital flight.)  JPM's rep also noted that the fall in FDI from 
traditional sources (U.S. and Europe) has been partially covered by 
increased investment from local groups and also from Brazilian 
companies, which are benefiting from the Real's appreciation against 
the Peso.  Both are better positioned to understand the risks of 
doing business in the Argentine market, and both also have tacit GoA 
approval for their investments. 
 
6. (SBU) Fitch's rep agreed, adding that the GoA's inability to 
issue debt internationally, and disinterest from traditional sources 
 
of FDI, has forced it to create its own financing sources.  For 
example, the GoA is forcing Argentine pension funds to repatriate a 
significant portion of capital they had earlier invested in other 
Mercosur countries, and this has led to a surplus of liquidity in 
the domestic market. 
 
7. (SBU) In response to questions from the CODEL, various 
participants noted that there is no significant Chinese investment 
in Argentina, despite the increasing trading relationship between 
the two countries.  The Goldman rep added that China has made 
significant investments in the region, particularly in energy, 
agriculture, and mining, and is reportedly looking at possible 
opportunities in Argentina.  However, he noted that China is moving 
cautiously, because it still considers Latin American the "backyard 
of the U.S." 
 
--------------------------------------------- --- 
Ag Strike Poses Challenge for K's Economic Model 
--------------------------------------------- --- 
 
8. (SBU) JP Morgan's rep commented that the ongoing agricultural 
sector strike, which started with the GoA's March 11 announcement of 
much higher taxes on major agricultural export crops, is the worst 
crisis the government has faced since 2003.  He also explained that 
the strike is a direct challenge to the Kirchners' economic model 
(the tax-the-farmers-to-build-the-welfare-state and support 
inefficient industry model on which Peronism and Kirchnerism is 
based). 
 
9. (SBU) Because the rural area is not organized, and there are no 
clear representatives directing the striking farmers, the GoA has 
had having difficulty influencing the situation.  Also, there are 
widely divergent views among farmers, particularly between the 
larger, more efficient commercial landholders and the smaller, less 
efficient farmers, whose livelihood is directly threatened by the 
new taxes.  JP Morgan's rep speculated that the GoA would most 
likely be forced to roll-back the recent export tax increase, or at 
least create a dual system that differentiates between large and 
small producers. (Note:  this prediction came true March 31, when 
the GoA announced measures to alleviate the impact on small and 
medium farmers.) 
 
10. (SBU) JP Morgan's rep also noted that the original justification 
for export taxes in Argentina was to balance out the beneficial 
impact to exporters of the GoA and Central Bank's policy of 
maintaining an undervalued or "competitive" peso.  Therefore, on one 
hand the competitive exchange rate allows exporting farmers to earn 
huge returns in peso terms due to the high world prices for 
agricultural commodities.  On the other hand, the GoA takes a 
percentage to be able to subsidize other sectors and consumers, so 
as to share the benefits with all of society.  However, the JPM rep 
noted that the GoA is not taking into account the increases in the 
costs of production due to inflation and higher-priced imports. 
Therefore, farmers are being squeezed.  (President Fernandez de 
Kirchner and her Economy Minister justified the March 11 tax 
increases as measures to keep down local food prices, foster income 
redistribution, and encourage crop diversification -- away from soy, 
which in the last ten years has dramatically increased its share of 
cultivated land from 30 to 45%.) 
 
--------------------------------------------- ---- 
Deal Expected Eventually with Holdout Bondholders 
--------------------------------------------- ---- 
 
11. (SBU) Although several of the participants agreed that the GoA 
will eventually work out some kind of deal with the so-called 
"holdout" bondholders (those who declined to participate in the 2005 
debt exchange), there was also general agreement that the GoA would 
have a difficult time fully resolving the problem.  JPMorgan 
commented that it would be almost impossible for the GoA to get 100% 
participation, if it were to re-open the debt exchange.  However, he 
predicted the GoA would eventually re-open the exchange, and would 
likely get around 75% participation in a deal similar to or slightly 
worse than the original offer.  Although the GoA would continue to 
experience difficulties with the remaining holdouts, it would show 
good faith to the U.S. and European courts (and ICSID tribunal) 
overseeing holdout lawsuits.  The Ambassador noted that it was part 
of the USG's fiduciary duty to continue pressuring the GoA to reach 
 
a mutually acceptable settlement with holdouts. 
 
--------------------------------------------- --------- 
Limited Impact of Global Financial Crisis on Argentina 
--------------------------------------------- --------- 
 
12. (SBU) The consensus among participants was that turmoil in 
global markets, resulting from the financial crisis in the U.S., has 
had limited impact on Argentina to date.  Fitch's rep attributed 
this mainly to Argentina's relatively small financial sector and 
limited access to international capital markets (due to the threat 
of lawsuits from holdout bondholders).  Nevertheless, Citi, 
supported by others, argued that the situation could change if the 
international crisis begins to impact global commodity prices. 
 
------- 
Comment 
------- 
 
13. (SBU) Financial sector participants were generally more downbeat 
than they have been in previous meetings with the Embassy.  As 
Citi's rep highlighted, "we're all making money here, but you never 
know what will happen next."  Clearly U.S. financial sector reps are 
discouraged by the lack of predictability in GoA economic 
decision-making.  Instead of the "gradual fine-tuning" that many of 
these same institutions predicted in 2007 would occur under the 
Cristina Fernandez de Kirchner administration, there has been almost 
complete continuity on economic policies, with no significant 
reforms to date.  As several lunch participants pointed out, most of 
the cabinet is unchanged and Nestor Kirchner still seems to be the 
top decision maker on economic issues.  End Comment. 
 
14. (U) CODEL Shelby cleared this message. 
 
WAYNE