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Viewing cable 08BUENOSAIRES1466, Pensions Nationalization Proposal Prompts Financial Panic,

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Reference ID Created Released Classification Origin
08BUENOSAIRES1466 2008-10-27 14:51 2011-08-25 00:00 UNCLASSIFIED//FOR OFFICIAL USE ONLY Embassy Buenos Aires
VZCZCXRO0219
OO RUEHCD RUEHGA RUEHGD RUEHHA RUEHHO RUEHMC RUEHMT RUEHQU RUEHTM
RUEHVC
DE RUEHBU #1466/01 3011451
ZNR UUUUU ZZH
O 271451Z OCT 08 ZDS
FM AMEMBASSY BUENOS AIRES
TO RUEHC/SECSTATE WASHDC IMMEDIATE 2321
INFO RUEATRS/DEPT OF TREASURY WASHINGTON DC IMMEDIATE
RUCPDOC/USDOC WASHINGTON DC IMMEDIATE
RHMFIUU/HQ USSOUTHCOM MIAMI FL IMMEDIATE
RUCNMRC/WESTERN HEMISPHERIC AFFAIRS DIPL POSTS IMMEDIATE
RUEAIIA/CIA WASHINGTON DC IMMEDIATE
RHEHNSC/NSC WASHINGTON DC IMMEDIATE
RUEKJCS/SECDEF WASHINGTON DC IMMEDIATE
RUEHMD/AMEMBASSY MADRID 2153
RUEHFR/AMEMBASSY PARIS 1476
RUEHLO/AMEMBASSY LONDON 1269
RUEHRO/AMEMBASSY ROME 1455
RUEHRL/AMEMBASSY BERLIN 1147
UNCLAS SECTION 01 OF 04 BUENOS AIRES 001466 
 
C O R R E C T E D  C O P Y - (PARA NOS.) 
 
SENSITIVE 
SIPDIS 
 
E.O. 12958: N/A 
TAGS: EFIN ECON PREL PGOV AR
SUBJECT: Pensions Nationalization Proposal Prompts Financial Panic, 
Market Crash in Argentina 
 
Ref: BUENOS AIRES 1442 
 
BUENOS AIR 00001466  001.2 OF 004 
 
 
------- 
Summary 
------- 
 
1. (SBU) The Argentine government appears to have been completely 
unprepared for the plunge in Argentine stock and bond prices 
following its announcement that it would nationalize the nation's 
private pension system.  GoA officials clearly did not think through 
the possible negative consequences of this decision, and have 
struggled to respond to the crisis, with both the GoA Treasury and 
Central Bank intervening heavily in markets to sustain equity and 
debt prices, bolster the peso, and prevent massive capital outflows 
from the banking sector.  The President apparently also had to call 
her Spanish counterpart to reassure him, given the negative impact 
on the Spanish stock market, and to address rumors of deciding to 
end negotiations with the Spanish company Marsans over the 
nationalization of Aerolineas Argentinas.   . 
 
2. (SBU) There is a heightened sense of fear and uncertainty in the 
country, with increasing talk of recession in 2009, concerns about 
GoA finances and default risks, and a growing sense that no economic 
sector is immune from GoA intervention.  Although the GoA is 
optimistic about Congressional approval of the bill, Post is hearing 
of rising opposition to the measure, particularly in the Senate. 
The GoA may have a larger fight on its hands than it originally 
expected, and at an incredibly sensitive time for both international 
and domestic economies.  Septel provides additional details about 
the GoA plan, market reactions, and the increasingly negative 
outlook for the Argentine economy.  End Summary. 
 
--------------------------------------------- --------- 
Financial Panic Sparked by GoA Pension Nationalization 
--------------------------------------------- --------- 
 
3. (SBU) The freefall in stock and bond prices October 21-22 in 
reaction to the GoA's October 21 announcement that it intended to 
nationalize the private pension funds (AFJPs) (reftel) appears to 
have caught the GoA completely unprepared.  With the Buenos Aires 
Stock market dropping over 20% in two days and the country risk 
premium spiking to over 2,000 basis points, GoA officials struggled 
to find ways to halt the market panic they clearly had not 
anticipated.  A high-level source close to the Casa Rosada told DCM 
October 23 that the markets reaction hit the government "like 
Hurricane Katrina."  Cabinet Chief Sergio Massa is apparently being 
pulled in a thousand directions at once as he tries to manage both 
the fallout and demands from the Kirchners, and he is apparently 
being "overwhelmed" by the multiple challenges the administration is 
facing. 
 
4. (SBU) Several other sources told Ambassador that the small circle 
that made the pension decision had not anticipated the negative 
market reactions, but had only considered that the public did not 
like the private pension system and thus would likely support the 
GoA's move.  As the financial storm mounted, the Kirchners 
reportedly responded with anger and vigorous efforts to calm the 
markets, without going back on the decision. 
 
5. (SBU) According to press reports (confirmed in general terms by 
central bank contacts), the GoA reacted October 22 by buying both 
local bonds and stocks.  This intervention seems to have succeeded 
in halting some of the panic-selling in the stock market, although 
short-term bond prices continued to fall on October 23.  The Central 
Bank has also intervened heavily in currency markets, selling 
dollars to bolster the peso and  limit incentives for capital 
outflows from the banking sector.  While the BCRA has succeeded in 
maintaining the peso relatively stable, banks report deposit 
withdrawals and dollar purchases at rates up to five times higher 
than normal (albeit still below the worst days of the farm crisis). 
Argentine media speculates that the GoA is considering further 
"market-friendly" actions to counteract the negative perceptions of 
the AFJP nationalization, and Post's contacts among private banks 
expect this to focus on large scale bond repurchases. 
 
--------------------------------------------- -------- 
GoA Motivated by Financial Concerns, but Ignored Unintended 
Consequences 
--------------------------------------------- -------- 
 
BUENOS AIR 00001466  002.2 OF 004 
 
 
 
6. (SBU) Although President Cristina Fernandez de Kirchner has 
billed this as a "rescue of future retirees from a failed system," 
Post's contacts (including at the central bank) uniformly agree that 
the GoA's primary motivation for nationalizing the AFJPs is 
financial.  Facing increasing financing needs in coming years, no 
access to international credit markets, plummeting commodity prices, 
and growing fears of recession in 2009, the GoA was clearly 
desperate for a source of funding to sustain debt payments and keep 
from having to cut spending in the run-up to the mid-term 2009 
elections.  While there is disagreement over the actual financial 
benefit to the GoA, in addition to taking possession of the AFJPs' 
$30 billion in assets, it is likely to realize inflows of $8-10 
billion in 2009 (including contributions, free deposits, and reduced 
interest and principal amortization on GoA bonds held in AFJP 
portfolios, see Reftel).  This should fortify GoA finances 
sufficiently to enable it to meet debt payments in 2009. 
 
7. (SBU) However, according to a wide range of sources, the 
President, ex-President, Cabinet Chief and Public Pensions Chief did 
not appear to have taken into consideration the importance of the 
private pension system to the financial sector.  Not only are the 
AFJPs the largest purchaser of GoA bonds (which comprise roughly 60% 
of AFJP portfolios), but they also hold significant equity positions 
in all the major local companies and banks, are a key source of new 
financing for companies, and also are the largest source of 
short-term trade financing.  Therefore, by announcing the 
nationalization (followed by a judicial order prohibiting AFJPs from 
making any financial transactions in the near term), in one fell 
swoop the GoA succeeded in cutting off a main trader in the stock 
exchange and bond markets, eliminating a main source of financing 
for companies and trade financing for exporter and importers, and 
raising alarm among companies who now will have a highly 
interventionist government as a major shareholder and potential 
board member.  The GoA also seems not to have considered that the 
AFJPs own large stakes in foreign companies, and these positions 
could be subject to attachment by holdout bondholders after the GoA 
takes possession of AFJP assets. 
 
8. (SBU) The immediate and negative impact on the Spanish stock 
market also caught the GoA by surprise and set off a series of 
consultations.  These reportedly included a call from President 
Cristina Fernandez de Kirchner to Spanish President Zapatero to 
reassure him about Goa objectives on the pension moves and on the 
nationalization of Aerolineas Argentinas, where press reported a GoA 
decision to break off negotiations with the Spanish owners 
(Marsans). 
 
-------------------------- 
Fear and Uncertainty Reign 
-------------------------- 
 
9. (SBU) Most local and foreign analysts were already concerned 
about weakening GoA finances in the face of plummeting global 
commodity prices and a rapidly decelerating economy.  The consensus 
among Post's banking sector contacts even prior to the October 21 
announcement was that Argentina was facing recession in 2009, and 
default risks were on the rise.  While agreeing that the AFJP 
nationalization most likely reduces the risk of default over the 
next few years, Post's contacts worry about its medium term impact 
on the economy.  Their main concern now is whether this latest 
crisis will result in large-scale capital outflows from a now 
significantly less liquid financial system.  However, they also note 
that AFJPs are the main source of financing in Argentina, and 
scarcer credit without them could exacerbate the economic downturn, 
and could enhance the GoA's leverage over the private sector.  In 
the face of this probable credit crunch and expanding GoA presence, 
Banks now worry they may be the GoA's next target, as the GoA seeks 
to ensure availability of credit (possibly through old-school 
Peronist techniques, such as capped interest rates and forced 
lending).  Broadly, there is growing fear that no sector is immune 
from GoA intervention.  (Septel analyzes these issues in more 
detail.) 
 
--------------------------------------------- --- 
Rising expectations of a tough fight in Congress 
--------------------------------------------- --- 
 
10. (SBU) The Ambassador, DCM, and EconOffs have consulted widely 
 
BUENOS AIR 00001466  003.2 OF 004 
 
 
with economists, journalists, bankers, Central Bank (BCRA) 
officials, and AFJP executives this week, and the initial consensus 
was that the Argentine Congress would approve the measure relatively 
easily, albeit possibly with some modifications.  The sense was that 
this issue does not resonate the same as the farmers strike with 
either Argentine society or Congressional representatives, and also 
that there is broad dissatisfaction in Argentine society with the 
retirement system writ large, and the common perception is that the 
AFJP system (with only 3-5 million mostly white collar regular 
contributors), was poorly conceived, expensive to administer, and 
has generally not met expectations.  Certainly the GoA is publicly 
optimistic that it has the votes necessary to get the bill through 
both houses of Congress. 
 
11. (SBU) However, the mood has shifted during the last 36 hours, 
and there are increasing signs that many political leaders are 
having doubts.  At minimum, it appears that the Senate will push for 
modifications to the GoA's bill, such as greater controls and 
transparency with regards to GoA management of the funds.  There are 
increasing calls in Congress for guarantees that no funding from the 
AFJPs will be used to finance expenditures or make debt payments. 
Given the assumption that the GoA's primary motivation is to get 
funds for these purposes, it appears the GoA may have more of a 
fight on its hands than it bargained for. 
 
12. (SBU) Opposition Congressman Esteban Bullrich told the 
Ambassador October 24 that many opposition Radical party Deputies 
and Senators, who initially supported the measure, are now leaning 
towards opposing it.  More significantly, Bullrich alleged that 
during Senate Majority Leader Miguel Angel Pichetto's October 23 
meeting with former President Nestor Kirchner (in which Chamber of 
Deputies Majority leader Agustin Oscar Rossi also was present), 
Pichetto insisted that he needed "flexibility to make significant 
modifications" to the law, in order to get it through the Senate. 
Kirchner is reported to have rejected this plea, but Pichetto's 
concern is indicative of how strong opposition to the bill -- at 
least as currently drafted -- may be in the Senate. 
 
13. (SBU) Bullrich further notes that opponents are trying to 
highlight how costly this measure will be to the Argentine society, 
a tact that was highly successful during the July Senate vote over 
the GoA's bill to raise export taxes.  Finally, the reactions of the 
Governors will be key, because Senators are much more responsive to 
their Provincial constituencies than are lower house Deputies who 
normally vote party lines.  Many Governors are unhappy right now 
with the GoA, not least because the GoA is said to be broadly 
delaying both non-discretional and discretional funds transfers to 
the provinces. (Septel will detail Argentina's co-participation 
federal/provincial revenue sharing system.) 
 
14. (SBU) Post's contacts until recently have also been relatively 
sanguine regarding concerns about the possible social outcry.  For 
the same reasons stated in Para 6 above, most observers do not 
expect social protests of the kind that could block the initiative 
or destabilize the government.  While there are efforts (mostly via 
mass emails) to organize "cacerolazos" (pot-banging) protests, there 
were doubts about how effective these calls for protest would be. 
(There are emails calling for a cacerolazo at 8:00 p.m. local time 
tonight.)  That is also changing, according to Deputy Bullrich.  He 
pointed out that he set up a section of his website opposing the 
AFJP nationalization, and within a day had received 4,000 comments 
from outraged citizens (most likely AFJP contributors).  This was a 
much faster reaction than he saw during the spring farm strikes, 
according to Bullrich, and he sees it as evidence that opposition 
may be building in the public. 
 
------- 
Comment 
------- 
 
14. (SBU) During an October 22 lunch, several highly connected 
journalists and bankers told Ambassador that some in the private 
sector had initially characterized the GoA's move as a "brilliant" 
way to get more funds flowing into the GoA Treasury.  However, as 
the implications set in, most analysts now are portraying it as a 
blow to Argentina's ability to attract investment, as it provides 
further evidence of the GoA's willingness to change the rules of the 
game at whim.  It will thus likely reinforce the idea that Argentina 
is an unpredictable place to invest, and will also undermine GoA 
 
BUENOS AIR 00001466  004.2 OF 004 
 
 
efforts to entice Argentines to repatriate capital back from 
overseas.  This is the overwhelming buzz in elite circles.  Most 
distressing to many in Argentina is the manner in which the GoA 
concocted this scheme, originating and developing it within a small 
group, not consulting the AFJPs or the broader financial sector, and 
disregarding the probable negative consequences that were obvious to 
most of Post's contacts.  Once again the GoA has taken a bad 
situation and made it worse through its own doing.  To paraphrase 
noted Argentine commentator Eduardo van der Kooy, in his October 23 
column in Clarin, the impact of the global crisis on Argentina was 
the equivalent of a light drizzle, a shower that Cristina and Nestor 
Kirchner managed to turn into a downpour. 
 
WAYNE