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### Viewing cable 09BUENOSAIRES66, ARGENTINA: CENTRAL BANK PRESIDENT DEFENDS

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Reference ID | Created | Released | Classification | Origin
--- | --- | --- | --- | ---
09BUENOSAIRES66 | 2009-01-21 19:23 | 2011-03-14 07:00 | CONFIDENTIAL | Embassy Buenos Aires
Appears in these articles: http://www.lanacion.com.ar/1357238-evaluaron-echar-a-la-argentina-del-g-20 http://www.lanacion.com.ar/1357239-gestiones-ante-el-gobierno-para-pedir-un-cambio

`

    VZCZCXYZ0001
    OO RUEHWEB

    DE RUEHBU #0066/01 0211923
    ZNY CCCCC ZZH
    O 211923Z JAN 09
    FM AMEMBASSY BUENOS AIRES
    TO RUEHC/SECSTATE WASHDC IMMEDIATE 2893
    INFO RUCNMER/MERCOSUR COLLECTIVE IMMEDIATE
    RUEAIIA/CIA WASHINGTON DC IMMEDIATE
    RUCPDOC/DEPT OF COMMERCE WASHINGTON DC IMMEDIATE
    RUEATRS/DEPT OF TREASURY WASHINGTON DC IMMEDIATE
    RHMFISS/HQ USSOUTHCOM MIAMI FL IMMEDIATE
    RHEHAAA/NATIONAL SECURITY COUNCIL WASHINGTON DC IMMEDIATE

` `

    C O N F I D E N T I A L BUENOS AIRES 000066

    SIPDIS

    E.O. 12958: DECL: 01/21/2029
    TAGS: ECON EFIN AR
    SUBJECT: ARGENTINA: CENTRAL BANK PRESIDENT DEFENDS
    INSTITUTIONAL INDEPENDENCE

    REF: A. '08 BUENOS AIRES 1491
         ¶B. '08 BUENOS AIRES 1389
         ¶C. '08 BUENOS AIRES 1398

    Classified By: Amb. E.A. Wayne.  Reasons 1.4 (B,D)

    -------
    Summary
    -------

    ¶1. (C) Central Bank (BCRA) President Martin Redrado
    emphasized his success maintaining relative market confidence
    in the Argentine Peso in the face of four major financial
    crises since August 2007.  In a January 16 meeting with
    Ambassador, he discounted market expectations of a large
    depreciation this year, arguing that the fate of the Peso
    depends on numerous factors, including Dollar and Euro
    values, global interest rates, and commodity prices.  Redrado
    lamented that the GoA had left it to the BCRA to explain the
    ramifications of the new and controversial capital
    repatriation law to skeptical U.S. and Financial Action Task
    Force (FATF) officials, but assured that the law's
    implementing regulations will require domestic banks to
    adhere to international anti-money laundering and
    counter-terrorism finance requirements.  Redrado disagreed
    with market assessments that the GoA has undermined the
    BCRA's independence, arguing that the market has
    misinterpreted recent changes to the BCRAs charter to allow
    increased GoA borrowing from the BCRA as well as the BCRA's
    direct intervention in banks' currency trading operations to
    limit dollar sales and bolster the peso, which most observers
    believe is done on orders from GoA leadership.  While the
    reality appears to be that the BCRA policy is increasingly
    influenced by the GoA, Post's financial sector contacts still
    largely support Redrado and want him to stay in the job.
    Ambassador also noted that Treasury will soon be ready to
    sign an agreement with the BCRA and GoA on establishing a
    technical assistance project in the area of terrorism
    finance.  Regarding the G-20 process, Redrado said he and his
    team would do their best to assure a serious and productive
    Argentine participation in preparations for the April
    meetings.   End Summary

    ¶2. (SBU) Ambassador met with Central Bank (BCRA) President
    Martin Redrado and BCRA Deputy General Manager of Economy and
    Finance Pedro Rabasa January 16 to review Argentina's
    economic outlook, new capital repatriation law, and the
    status of the Treasury OTA technical assistance project, and
    Argentine thinking on the upcoming April G-20 meeting.

    ---------------------------------------
    Redrado: Managed Float Proves its Value
    ---------------------------------------

    ¶3. (SBU) Redrado called himself well satisfied with BCRA
    performance over the past two years in maintaining market
    confidence in the Peso in the face of four notable crises:
    August 2007 market turmoil at the start of the sub-prime
    crisis; deposit outflows during the  March ) July 2008 GoA
    confrontation with the agricultural sector over the GoA's
    efforts to impose higher and variable export tariffs; the
    flight to quality following the September 2008 Lehman
    Brothers bankruptcy; and the November 2008 deposit outflows
    that followed the GoA's announcement of its intent to
    nationalize private pension funds.  The BCRA's ability to
    navigate these extraordinary challenges, Redrado said,
    demonstrates the effectiveness of its broad monetary policy
    and its managed peso float.  Despite media speculation,
    constraints on BCRA actions don't come from the Casa Rosada
    (Pink House ) seat of Executive power, equivalent to the
    White House), Redrado emphasized, but rather from Argentina's
    ""mental dollarization"" which has required the BCRA to boost
    domestic interest rates to staunch capital flight and retain
    local currency deposits.  ""We didn't invent the managed float
    concept,"" Redrado concluded, ""but we have proven its
    effectiveness.""

    ¶4. (SBU) Redrado discounted any pre-set value or margin for
    devaluation of the peso in 2009 (Futures markets currently
    put the peso's value at roughly 3.8 - 4.0 pesos/dollar at
    year-end 2009.)  Rather, the value of the Peso over the
    coming year will be determined by a host of market variables,
    including the Dollar/Euro cross-exchange rate, global
    interest rates, and the price of soy.  ""Tell me where these
    variables will stand at year-end 2009 and then I'll project a
    value of the peso for you,"" Redrado concluded.

    --------------------------------------------- ----
    Ensuring FATF-Consistent Capital Repatriation Law
    --------------------------------------------- ----

    ¶5. (C) Redrado acknowledged that the BCRA had navigated a
    ""difficult operating environment"" in 2008, and said he
    expected to confront more convulsions (""cimbronazos"") like
    the market's skeptical response to the GoA's capital
    repatriation law.  ""But, what doesn't kill you makes you
    stronger,"" Redrado joked.  He lamented that few GoA officials
    understand how to talk to markets and said that it was left
    to his BCRA team to explain to Treasury Deputy Assistant
    Secretary for Terrorist Financing and Financial Crimes Danny
    Glazier that the new capital repatriation law would be
    regulated and managed in ways consistent with FATF anti-money
    laundering mandates.  The BCRA is actively involved in
    drafting the law's implementing regulations, he said, and the
    BCRA has inserted ""know your customer"" language into (still
    in draft) regulations that will ensure repatriated capital is
    only flowed from international banks and to domestic banks
    that fully comply with FATF suspicious transaction protocols.
     (Comment:  Though their body language, both central bank
    officials indicated they did not expect this legislation to
    prompt a large amount of capital to rush back into
    Argentina.)

    --------------------------------------------- --
    BCRA Sustaining Private Bank Profits, Liquidity
    --------------------------------------------- --

    ¶6. (SBU) The BCRA has successfully managed its reserve
    positions, buying and selling dollars ""anti-cyclically"" to
    moderate volatility in the peso, Redrado said.  Beyond
    managing the peso exchange rate and the inter-bank rate to
    limit the withdrawal of deposits from spooked savers, the
    BCRA has demonstrated to banks that it is truly a
    lender-of-last-resort, using BCRA financial instruments to
    inject needed liquidity into the private banking system.

    ¶7. (SBU) The BCRA has sustained good working relations with
    Argentine private sector banks, Redrado said, demonstrating
    the BCRA's concern for private banks' need to both attract a
    stable deposit base and maintain bottom line profitability.
    Implicitly acknowledging significant central bank
    intervention in private bank foreign exchange trading during
    the last three months of 2008, Redrado said that, while
    private bank trading desks have an interest in ""generating
    volatility"" in order to create profitable trading and
    arbitrage opportunities, their corporate and consumer lending
    colleagues benefit from the kind of BCRA-managed currency
    stability that generates reliable deposit flows.  As a
    result, BCRA had ""talked to"" the likes of Citibank to
    ""explain8 the need for foreign exchange trading prudence.

    ¶8. (SBU) Post Comment: Beginning early November 2008 the BCRA
    assigned monitors to oversee banks' currency trading desks
    and various GoA regulatory agencies sent inspectors to both
    banks and exchange houses, with the purpose of using moral
    suasion and threats of tax audits to limit currency trading
    and deposit withdrawals.  This tactic succeeded in preventing
    institutional depositors from dollarizing their accounts, and
    the resulting stabilization of deposit levels appears to have
    reassured retail depositors.  While capital outflow
    continues, it is contained, and the BCRA has not been forced
    to continue large scale dollar sales to strengthen the peso
    and prevent deposit outflows.  Based on Post's financial
    sector contacts, Redrado is correct in saying that bankers
    generally support these measures, even if they do not say so
    publicly. End Comment.

    --------------------------------------------- ---
    2009 Budget: BCRA Charter Change ""Misunderstood""
    --------------------------------------------- ---

    ¶9.  (SBU) Ambassador asked about provisions of the 2009
    budget law (Ref B) that market analysts -- including Goldman
    Sachs -- had reported as eroding central bank independence by
    allowing an expanded share of central bank reserves to be
    lent to the GoA Treasury.  Redrado called this a
    mis-interpretation and explained that the 2002 revision of
    the BCRA charter limits general central bank short-term
    lending to the Treasury to 12% of the monetary base and
    limits lending to the Treasury for payment of IFI debt
    obligations to 10% of the previous 12 months' tax revenues.
    The 2009 budget law, he clarified, simply allows such funds

    to be used to satisfy general GoA foreign currency
    obligations rather than restricting their use to IFIs.

    ¶10. (SBU) The change maintains the original spirit of the
    2002 BCRA charter, Redrado said.  The original law was
    drafted in a period where IFIs credits represented a more
    significant percentage of government funding, he said.  Under
    the revised charter, BCRA funds can be used, he said, to
    repay Boden 2012s that will mature in August 2009.  In any
    case, Redrado clarified, the change will be money-supply
    neutral.  (This exchange has no monetary effect because the
    GoA will pay dollar-denominated bonds using dollars borrowed
    from the central bank, but these transactions will not
    increase the amount of pesos in circulation.  If the central
    bank subsequently purchases these dollars back using pesos,
    it would need to sterilize the increase in the money supply
    by issuing debt instruments to mop up the extra pesos.)

    ------------------------
    2009 Challenges for BCRA
    ------------------------

    ¶11. (SBU) Redrado called his primary concern in the coming
    year increasing unemployment and upcoming union salary
    negotiations. (Recent media reports have projected 2009
    inflation in the 15-18% range and have noted that GoA
    officials hope to limit salary increases to the 12-13%
    range.)  He acknowledged that the GoA's 7.2% ""official""
    measure of 2008 inflation had little street credibility and
    that teamster union boss Hugo Moyano's statement that he
    would develop salary demands using a ""housewives"" inflation
    index augured for a new round of significant union salary
    increases that would further stoke inflationary expectations.

    ¶12. (SBU) Another challenge to be addressed in 2009 will be
    Argentine industry's need to access longer term financing.
    Argentina needs some type of long term bank on the model of
    Brazil's BNDES, Redrado said. He discounted using GoA
    second-story bank BICE for this end (Ref C), but suggested
    that the GoA was already addressing this issue by auctioning
    subsidized social security (ANSES) funds to commercial banks
    who promise to on-lend them longer term at competitive rates.
     ""Private banks will take the credit risk, while ANSES takes
    the liquidity risk,"" Redrado said.

    -----------------------------------------
    Treasury OTA Technical Assistance Project
    -----------------------------------------

    ¶13. (SBU) Ambassador noted that Treasury recently approved
    funding for the technical assistance project focused on
    terrorism financing with the central bank and GoA regulatory
    agencies.  The next step will be to coordinate with the
    Central Bank and Justice Ministry on the Terms of Reference
    and finalize the Work Plan.  Redrado agreed that a signing
    ceremony to highlight bilateral cooperation in this area
    would be appropriate and send welcome signals of bilateral
    cooperation to the incoming Obama administration.

    ----------------
    G-20 Preparation
    ----------------

    ¶14. (SBU) Ambassador noted that this sources (U.S. and other
    G-7) indicated that Argentina's tone and substance at the
    first G-20 Summit in Washington had been quite distinct from
    the other 19, and that there could be a missed opportunity
    for Argentina if a more constructive approach was not evident
    in preparation for the April G-20 Summit.  Redrado said he
    agreed fully on the need for a serious approach to this next
    opportunity to play a role in reshaping global financial
    practices and institutions.  He said that he and his BCRA
    team would focus on playing a constructive role in the
    preparations process and in agreeing on documents with
    specifics for the next Summit.  That would provide the base
    for more focused discussions among leaders, he suggested.

    -------
    Comment
    -------

    ¶15. (C) Redrado repeated his standard defense of an Argentine
    central bank management that few local market players regard
    as truly independent.  He acknowledged, however, that his
    room for maneuver has been constrained by the Kirchner
    administration's penchant for announcing new economic

    initiatives with minimal consultation with the broader
    economic team, including the BCRA.  ""We are condemned by our
    history and our reputation for improvisation,"" Redrado said.
    In fact, GoA encroachment into the BCRA's area of authority
    over the last six months has been extensive.  In addition to
    the 2009 budget bill's alteration of the BCRA charter to
    allow use of reserves to pay bilateral debts, the GoA also
    unilaterally announced in September 2008 its intention to use
    official reserves to pay Paris Club debts.  It is accepted
    wisdom in the banking sector that the BCRA's direct
    intervention in currency trading markets in support of the
    peso is being conducted on direct orders from Nestor
    Kirchner, who reportedly opposed allowing the peso to
    depreciate.  Despite his reduced independence, local bankers
    say they respect Redrado's skill at navigating the complex
    circumstances he faces.  These same bankers frequently tell
    us that Redrado is the only Argentine official who
    understands their concerns and assert that the financial
    sector would be much worse off without him in charge at the
    central bank.
    WAYNE

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