US embassy cable - 05BUENOSAIRES159

C O N F I D E N T I A L SECTION 01 OF 04 BUENOS AIRES 000159 
 
SIPDIS 
 
E.O. 12958: DECL: 01/19/2015 
TAGS: PREL, PGOV, ECON, EFIN, ETRD, PHUM, AR 
SUBJECT: CODEL DODD VISIT TO ARGENTINA 
 
REF: BUENOS AIRES 138 
 
Classified By: Ambassador Lino Gutierrez for Reasons 1.4 (b) and (d). 
 
1. Summary: (C) During their 24-hour visit to Argentina 
January 12-13, CODEL Dodd, accompanied by Ambassador 
Gutierrez, held informative and wide-ranging discussions with 
President Nestor Kirchner, Minister of Interior Anibal 
Fernandez, Deputy Foreign Minister Jorge Taiana, and Central 
Bank President Martin Redrado.  In addition, prior to their 
arrival in Buenos Aires, the CODEL visited the Tri-border 
region of Argentina where they were briefed on GOA 
counternarcotics and counterterrorism activities.  All of the 
interlocutors expressed their satisfaction with the overall 
state of U.S.-Argentine relations.  In particular, they noted 
that cooperation with the U.S. on counternarcotics and 
counterterrorism issues was excellent.  During a luncheon 
hosted by the Ambassador attended by a number of independent 
political and economic analysts, the CODEL was told how the 
U.S. Administration had been particularly helpful to 
Argentina during the recent economic crisis, prompting 
Senator Dodd to state that the U.S. clearly had devoted 
considerable attention to support Argentina which is not what 
he thought prior to his visit.  End Summary. 
 
2.  (U)  Senators Christopher Dodd (D-Conn), Bill Nelson 
(D-Fla) and Lincoln Chafee (R-RI) had a brief but busy 
schedule during their visit to Argentina.  CODEL Dodd was in 
Argentina to discuss political and economic trends in general 
and counternarcotics and counterterrorism cooperation in 
particular.  In a last minute addition to the schedule, 
President Kirchner also received the delegation (reftel). 
 
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Interior Minister Fernandez Praises Cooperation 
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3. (C) In his opening remarks, Interior Minister Anibal 
Fernandez praised the level of cooperation the GOA has 
received from the U.S. on counterterrorism issues.  He noted 
this cooperation was of "high quality" and "value added" that 
included "shared information, sources and common action."  He 
said this work continued on a day-to-day basis with a 
constant exchange of information.  However, when asked by 
Senator Nelson if the cooperation was enough, Fernandez 
responded, "No, it's never enough.  We can do a lot more." 
 
4. (C) In response to a question on cooperation with Paraguay 
and Brazil on counterterrorism issues, Fernandez said there 
had been a lot of progress on common policy under the 
MERCOSUR umbrella but that joint work with its two neighbors 
was not as extensive as the GOA would prefer.  With Paraguay, 
the problem was one of capacity, while with Brazil it was a 
question of willingness to cooperate.  Fernandez, though, 
said the GOA was working to overcome difficulties with Brazil 
and that a common policy on counterterrorism was gradually 
emerging. 
 
5. (C) Fernandez said his ministry was focusing on three 
major transnational themes: terrorism, narcotics trafficking 
and smuggling.  In response to these challenges, the GOA had 
set out to define and create a common policy and response 
both at the federal and provincial level.  A critical 
component of this common policy would be to reach a consensus 
in judicial terms on rules of procedure to fast-track 
investigations and prosecutions in these areas.  Fernandez 
said that by February 1, the GOA would have a special strike 
force unit within the Attorney General,s office to deal with 
these issues.  A second critical component of the GOA,s 
efforts would be directed at coordinating the actions of the 
intelligence community on narcotics and terrorism 
investigations. 
 
6. (C) When Senator Dodd asked about reports that Colombians 
were increasingly involved in narcotics trafficking in 
Argentina, Fernandez, at first, expressed skepticism.  When 
told by an Embassy DEA representative attending the meeting 
that Colombians were behind a number of major narcotics cases 
currently being investigated by both Argentine and U.S. 
authorities, Fernandez agreed that "Yes, it,s possible." 
The Minister then said he was more concerned with the 
corrupting power of the money that goes along with 
trafficking than with who was actually running the drugs.  He 
said drug seizures alone did not really capture the depth of 
the problem in Argentina.  Fernandez, referring to two recent 
local drug lab seizures, added that drugs are not just 
reaching Buenos Aires, they are being processed here.  In a 
somewhat somber conclusion to the meeting, Fernandez opined 
that "we can,t win (the fight against drug traffickers); 
what I don,t want is to lose badly." 
 
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Taiana: GOA Will Continue to Work Regional Issues 
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7. (C) Deputy Foreign Minister Taiana underscored to CODEL 
the GOA,s intention of remaining actively involved in 
promoting human rights and democratic institutions in the 
hemisphere.  Asked by Senator Chafee about relations with 
Venezuela, Taiana said the GOA had attempted to fashion a 
"moderating role" designed to reduce tensions within 
Venezuela.  He noted that Kirchner had met with opposition 
leaders and factions during both of his visits to Venezuela. 
Taiana said he had discussed with Assistant Secretary Roger 
Noriega the question of human rights in Venezuela and how the 
GOA and the U.S. might work together in this area.  Taiana 
mentioned in particular his concern about legislation either 
enacted or being considered by the Venezuelan legislature 
impacting on human rights.  Senator Nelson commented that 
President Chavez claims he wants a new relationship with the 
U.S.; but what he really wants is the public relations 
benefits of better relations while continuing to crack down 
on the press, property rights and packing the Supreme Court. 
 
8. (C) On other regional issues, Taiana told the CODEL that 
the GOA was firm in its commitment to Haiti.  "We can,t turn 
our backs or look at the cost.  We can,t fail."  He said it 
was important that Latin America make a significant 
contribution and work to improve basic security and to build 
democratic institutions in Haiti.  Taiana said that friendly 
and cooperative relations with Brazil and Chile were now 
Argentina,s highest priority and that this change of culture 
from one of confrontation to one of cooperation with these 
two nations represented one of the greatest accomplishments 
of Argentina,s 22 years of democracy.  In his concluding 
remarks, Taiana reiterated the GOA,s commitment for a 
successful Summit of the Americas which Argentina will host 
this November.  He noted that the Summit would focus on the 
interrelated themes of creating jobs, fighting poverty and 
increasing democratic governance. 
 
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BCRA President Redrado Discusses Macroeconomic Issues 
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9. (SBU) Central Bank (BCRA) President Martin Redrado told 
the CODEL that Argentina,s economic history could be 
summarized by the phrase, "overspending and 
overindebtedness."  He then claimed that the world was now 
seeing for the first time in Argentina fiscal discipline, a 
realistic floating exchange rate, prudential monetary policy, 
and "productive integration with the rest of the world." 
Argentina had a consolidated fiscal surplus of 5.2 percent of 
GDP in 2004, including 4.3 percent of GDP in the central 
government plus almost another one percent in the provinces. 
Argentina,s floating exchange rate is important for the 
"productive integration" of the Argentine economy with the 
rest of the world.  The BCRA held inflation to 6.1 percent in 
2004, below the originally targeted range of 7-11 percent. 
Redrado also recognized that the country still needed to 
"address public utility and energy prices and adapt to a new 
regulatory framework" or there "won,t be any investment" and 
to obtain a successful debt restructuring with "a strong 
response from the creditors." 
 
10. (C) Senator Dodd asked Redrado to what extent he thought 
there was tolerance in the body politic for badly needed 
structural reforms.  On the debt restructuring, Redrado 
emphasized that this was not in his area of responsibility, 
but speaking as a private economist he thought that the 
strong participation of domestic pension funds, banks and 
industry would produce a participation rate of at least 45-50 
percent.  After that, he thought it was a question of how 
much manpower the participating banks had to persuade the 
foreign bondholders to participate in the restructuring. 
Powerful investors like Soros have the option of going to the 
courts, unlike individual bondholders, and will win, but even 
then, they will not be able to collect because, unlike 
Venezuela, Argentina does not have assets abroad.  From what 
he saw in the foreign exchange market, he thought investors 
wanted to go to emerging markets to take advantage of the 
difference in yields, and this increased the likelihood of a 
successful debt exchange.  More specifically, he said that 
the spread between the yields on emerging market bonds and 
U.S. Treasuries was now only 350 basis points, or 3.5 
percent, which was the narrowest spread that there had been 
in 10 years. 
 
11. (C) On tax reforms, Redrado said that President Kirchner 
was fiscally conservative, to the point of blocking some 
changes.  Redrado wanted to eliminate the distortionary 
financial transactions tax, which encourages people to 
operate in the informal economy.  However, whenever he tried 
to eliminate the tax, President Kirchner would ask, "With 
what are you going to replace it?"  On revenue sharing, 
Redrado said Argentina has a federal government with central 
tax collection and subsequent distribution of revenues to the 
provinces, which prevents the development of fiscal 
responsibility in the provinces.  "There is a move toward 
decentralization," he said, "but this is hard to do 
politically."  There is also a feeling that it is not worth 
the effort, so progress will be limited to reforms such as 
"the elimination of distortionary taxes in due time."  On the 
renegotiation of public utility and energy prices, Redrado 
said "the sooner, the better" but it is unlikely this will 
occur in an election year.  Price increases that do occur 
will be limited to private companies, and will not affect 
residential users.  Redrado explained that President Kirchner 
is "willing to go over the heads of the political structure" 
to appeal to the people and is therefore especially sensitive 
to the public's reaction to potential price increases. 
 
12. (C) On monetary policy, Redrado said that there was a 
great deal of stimulus at the beginning of the year coming 
from measures like increased payments to retirees, higher 
wage payments, and postponed tax payments.  The BCRA 
compensated by raising the BCRA interest rate from 2.5 to 
2.75 percent.  Redrado thought Minister of Economy Roberto 
Lavagna had implemented these measures in order to lower the 
consolidated fiscal surplus when he had to present the debt 
exchange to the country,s creditors.  Redrado said the BCRA 
wanted to tell the market that it would err on the side of 
conservatism, dealing with "inflation first, and the exchange 
rate second."  If there was a problem with the exchange rate, 
he said, the GOA could use its surplus to buy dollars as it 
had done in the past.  On relations with the IMF, Redrado 
said the IMF had "made a mistake" in not asking for a higher 
primary fiscal surplus in Argentina,s current IMF agreement. 
 Consequently, the GOA should commit to a higher surplus in 
the renegotiation of the current IMF agreement, but should 
"not tie our hands" as to how to use the surplus. 
 
13. (C) Redrado said that he was sensitive to the things that 
are of interest to the U.S.  He said that he was concerned 
about how the financial system could be used for money 
laundering to finance terrorism and that he had asked the 
Ambassador for technical assistance to tell the BCRA what it 
was doing right or wrong.  (Note: During January 10-15 a U.S. 
Treasury technical assistance team visited Argentina to 
assess Argentina's anti-money laundering capability and 
possibilities for USG technical assistance in this area.) 
Redrado expressed particular concern about the use of 
Argentina,s money exchange houses for money laundering, 
since he did not have enough inspectors to inspect either the 
money exchange houses or banks in the provinces.  Redrado 
added that he had just issued a BCRA resolution that 
permitted the BCRA to freeze financial accounts due to 
suspicious activity. 
 
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Lunch with Economic and Political Analysts 
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14. (C) In order to provide a different perspective on 
Argentine political and economic developments, the Ambassador 
hosted a luncheon for the CODEL with a number of prominent 
independent analysts.  The main topic of the discussion was 
Argentina,s ongoing debt rescheduling offer and the 
country,s expected renegotiation of its existing IMF 
agreement.  Daniel Artana, Director and Chief Economist of 
the Latin American Economic Research Foundation, was cautious 
about the potential outcome of the debt rescheduling, noting 
that even if all of the creditors accepted the offer, 
Argentina would still have a large debt burden, which he 
estimated at 80 percent of GDP.  On the positive side, he 
noted the GOA had delivered much better fiscal results than 
in the past and would not have to go to the debt market for 
the next few years.  Artana also thought that Argentina could 
obtain a new IMF agreement in the second quarter of 2005. 
 
15. (C) Senator Dodd asked how the U.S. role during 
Argentina,s recent economic crisis had been perceived.  The 
lunch participants agreed that the U.S. role had been and 
continues to be very positive.  Javier Finkman, Chief of 
Economic and Risk Research for HSBC Bank Corporation, 
described the U.S. as "a friendly voice for Argentina" and 
praised U.S. support in the G7 and the IMF.  Political 
analyst Jorge Castro, president of the Argentine Institute of 
Strategic Planning, said that the USG had been the GOA,s 
"main supporter" during the last 18 months.  Senator Dodd 
said he was pleased to hear that the U.S. role had been 
constructive, since prior to his visit he had been convinced 
that this had not been the case. 
 
16. (C) Another topic of discussion was the contrast between 
the faster than expected economic recovery and the 
persistently high level of individuals still living below the 
poverty line.  Economist Artana noted that the economy would 
soon be back to where it was during its previous peak in 
1998.  Nevertheless, poverty and structural unemployment had 
doubled during the same seven-year period.  In addition, two 
out of four of those employed work in the informal sector, 
and a third works for the public sector.  Political and 
military analyst Vicente Massot observed that Argentina is a 
"very peculiar country" where social problems increase at a 
time when social conflict goes to zero.  He argued that the 
lack of social conflict was due to the weakness of civil 
society and the political system's successful co-optation of 
the unions.  Economic consultant Esteban Fernandez described 
President Kirchner as a "neo-populist economic conservative," 
who takes a populist approach to politics while maintaining 
conservative fiscal and monetary policies.  Senator Dodd 
responded that despite the problems, the overall lunch 
conversation had been much more positive than the 
conversations that he had had a year ago. 
 
17. (C) Comment:  All of the CODEL,s interlocutors, up to 
and including the President, spoke highly of the GOA,s 
cooperative relationship with the U.S. and President Bush's 
strong support for Argentina.  At the conclusion of the 
luncheon, Senator Dodd acknowledged that he had come to 
Argentina believing that the Administration had not been 
helpful but recognized that the Bush Administration had been 
engaged in suppporting Argentina.  End Comment. 
 
18. (U) CODEL Dodd did not review/clear on this cable. 
 
19. To see more Embassy Buenos Aires reporting, visit our 
classified website at 
http://www.state.sgov.gov/p/wha/buenosaires 
GUTIERREZ