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DE RUEHBU #0827/01 1961828
ZNY SSSSS ZZH
R 151828Z JUL 09
FM AMEMBASSY BUENOS AIRES
TO RUEHC/SECSTATE WASHDC 4069
INFO RUEHWH/WESTERN HEMISPHERIC AFFAIRS DIPL POSTS
RHEHAAA/NATIONAL SECURITY COUNCIL WASHINGTON DC
RUEATRS/DEPT OF TREASURY WASHINGTON DC

S E C R E T SECTION 01 OF 05 BUENOS AIRES 000827

SIPDIS

E.O. 12958: DECL: 07/15/2029
TAGS: PGOV PREL ECON AR
SUBJECT: NOW WHAT? THE KIRCHNERS' OPTIONS IN POST-ELECTION
ARGENTINA

Classified By: Charge d' Affaires Tom Kelly for reasons 1.4 (B) and (D)
.

¶1. (C) Summary/Introduction. More than two weeks have
passed since Argentina's ruling first couple lost badly in
mid-term congressional elections. It has taken President
Cristina Fernandez de Kirchner (CFK) and her husband Nestor
time to process the meaning of the debacle and respond.
Though the GOA has taken some significant steps over the past
two weeks, including a Cabinet shuffle, the signals that the
Kirchners and their associates have sent have been decidedly
mixed. It may be another month before their new strategy is
fully discernible.

¶2. (S/NF) In the past two weeks, Mission personnel have
talked to dozens of political analysts, economists,
businesspersons, and politicians about the Kirchners' likely
course. Most analyses posit three possible scenarios:
radicalization, reform, or the status quo. While there are
serious, smart people who believe that the government will
lurch simply left or right over the coming months, we, and
most of our contacts, believe that the government will behave
in the future much as it has in the past. We think a tepid
move toward reform is more likely than radicalization because
the country's ascendant forces support the former, not the
latter. At the same time, we doubt that Kirchner-led reform
will be ambitious. The best that can be expected from this
weakened government is a "reform-lite" agenda that seeks to
recapture political space without significant policy
concessions. This cable examines the three scenarios in
depth; identifies evidence in support of each one, as well as
indicators to watch for that might clarify the Kirchners'
future intentions; and evaluates the scenarios' likelihood.
A separate message will critically examine another possible
political outcome - that CFK will fail to reach the end of
her term. End Summary/Introduction.

---------------------------
The Radicalization Scenario
---------------------------

¶3. (C) In the first (and least likely) scenario, the
Kirchners react by turning hard left, attempting to reverse
their fortunes through a radicalization of their regime that
would propel them unambiguously into the Bolivarian camp led
by Hugo Chavez. This approach is referred to locally as
"deepening the model." Key elements of this approach would
include:

-- Economy: Further nationalization of private companies
and/or intensified attempts to manage their behavior; a
partial default on sovereign debt instruments; and a
confirmation of Internal Commerce Secretary Guillermo Moreno
as the executor of NK's dirigiste economic policy; increased
influence by labor unions.

-- Governance: Abandonment of the Peronist party in favor of
"transversality," in which the Kirchners consort with any and
all who offer their fealty; use of the government budget and
other means to punish Peronist governors and other
politicians deemed disloyal; pursuit of restrictive media
legislation; increased resort to executive decrees.

-- Foreign Policy: Closer identification with Hugo Chavez
and his Bolivarian allies; increasing criticism of USG
policies.

-------------------------------
Evidence of a Shift to the Left
-------------------------------

¶4. (C) There is a significant group of observers (including
political analyst Rosendo Fraga and Deutsche Bank Managing
Director Marcelo Blanco) who subscribe to this school of
thought. They do not lack evidence. Erstwhile Kirchner
allies in the private sector, including Bank Association
chief Jorge Brito and Argentine Industrialist Association
head Hector Mendez, tell us that they are disgruntled with
the Kirchners and lack influence on them. Their loss seems
to be union boss Hugo Moyano's gain. He flexed his muscles
last week, compelling the GOA to withdraw a subcabinet
nomination in the Health Ministry that threatened his unions'
financial interests and installing the son of his attorney as
head of Aerolineas Argentinas (septel).

¶5. (C) On the political front, Nestor Kirchner resigned his
position as head of the Peronist Party the day after the June
28 election. Since then, rumors have proliferated of a new
"transversal" approach that elevates Kirchner loyalists and
hard-line ideologues like "piquetero" street activists and

BUENOS AIR 00000827 002 OF 005


the "Carta Abierta" intellectual group. Kirchner showed up
last week at an open-air meeting of "Carta Abierta," his
first public appearance since his June 29 resignation as
Peronist-in-chief. Last week's cabinet shuffle only
strengthened the hands of the loyalists, with no new blood
and the replacement of the reform-oriented Sergio Massa with
Kirchnerista Anibal Fernandez as Cabinet Chief.

¶6. (C) Some of the GOA's post-election foreign policy moves
can also be read to support the radicalization thesis. The
most obvious was CFK's spur-of-the-moment trip to Central
America (via the OAS in Washington) in a hastily conceived
effort to restore Manual Zelaya to power in Honduras. Only
Ecuador's Rafael Correa and Paraguay's Fernando Lugo
accompanied CFK and OAS Secretary General Insulza on the
ill-fated Mission. Wittingly or not, she seemed to side with
hasty Bolivarian efforts to force the issue in Honduras
rather than to wait for mediation to take its course. A more
careful leader, Uruguay's Tabare Vazquez, let it be known
that he declined CFK's invitation to join her aboard Tango
One.

¶7. (C) There was one other foreign policy-related event that
may suggest a leftward turn. Kirchner congressional ally
Patricia Vaca Narvaja recently wrote a letter to U.S. Speaker
of the House Nancy Pelosi asking for the USG to declassify
all information at its disposal regarding the Argentine
military dictatorship. The Kirchner government has often
seemed obsessed with refighting the "Dirty War" of the 1970s
and early 80s, and the request could be construed as a
prelude to another rhetorical offensive against the USG for
its "support" of military regimes in the region.
(Alternatively, it could be a routine request consistent with
the government's longstanding interest in settling Dirty
War-related human rights cases.)

--------------------------------
The Verdict: "Red Dawn" Unlikely
--------------------------------

¶8. (C) Despite all of the above, we view the radicalization
scenario as the least likely of the three paths that the
government will take, with a probability of less than five
percent. Even if the Kirchners prefer this approach in their
heart of hearts, circumstances in the wake of the election
give them virtually no margin to implement it. Immediately
after the election, many of the most powerful forces within
the governing coalition began clamoring for more moderate
policies, a more inclusive approach to governance, and
(especially) a larger share of government finances. These
Peronist governors and mayors fared far better than Nestor
did, and they are in no mood to take orders from the
Kirchners. As a source close to Buenos Aires Governor Daniel
Scioli told the CDA, "There are no captive politicians after
these elections." The private sector is similarly
emboldened. As Industrialist Association (UIA) chief Hector
Mendez told us that "deepening the model won't happen. We
just won't allow it." Finally, the anti-Kirchner opposition
is clearly ascendant. These groups will fight GOA efforts to
march Argentina further to the left. Given the current
political climate, they should have the votes to hold the
Kirchners at bay even before the new Congress is seated in
December.

¶9. (C) Nor do we believe that Argentina's foreign policy is
becoming more Bolivarian. The GOA has become much less eager
to criticize the USG directly since Barack Obama became
President. CFK wears her affection for our
Commander-in-Chief on her sleeve. In addition, as mentioned
in the next section (para 16), there is new evidence of
concrete GOA efforts to support U.S. foreign policy
objectives in multilateral fora, at least behind the scenes.

¶10. (C) There is another external factor that makes
Argentina's embrace of Bolivarian politics unlikely -- the
growing influence of Brazil here. The local IDB rep,
Brazilian Daniel Oliveira, told econoff recently that
"Argentina has become as important to Brazil as Mexico is to
the United States." With a US$31 billion trade relationship
and more than US$10 billion in Brazilian investment flowing
into the Argentina economy since 1997, Brazil is strongly
engaged here, and is not shy about defending its interests.
The local press has reported that Lula worked the phones in
July 2008 to prevent the Kirchners from abandoning power in
the wake of their failed attempt to push a tax increase on
agricultural exports through Congress. Lula and his
associates will remain an important moderating influence on
the Kirchners.

¶11. (S/NF) Although we think this scenario's likelihood is

BUENOS AIR 00000827 003 OF 005


limited, it bears mention that it is also the most likely to
lead to political crisis, confrontation, escalating violence,
and CFK's failure to reach the end of her term. We explore
how such a downward spiral might play out, and the likelihood
of this calamitous scenario, in a separate report.

-------------------------------------------
Scenario Two: The Kirchners Embrace Reform
-------------------------------------------

¶12. (C) Some observers expect (and many more hope) that the
Kirchners will reinvent themselves, pursuing a reform-minded
agenda that mollifies Peronist governors, defangs the
opposition, and wins over new foreign friends. A larger
group believes that a rebellious Peronist establishment will
put them on that course, whether they like it or not. Key
policy features of such an approach would include:

-- Economy: Interventionist-in-Chief Guillermo Moreno is
dismissed, clearing the way for a normalization of the state
statistical institute INDEC (and thus a return to
methodological integrity in the national accounts); GOA makes
deals with the Paris Club and private bondholders left out of
the 2005 debt swap deal and normalizes its relationship with
the IMF, starting with an Article IV Consultation; progress
on outstanding ICSID judgments against Argentina.

-- Governance: CFK rules more inclusively, coordinating
policies with governors and looking for common ground with
the opposition in the current and next Congress. Government
rolls back agricultural export taxes as a down-payment on its
new conciliatory approach. NK reduces his public profile.

-- Foreign Policy: Concrete steps benefiting the United
States and non-Bolivarian governments in the hemisphere,
coupled with distancing from Chavez and his allies.

¶13. (C) Proponents of this scenario's likelihood have plenty
of recent evidence to back them up. There is clearly ferment
in the government's approach to economic policy, with a new
Economy Minister on board, powerful (and heretofore
pro-Venezuelan) Planning Minister Julio De Vido now reputed
to be an advocate of pragmatic moderation, and prestigious,
market-oriented advisors (specifically, former Central Banker
and IMF official Mario Blejer) said to be poised to join the
government. The government sacked its statist, corrupt
Transportation Secretary Ricardo Jaime days after the
election, and rumors abound that Moreno, the icon of "market
repression" economics, has become such a political liability
that his days in the government are numbered. Well-placed
sources within the government confirm that change is in the
air. Top Kirchner aide Carlos Zannini indicated that the GOA
would focus almost exclusively on changes on the economic
policy front this month, and influential Buenos Aires
Province Vice-Governor Alberto Balestrini told the CDA last
week that the GOA would roll back agricultural export taxes
on wheat and corn soon.

¶14. (C) Nor is there any doubt that the political center of
gravity has shifted dramatically in Argentina since the
election. Most of the country's 16 Peronist governors have
reportedly expressed their desire for market-oriented
changes, at least privately. Some former allies, like
ambitious Chubut Governor Mario Das Neves, have broken ranks
with the Kirchners and openly criticize them. Even loyalist
governors like Chaco's Jorge Capitanich have publicly called
for straightening out INDEC and other changes. Faced with
this onslaught from ostensible allies, CFK announced on July
9 (as she has before) that she would convoke the country's
main political and private sector leaders to a process of
dialogue. The following week, she modified the proposed
process to accommodate opposition demands.

¶15. (C) The GOA's political position is further weakened by
the prospect that it will suffer defections from its ranks in
the current Congress. Of course, the next Congress that
takes office December 10 will be more independent, with the
government losing majorities in both chambers. This will
make it easier for reform-minded groups to push the Kirchners
into accepting elements of their agendas. As Balestrini told
us, the GOA will need to renegotiate and compromise in order
to rule.

¶16. (C) The GOA has taken a few subtle foreign policy moves
that could be construed as harbingers of a closer
relationship with the United States. After he received a
call on the issue from Secretary Clinton, FM Jorge Taiana
convinced CFK to change the voting instructions of the
Argentine delegation to the International Atomic Energy
Agency, which enabled U.S.-supported candidate Yukiya Amano

BUENOS AIR 00000827 004 OF 005


to win election after a month-long impasse. In a more
prosaic but perhaps symbolically important development, the
CDA received a warm note from CFK expressing regret for her
failure to attend the Mission's Independence Day celebration
and offering best wishes. We had never before received such
a note from either Kirchner.

-------------------------------------
The Verdict: Don't Bet On A New Leaf
-------------------------------------

¶17. (C) While the reform scenario has gained credence over
the past week, driven primarily by economic policy news and
rumors, we remain skeptical that Nestor and Cristina will
turn into a latter-day incarnation of Ozzie and Harriet,
dispensing moderation and good sense wherever they turn.
Neither Kirchner seems inclined to admit error, even tacitly,
by shifting course so abruptly. A senior official at the
Central Bank told us that Nestor will resist reformist
policies because they would be interpreted as a sign of his
weakness and even irrelevance. If changes come, he argues,
they will come at a time of his choosing. A reformist path
may also strike the Kirchners as politically risky,
distancing them from their most fervent supporters in the
working class, poor "villas," and intelligentsia in deference
to sectors that are at best disloyal and at worst openly
hostile to them.

¶18. (C) The "forced reform" variant of this scenario seems
somewhat more likely, but not by much. For it to work, one
of two things must happen. Either the Peronist governors
will need to set aside their rivalries and effectively
advocate for a more robust approach to reform than seems
likely, or the bickering, often inept opposition will need to
get its act together and engage the Kirchners as a united
front. Much depends, for example, on whether dissident
Peronists coalesce behind Senator Carlos Reutemann, who has
emerged as a frontrunner for the Peronist presidential
nomination in 2011, and whether Vice President Julio Cobos
can gain some traction in pulling together support from the
Radicals, Civic Coalition, and Socialists. If either of
these two groups works cooperatively over the coming two
months, it is possible that positive changes can come to
Argentina before CFK leaves office in 2011. We don't think
that will happen, however, and estimate the two reform
scenarios' combined probability at no more than twenty
percent.

---------------------------------
Scenario Three: Muddling Through
---------------------------------

¶19. (C) In the third scenario, the Kirchners do not
definitively opt for reform or radicalization. Maintaining
the short-term focus that has characterized their six years
in power, they muddle through as best they can, trying to
salvage their political futures or at least to reach the end
of CFK's term in 2011. There may be some positive changes in
this scenario -- one analyst dubs it "reform-lite" -- but the
electoral setback does not ultimately result in a dramatic
course correction. In the words of economist Nicolas
Dujovne, the Kirchners will pursue a strategy of "minimum
reforms, but without collapse." Under this scenario, the
following might happen:

-- Economy: Lots of policy zigzagging without a clear
direction; Moreno stays, or leaves and is replaced with
another hard-liner; new, "reform-minded" Economy Minister
Boudou changes little, like the Cabinet's previous reformist
also-rans Martin Lousteau and Sergio Massa.

-- Governance: Cooption of some Peronist governors and
mayors, punishment of others considered to be disloyal.
Stalemate on legislation in Congress. Top-down dialogue
process initiated without intention to compromise.

-- Foreign Policy: Some private gestures to the USG, but
little movement towards resolution of long-term sources of
friction; no palpable distancing from Chavez's camp or
modification of the GOA's "independent" foreign policy.

--------------------------------------------- ---------
For Evidence That Nothing Has Changed, Buy a Newspaper
--------------------------------------------- ---------

¶20. (C) This status-quo scenario is the clear frontrunner
among our contacts. There is fresh evidence to support it in
every day's harvest of newspapers. The two dominant news
stories since the election, CFK's botched trip to Honduras
and the GOA's response to the H1N1 epidemic here, both

BUENOS AIR 00000827 005 OF 005


suggest that the government's improvisational style and
closed decision-making process remain intact. This in turn
will mean that GOA policies are more likely to develop in
response to the first couple's whims than to a coherent
design. It also means that the government bureaucracy is
unlikely to save the Kirchners from the consequences of their
impulses. For example, CFK went ahead with her ill-advised
trip to Washington and Central America earlier this month
against the advice of her Foreign Ministry. She ended up
achieving no more than Nestor did in December 2007 when he
participated in the Chavez-organized "bungle in the jungle"
in Colombia, in which Nestor and others sat helplessly in the
jungle for days in the futile hope that the FARC would
deliver hostages to them.

¶21. (C) The opacity of decision-making at the GOA's apex
means that the government will continue to meander hither and
yon, regardless of whether or not it has definitively chosen
a particular direction. The GOA's performance in dealing
with H1N1 flu is a case in point. Although many public
health officials in the GOA are working around the clock to
contain the challenging problem, the government's lack of
internal communication made it look hapless. For example,
upon alighting on Argentine territory after her Central
American jaunt, CFK denounced "fear-mongering" media reports
of 100,000 flu cases in Argentina -- information that had
come from her own health ministry. (The 100,000 number
referred to all flu cases, not just H1N1 flu.) The poor
coordination continues. Over the past weekend, the Mission
found itself in the middle of an unsightly (non-public)
dispute between the federal Ministry of Health and its
counterpart in the Province of Buenos Aires (governed by
Kirchner ally Daniel Scioli) over the destination of
CDC-donated Tamiflu doses, with each accusing the other of
bad faith and subterfuge.

--------------------------------------------- ------
The Verdict: More of the Same, But Good Can Happen
--------------------------------------------- ------

¶22. (C) Like most of our contacts, we think that this untidy
scenario is the most likely outcome. We don't expect the
Kirchners to change, but given the magnitude of their defeat
in the mid-terms, we don't expect the Peronist establishment
or the opposition to back down, either. The Kirchners may
even be able to prevail if their rivals and opponents fail to
unite. Prolonged stalemate on most of the "big" policy
issues seems the most likely outcome of a collision between a
closed, reform-adverse, and politically weakened regime and
disparate political groups that believe that they have a
mandate for reform.

¶23. (C) This does not mean, however, that no positive change
in this scenario is possible. The Kirchners could take steps
for ulterior motives that turn out to have beneficial
consequences. This has already happened in the post mid-term
era, when Transportation Secretary Ricardo Jaime departed
office soon after the election. One of our contacts
characterized the Kirchners' willingness to cut the
notoriously corrupt official loose as the beginning of a
purge designed to distance them from the shadiest elements of
their regime in an effort to reduce the likelihood that they
themselves could end up in prison. Whatever the reason,
Jaime's removal could lead to policy improvements in the
transportation sector.

¶24. (C) Nor does it mean that the USG should ignore the
Kirchner regime or give up on it as hopeless. CFK may not
have a grand scheme in mind for her remaining two years in
power, but she clearly would like to associate herself with
President Obama's star power. The intensity of this desire
opens all kinds of opportunities for us, as it did in
Argentina's decisive IAEA vote. As the Kirchners struggle
for political relevance or at least survival, they will be
looking for success stories -- and we should be on guard for
opportunities to induce them to do the right thing. Even if
the Kirchner government is unlikely to resolve every single
outstanding bilateral issue to our satisfaction, we think
that cultivation of the GOA -- CFK in particular -- can lead
to beneficial outcomes for U.S. interests bilaterally,
regionally, and multilaterally.

KELLY