Cablegate: U.S. Company Metlife Discusses Options in the Face Of

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UNCLAS SECTION 01 OF 03 BUENOS AIRES 001458

SENSITIVE
SIPDIS

Treasury for Luyen Tran, Gary Sampliner

Ref: BUENOS AIRES 1442

E.O. 12958: N/A
TAGS: EFIN ECON PREL PGOV AR
SUBJECT: U.S. Company MetLife Discusses Options in the Face of
Argentina's Plan to Nationalize Private Pension Funds

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Summary
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1. (SBU) Met Life, the only U.S.-operated private pension fund
operating in Argentina, does not see any way to block the Argentine
government's plan to nationalize all private pension assets
(reftels). The only possible obstacles are major social unrest or
Congressional rejection of the GoA's proposed law. MetLife
executives do not expect either scenario to occur. They say they
have yet to speak to GoA officials since the October 21
announcement, so are still uncertain about the details of the
initiative. While they welcome USG efforts to urge the GoA to
reconsider the action on the basis that it will undermine already
illiquid local capital markets and the broader economy, they ask
that the U.S. hold off raising Met-specific concerns until they have
better information. MetLife execs assert that both the private
pension funds and contributors will consider lawsuits to challenge
the constitutionality of the law, once Congress passes it. However,
they consider it too early to consider whether the GoA's action can
be considered an expropriation and eligible for ICSID arbitration
under the BIT. MetLife's preference is to get reasonable
compensation from the GoA and exit the sector. End Summary.

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Background on MetLife operations in Argentina
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2. (SBU) EconOff met October 22 with Metropolitan Life Insurance
Company (MetLife) executives Oscar Schmidt, Senior VP and Latin
America Region Head, and Luis Lategana, Argentina and Uruguay
Country Manager, to get their views on the GoA's October 21
announcement to nationalize all private pension funds (AFJPs)
operating in Argentina (see reftels for background on the
announcement). MetLife is the only U.S.-majority-owned AFJP in
Argentina, although New York Life Insurance Company owns a stake in
the AFJP "Maxima," majority owned and managed by HSBC. (Comment:
Schmidt requested that USG officials highlight in any conversations
with GoA officials that both Met and New York Life have interests in
Argentina, to avoid giving the impression that just Met is
complaining to the USG.)

3. (U) MetLife is among the top three largest AFJPs. As of April
2008, MetLife ranked third out of Argentina's eleven AFJPs in terms
of the number of contributors, with roughly 600,000 individuals (or
15% of the system). Met ranks second in terms of inflows received
(approximately $50 million/month - or 17% of total inflows to the
private funds in April) and third in terms of total assets ($113
million or almost 17% of the total assets in the system as of
February 2008). It ranks second in terms of net worth ($83 million
- 17% of the system's net worth). (MetLife is also the 14th largest
insurance company operating in Argentina, as of December 2007.)

--------------------------------------------- --
Too Late to Stop It, but Still Time to Amend It
--------------------------------------------- -

4. (SBU) Schmidt speculated that it is too late for the GoA to pull
this initiative back, and offered only two scenarios that can
possibly halt or change its course: a significant social outcry
and/or major opposition in Congress. He does not expect either, but
comments that after the difficulties the GoA had with Congress and
the Argentine public during the agricultural crisis, anything is
possible.

5. (SBU) Schmidt pointed out that the public largely distrusts the
private pension system, which he called poorly conceived and
expensive (in terms of administrative fees assessed compared to
other privatized systems in Chile), and which does not address
systemic pension problems. (Comment: this opinion is widely held in
Argentina, even among the most strident opponents of the GoA's
nationalization plan.) As for social outcry, there are reports of
efforts to organize popular protests (including the emblematic
Argentine "cacerolazo" or pot-banging protest, scheduled for Friday
evening, October 24). However, Schmidt felt that many contributors
are resigned to losing the money. (Comment: a common response from
AFJP participants is that they always saw their contributions as a
tax, and never trusted that they would get the money back.)

6. (SBU) Given public attitudes and the GoA's majority in Congress,

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Schmidt expects Congress to pass the GoA's proposed law easily.
However, he did hold out some hope that the opposition may insist on
modifications of the draft law, including better control of funds
and limits on lending to GoA by the Social Security Agency (ANSES).

7. (SBU) Schmidt argued that it is not a coincidence that the GoA
has presented this idea while Cabinet Chief Sergio Massa and ANSES
head Amado Boudou are in key positions and close to the President,
as they are two of the most knowledgeable people in the country
about the various Argentine pension systems. Therefore, Schmidt
emphasizes that this is not an issue of lack of understanding of the
system on the part of the GoA, as has been the case with previous,
poorly thought out GoA proposals this year (e.g., increasing export
taxes in March and announcing Paris Club payment in September.) On
the contrary, he asserted that Massa and Boudou know exactly what
they are doing, and have pursued a brilliant communications
strategy, using as justification for their move the opposition's
harsh criticism in the past of the private pension system. The way
they have sold it, Schmidt argues, will make it difficult for the
opposition to oppose the draft law during upcoming Congressional
debates.

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Met asks USG to limit intervention
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8. (SBU) Schmidt asked that the USG not advocate directly on
MetLife's behalf at this time, but acknowledged that Met's
government relations office had passed broad talking points to the
Treasury Department, to be used with Argentina's Ambassador to the
U.S. Hector Timmerman or other GoA officials. The gist of these
points is to highlight to the GoA that this initiative is
potentially devastating for the country's economy. They warn that
AFJPs are the main source of investment for Argentine equities,
corporate debt, and government bonds, so removing them will have
seriously adverse consequences on domestic capital markets. They
also warn that the GoA will further lose credibility with
international capital markets and foreign investors, and that the
GoA should expect litigation, since this action may be seen as an
expropriation of private assets.

9. (SBU) Schmidt acknowledged that the points may not have much
impact with the USG's first-tier interlocutors: Ambassador Timerman,
since he is likely a strong supporter of the initiative, or Cabinet
Chief Sergio Massa, since he was one of its main authors. He said
that the AFJPs have had an open and fluid relationship with Sergio
Massa until recently, but no senior GoA officials have been in
contact with any of the AFJPs since last weekend. They hope for a
meeting soon with the GoA to discuss details of the GoA initiative
and possible options for compensation.

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AFJPs divided on how/whether to fight back
------------------------------------------

10. (SBU) The AFJPs have been holding constant meetings since the
day of the announcement, but there is much uncertainty and they have
not reached an industry-wide agreement on how or if to fight back.
Post understands from other contacts in the sector that there is a
divisive debate among high-ranking AFJP executives, with some
arguing for a confrontational approach: to "expose GoA lies,"
explain the benefits of the private system, highlight the major
weaknesses of the public "pay-as-you-go" system, and also forcefully
argue that the GoA action is tantamount to expropriation. However,
the majority of AFJP executives are apparently resigned to the end
of the "AFJP era," are tired of constant GoA interference in the
sector and pressure to buy GoA debt instruments, and believe they
would never see the other end of a court case. These executives are
reportedly interested in completing the nationalization quickly and
keeping a low profile to avoid GoA retaliation.

11. (SBU) Schmidt noted an additional aspect that many in the sector
are considering. They are facing a Catch 22: if Congress approves
the nationalization law, the AFJPs' value goes to zero. However, if
Congress rejects the nationalization law, many in the industry
believe the possible consequences are higher risk of default in
2009, a sharp devaluation, and higher chances that the GoA loses the
2009 elections, and, weakened, is unable to govern the country
during a time of difficult global economic dynamics. Schmidt
commented that the second scenario is equally bad for AFJPs, so sees

BUENOS AIR 00001458 003 OF 003

this as a no-win situation for Met and the other AFJPs.

12. (SBU) For now, Met's Schmidt sees two fronts of action. First,
after Congress approves the law, many contributors will sue the GoA,
challenging the constitutionality of the nationalization, and likely
all AFJPs will also begin lawsuits as part of their fiduciary
responsibility (and to avoid being the target of lawsuits from their
own contributors). Second, the four foreign-owned AFJPs (Spanish
BBVA/Banco Frances's "Consolidar," British HSBC's "Maxima," Dutch
ING's "Origenes," and Met -- all four countries have active BITs)
may have to consider whether the GoA's action qualifies as an
expropriation, and eligible for arbitration under their home
countries' Bilateral Investment Treaties.

13. (SBU) Schmidt personally considers this an expropriation of
Met's business in Argentina. However, he has not yet discussed with
MetLife's lawyers opportunities for pursuing ICSID arbitration under
the BIT, and speculated that they are months away from the point of
having to consider either lawsuits or ICSID cases. He stated
frankly that Met would much prefer to reach a deal with the GoA for
reasonable compensation, so that Met can pay severances and close
the office. (The draft bill, which is only a few pages long,
includes a vague reference to compensation.)

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Comment
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14. (SBU) While MetLife representatives have asked the USG to stand
down as far as raising Met-specific concerns with GoA interlocutors,
they are not averse to Embassy or Washington agencies highlighting
to key GoA officials that there are U.S. company interests at play,
and reminding them of U.S.-Argentine BIT protections. At this time,
and until Met and or New York Life get a better handle on how the
nationalization plays out, Post does not plan to seek out GoA
officials to raise our concerns. However, we will take advantage of
normal contacts with the GoA to inquire about the details of this
proposal and highlight the U.S. interests involved.

WAYNE

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