1. (C) Summary. Honduran President Ricardo Maduro, nearing
the half-way point of his constitutionally mandated single
four-year term, faces numerous challenges in one of the
poorest and most corrupt countries in the Western Hemisphere.
His Administration has been stalled on its domestic agenda
since June of last year and has mustered little progress as
it tries to reconcile its ambitious goals to its
straitjacketed financial situation. Bilateral relations
between the U.S. and Honduras are excellent; Honduras was the
first country in the Western Hemisphere to sign and ratify an
ICC Article 98 Agreement with the United States. Honduras'
support for the international counterterrorism effort is
steadfast and the Government of Honduras (GOH) is sending
troops to Iraq in support of Operation Iraqi Freedom. The
United States and Honduras have maintained a long-standing
close relationship framed by such events as the establishment
of the banana plantations in the late 1800s, the Contra wars
of the 1980s, and reconstruction efforts in the wake of the
October 1998 fury of Hurricane Mitch. End Summary.



--------------------------


Key Issues in Bilateral Relationship


--------------------------





2. (C) The central themes in our bilateral diplomatic efforts
in Honduras are combating international crime by
strengthening governance and attacking corruption, assisting
American citizens, fostering economic development, promoting
regional stability, promoting trade and investment, and
combating terrorism. However, the underlying difficulty to
realizing USG objectives is improving the administration of
justice and rule of law. President Ricardo Maduro's
government is rhetorically committed on all of these issues,
but has made very little substantive headway in addressing
the myriad problems Honduras faces. While Maduro has also
spoken out strongly on tackling corruption, he faces
formidable challenges from entrenched economic and political
interests in moving his agenda forward.



3. (U) Your visit comes one week after the visit of the
Chairman of the Joint Chiefs of Staff, GEN Myers, to Honduras
on August 13. In his visit GEN Myers touched on many of the
political/military issues discussed in paragraphs 6-17. (See
septels for reporting on GEN Myers' visit.). Your visit is
also the first by a cabinet member since Secretary of the
Interior Norton came for President Maduro's inauguration
January 27, 2002, and will provide a significant boost to him
politically.



--------------------------


Status of the Maduro Government


--------------------------





4. (SBU) President Maduro is facing increasing criticism from
the political opposition over his government's policies and
continued dissatisfaction from his own party's Members of
Congress because of his Administration's technocratic style.
The Honduran Congress is a focal point of political
opposition to his policies. It is a corrupt institution
riddled with avaricious politicians, and Maduro's National
Party does not control a majority of the unicameral body.
Maduro recently lost his coalition partner, the Christian
Democrats, who had given Maduro a majority in Congress. The
ongoing problems within his own party are serious and
threaten his broader political agenda, which will require
legislation to advance. Continuing political negotiations
will be needed to manage this situation. Maduro's personal
life also intruded into the political sphere. His October
2002 wedding to a Spaniard was criticized by many Hondurans
who viewed the President as distracted by his personal life.
A recent public squabble has not helped the situation.



5. (SBU) The President's standing has remained stalled at a
low point since June 2002. Faced with slow progress in his
efforts to promote regional economic integration, Maduro's
team is pinning its hopes that a U.S.-Central American Free
Trade Agreement (CAFTA) can serve as a catalyst to regional
economic cooperation. Maduro is also beginning to hear wider
disillusionment among the Honduran public as violent crime
levels are increasing once again despite his initial "zero
tolerance" law and order campaign. Notwithstanding his
crackdown on street crime, criminal investigations are
usually inadequate and case closure rates, in particular for
homicides, remain very low.



--------------------------


Counterterrorism Cooperation


--------------------------





6. (SBU) Maduro is a good and reliable friend of the U.S. on
counterterrorism. His government hosted a major U.S.
military counterterrorism exercise in March 2002 and has
quickly responded with freeze orders to all U.S. requests
regarding suspect terrorist bank accounts. No terrorist
assets have been found in Honduran financial institutions, to
date. The GOH still needs to take the following concrete
steps: designate a national coordinator for counterterrorism,
file its national report in accordance with United Nations
Security Council (UNSC) Resolution 1373, and most of all,
sign and/or ratify the five outstanding international
conventions/protocols and two OAS conventions (1971 and 2002)
against terrorism. It is also of vital importance for
Honduras to improve security at its maritime ports,
particularly Puerto Cortes.



--------------------------


Iraq


--------------------------





7. (C) The GOH is in general supportive of key USG foreign
policy goals and is a member of the Coalition of the Willing.
In support of Operation Iraqi Freedom, the GOH will deploy
some 370 troops to the vicinity of An Najaf as part of the
Spanish Brigade operating under the Polish Division. The
troops departed Honduras for Spain on August 10-13. After
approximately a week in Spain, they will deploy in
conjunction with the other Central American units from El
Salvador, Nicaragua, and the Dominican Republic through
Kuwait to Iraq. Status of Forces Agreement (SOFA)
negotiations are still ongoing between the GOH and the
Government of Kuwait (GOK). In the interim, The GOK has
given the GOH authority to transit Kuwait under the blanket
USG SOFA, however this is not an ideal solution.



--------------------------


Bilateral Political/Military Issues


--------------------------





8. (C) In January of 1999, the constitution was amended to
abolish the position of military commander in chief of the
Honduran Armed Forces (HOAF), thus codifying civilian
authority over the military. Honduras now has a civilian
Minister of Defense (MOD) and a Chief of the Joint Staff who
heads the HOAF. Civilian control is well accepted by the
HOAF, and the transition to civilian control has resulted in
greater transparency and fiscal accountability. The current
MOD, Fred Breve, enjoys a good relationship with the HOAF
military leadership, but the Office of the Minister of
Defense still lacks a staff that could provide institutional
memory and continuity between the change in political
administrations.



9. (C) Honduras was the first country in all the Western
Hemisphere to sign and ratify an Article 98 Agreement with
the USG. President Maduro, despite domestic political and
some regional opposition, has also consistently supported
overall USG foreign policy objectives, particularly U.S.
efforts to create a stable and peaceful Iraq. President
Maduro and his military advisors are very aware that
Nicaragua and El Salvador have received FMF funds and
question why Honduras, even though it has been a staunch
political and military supporter in the region, has not
received any funds for many years.



10. (SBU) In January 2002, Honduras formally requested 6
UH-1H helicopters through the EDA program. However, due to
changes in U.S. law, the cost of 6 EDA helos rose from about
USD 700,000 to USD 4.2 million - an amount the GOH was unable
to afford. The original Letter of Agreement expired some
three months ago. In early August, however, MOD Breve
renewed his request for UH-1H helicopters, and also asked if
there was way to get them either free (i.e. under section 516
as grant aid at no cost to the GOH), or at an extended
payment plan, i.e. 15 years. The AMB and country team
strongly support any assistance in this area as a principal
use for these helos is to support counternarcotics
operations. The current Honduran fleet of UH-1H helicopters
is in poor condition with a limited life expectancy.



--------------------------


Soto Cano Air Base - Joint Task Force Bravo


--------------------------





11. (SBU) Five hundred fifty-eight U.S. service men and women
and eight civilian DOD employees are stationed at Honduras'
Soto Cano Air Base under the auspices of SOUTHCOM as Joint
Task Force Bravo. In 1954, the USG and GOH signed a
Bilateral Military Assistance Agreement that set forth their
intention to work closely together to foster peace and
security in the Western Hemisphere. The ICC Article 98
Agreement with Honduras is therefore a particularly important
accomplishment and will enable our military forces to
continue to work together in such areas as disaster relief,
joint training exercises, and counternarcotics missions.



--------------------------


Cerro La Mole Radar


--------------------------





12. (C) In 1993, the U.S. entered into an agreement with the
GOH regarding the maintenance of the radar located at Cerro
La Mole, under which the U.S. military agreed to pay 75
percent of maintenance costs up to USD 400,000 per year. The
U.S. has paid nothing under the agreement, (OSD/CN has stated
that the USG cannot fund radars operated by foreign
nationals) and the issue affects relations between the U.S.
and Honduran militaries. The Embassy has sought guidance
from DOD and State on how to resolve U.S. obligations, and
recommended that the U.S. either replace the radar with a
solid state version (TPS-78) or with another TPS-70
transferred from counterdrug programs. When operational, the
radar provides a view of the Honduras-Nicaragua-El Salvador
border areas and the Gulf of Fonseca on the Pacific Ocean. A
functioning radar in this location could greatly enhance
Honduran capability to intercept and track illegal flights.
The MOD and CHOD have agreed to share all data from this
radar with the US and with its neighbors. Additionally, this
radar would be the first step in eliminating the 10 mile "no
fly" (without advance notice) corridor between the Honduran
and Nicaraguan border - currently a safe haven for illegal
flights. The AMB and country team strongly support current
efforts to have the radar in Venezuela (currently being
dismantled) be made available for EDA for Honduras in
December of this year.



--------------------------


F-5's for MANPADS?


--------------------------




13. (C) Honduras maintains a fleet of aging F-5's as part of
its overall defense structure, providing Honduras with the
most lethal air force in the region. Honduras has been under
some regional pressure to give up or reduce its fleet of
F-5's as a consolation to Nicaragua who is also being
encouraged to give up, or significantly reduce, its stock of
Man Portable Air Defense Systems (MANPADS). Honduras has
resisted these efforts, suggesting that its fleet of F-5's
should be de-coupled from any discussion of MANPADS, which
are a potential terrorist weapon. The issues were discussed,
but not linked, at an August 11 regional disarmament
conference hosted by Managua that focused on reducing small
arms and MANDPADS. Honduras is not opposed to discussing the
future of its F-5s in the context of regional disarmament,
but not if the F-5s are directly linked to the reduction of
Nicaraguan MANPADS.



--------------------------

---
Brooke Amendment - GOH Facing Possible Sanctions


--------------------------

---



14. (C) Honduras faces the possibility of mandated Brooke
Sanctions in September if three DOD loans totaling USD 1.73
million are not paid in full. This debt is over a year old
and once Brooke Sanctions are invoked, no new or pending USG
assistance is permitted to proceed, including programs
administered by USAID, DOD, and State. These sanctions do
not affect existing assistance efforts already obligated by
these agencies. The GOH is fully aware of the consequences
of falling under Brooke Sanctions but is not clear at all
how, or if, the GOH will be able to repay the loans before
the September 3 deadline. Also, another payment of USD
295,000 comes due on October 1, which if not paid will also
place Honduras under Brooke. The situation is further
complicated because under the Paris Club rules, the GOH is
not allowed to pay only one official creditor. Brooke has
never before been invoked against a Central American nation,
although Nicaragua came close. If Brooke Sanctions are
applied, any attempt to settle the issue of the radar at
Cerro la Mole or provide assistance in purchasing EDA
helicopters could not proceed.



--------------------------


Counternarcotics Issues


--------------------------





15. (C) Honduras' geography places it squarely in the middle
of a major illegal drug transshipment zone and the Embassy
estimates that between 80-100 tons of cocaine transit the
country annually on its way to the U.S. market. Honduras'
airspace is regularly violated by drug traffickers, who also
use go-fast boats to transit their cocaine through the
region. Heroin and marijuana are likewise transited through
Honduras on a lesser scale. Recently, the Embassy has
noticed a significant increase in drugs-for-guns bartering
between Colombian traffickers and local Honduran smugglers.



16. (C) Honduras has been under heightened USG pressure to
increase its effectiveness on narcotics interdiction after
disappointing results in 2001 and 2002. This effort appears
to have born fruit. The GOH has seized approximately 4,000
kilos of cocaine this year (more than the previous four years
combined). While seizure rates have expanded significantly
this year, endemic corruption in the Public Ministry and the
police continue to hamper long-term efforts to increase the
rule of law and reduce the amount of drugs transiting the
country.



17. (C) Under pressure from the USG to interdict more drugs,
in April the Honduran Air Force shot-down an intruding
Colombian aircraft carrying approximately 942 kilos of
cocaine, killing the plane's two Colombian crewmembers.
SOUTHCOM temporarily suspended sharing of air-track
information pending reconfirmation from the GOH that Honduras
has a "no shoot-down" policy. The Embassy has since received
such assurances and the GOH has stated that the incident was
an aberration. Honduras is fully aware that under U.S. law,
the USG is not allowed to share tactical air-track
information with countries that employ a shoot-down policy.
SOUTHCOM has since restored sharing air-track information
with the GOH.



--------------------------


Anticorruption


--------------------------





18. (C) U.S. policy against corruption struck a nerve in
Honduras, especially any mention of our visa revocation
authorities. Politicians in Congress and certain business
elements feel the U.S. is attacking them. Maduro appears
committed to addressing corruption, even if it will cost him
political support within his party. The Supreme Court
President is also on board. However, individual judges
remain susceptible to offers of bribes and the Attorney
General is unwilling to prosecute high-profile cases. Given
the scope of the problem, any public discussion about the
country's pervasive corruption is a positive development.



--------------------------


Supreme Court and Judicial Reform


--------------------------





19. (SBU) The Supreme Court is developing into an independent
branch of power, unlike all of its predecessor courts since
democracy was restored in 1982. It is pro-reform in
orientation and fighting for its prerogatives. A key
emerging issue is whether it can become a fully independent
and co-equal branch of political power, consistent with the
separation of powers provision in the Honduran Constitution.
The established political order is fighting that prospect
with all its might. In fact, the Congress seized the
political opportunity to introduce legislation that would
amend the constitution to give itself the power to interpret
the constitutionality of the laws it passes. The Supreme
Court ruled in May that the proposed amendment was
unconstitutional, which sparked a tense confrontation between
the Supreme Court and Congress. Congress, however, refrained
from any precipitous action and the issue has since receded.



--------------------------


Public Security/Human Rights


--------------------------





20. (SBU) Upon taking office on January 27, 2002, President
Maduro's first act was to fulfill his main campaign promise
-- a zero tolerance campaign against the country's
out-of-control crime situation. He deployed more than 5,000
soldiers to the streets to support the police. The public
responded enthusiastically. However, despite the initial
success of establishing a visible police presence, violent
crime, particularly homicides, continues at a high rate.
Public support is fading and the campaign needs some visible
victories to restore confidence in the government's program.
The USG is helping the Maduro government establish an
anti-kidnapping unit, increase intake/training of police
recruits, create a model tourist police force, boost its
counternarcotics efforts, and expand the frontier police.
The country's geographic position makes it an obvious
strategic transit point for narcotics trafficking, alien
smuggling operations and other organized crime activities.



21. (SBU) Extrajudicial killings, especially of
children/young adults since 1998, have been a source of
serious concern and only recently has the GOH begun to take
steps to investigate the hundreds of unsolved cases. There
are serious problems with child labor in several industries,
particularly melon, coffee, and sugar cane (but not the
maquila) sectors, and trafficking in persons of
women/children for prostitution in the U.S. and children for
commercial sexual exploitation in Central America. USAID and
Peace Corps have both been involved in HIV/AIDS prevention.



--------------------------


Consular Issues


--------------------------





22. (SBU) At least 600,000 Hondurans, both legal and illegal,
live in the U.S., a fact that places immigration issues high
on the bilateral agenda. (The population of Honduras is 6.5
million.) There is deep appreciation for the USG's extension
of Temporary Protected Status (TPS) in the U.S. and interest
in possible congressional action on the proposed Nicaraguan
Adjustment and Central American Relief Act (NACARA), which
would give immigration parity for Hondurans. With
approximately 18,000 American citizens residing in Honduras
and many thousands visiting Honduras annually for tourism and
business, American Citizen Services are a key part of the
Embassy's work. Since 1995, 34 American Citizens have been
murdered in Honduras. There has been little progress on
these cases and to date, only two convictions have been made.
However, in the last year the GOH has increased cooperation
with the Embassy on the remaining cases, including
establishing two prosecutors to further the GOH's effort.
Also, little progress has been made on extradition cases
involving American Citizens residing in Honduras who are
wanted for felonies in the United States.



--------------------------


Border Relations


--------------------------





23. (SBU) Honduras has border disputes with its three Central
American land neighbors and its seven maritime neighbors.
Maduro is personally engaged with his Presidential
counterparts to address these issues. Its land and maritime
disputes with El Salvador and Nicaragua are the most heated.
The Gulf of Fonseca on the Pacific coast is a particularly
difficult point. A 1992 International Court of Justice (ICJ)
ruling laid out shared areas of control in the Gulf of
Fonseca and established the land border between Honduras and
El Salvador, although El Salvador has been slow to implement
the ruling. In September 2002, El Salvador requested a
revision of the 1992 ICJ ruling. Honduras has responded to
this request and opposes any revisions to the original
ruling. In the interim, the Organization of American States
(as a neutral third party) is providing both nations
technical assistance to help them implement the ICJ's ruling.




24. (SBU) On the Caribbean coast, Honduras and Nicaragua have
a long-standing maritime border dispute over the 15th
parallel. In the past, the dispute has threatened to derail
trilateral counternarcotics operations. Honduras provoked
Nicaraguan retaliation when it signed a maritime treaty with
Colombia recognizing the 15th parallel as its maritime border
in 1999. Nicaragua filed an ICJ case over the maritime
border and more importantly in 1999 slapped a punitive 35 per
cent tariff on Honduran goods. This tariff remained in place
until April of this year despite a Central American Court of
Justice ruling that it is illegal. Only after Honduras
responded with a retaliatory tariff, threatening Nicaraguan
exports, did Managua back down. Tensions still exist between
the GOH and Nicaragua, hampering regional integration and
couternarcotics efforts.



--------------------------


Economic Overview


--------------------------




25. (SBU) Honduras, with a per-capita income of only USD 950,
is the third poorest country in the Western Hemisphere ahead
of only Nicaragua and Haiti. The Honduran economy is growing
slowly, with real GDP growth of only two-and-a-half percent
in 2002 and 2003. Low world coffee prices also continue to
inhibit growth in rural areas. Inflation, at double-digit
levels in the late 1990s, has decreased and is now relatively
stable at about 8 percent per year, while the currency is
depreciating at a rate of about 6 percent per year. The
economy continues to be dominated primarily by agriculture,
particularly the production of coffee, bananas and cultivated
shrimp. However, the in-bond apparel assembly industry
(maquilas) has grown dramatically over the past decade and
now employs over 100,000 people. Remittances from Hondurans
living overseas, primarily in the United States, continue to
grow rapidly (up 15 percent in the first six months of 2003)
and have become the most important source of foreign
exchange. The U.S. is Honduras' largest trading partner and
the roughly 150 U.S. companies that do business in Honduras
constitute the largest block of foreign direct investors.
While many social indicators are improving, two-thirds of all
Hondurans live in poverty and average educational levels are
very low.



--------------------------



--------------------------


Stubborn Fiscal Deficits Endanger IMF Program/Debt Relief


--------------------------



--------------------------





26. (C) President Maduro inherited a stagnating economy and
seriously deteriorated government finances from the previous
administration. During its first 18 months in power the
Maduro administration has passed two fiscal packages (in May
2002 and April 2003) designed to broaden the tax base, help
reduce chronic budget deficits, and move the government on
the road to an IMF agreement. However the IMF is still
concerned about persistent fiscal deficits, and an IMF
agreement is highly unlikely until the Congress passes major
civil service reform legislation. The Maduro Administration,
however, is hesitant to push these needed reforms because
they will fundamentally alter the salary structure of
teachers and medical workers who currently benefit from
special legislation which gives them annual salary increases
well above inflation. Teachers particularly are a powerful
special interest group that if agitated could destabilize the
government. Moreover, Maduro's lack of congressional support
for civil service reform has also hamstrung his efforts.



27. (SBU) Multilateral and bilateral donor disbursements (USD
140 million) will be held up until a new IMF program is in
place. There is also pressure on GOH Paris Club debt service
payments (USD 100 million per year), and the completion point
for debt reduction under the Highly Indebted Poor Countries
initiative (HIPC - worth USD 900 million) continues to slip
back further. If unaddressed, this fiscal situation could
also impact Honduras' eligibility for Millennium Challenge
Account grants.



--------------------------



--------------------------


U.S.-Central America Free Trade Agreement (CAFTA)


--------------------------



--------------------------





28. (SBU) President Maduro, who has identified CAFTA as his
government's principal trade objective, is a strong supporter
of regional economic integration. The historically weak
Ministry of Trade and Industry got a late start in preparing
for this year's CAFTA negotiations, but has added staff and
been an active participant in the negotiations so far.
Latent protectionism exists in the private sector, especially
agriculture, but the general attitude toward a free trade
agreement in Honduras is guardedly positive. The textile and
apparel industry in particular believes that some type of
free trade agreement is the only way that the Honduran
apparel sector can survive the elimination of quotas in 2005
and compete with Asian manufacturers. As such, it is the
strongest supporter of CAFTA.



--------------------------


U.S. Investment Faces Problems


--------------------------





29. (SBU) Maduro's Administration understands the need to
increase foreign (and domestic) investment to spur economic
growth, but so far has placed its emphasis on the more
immediate problems of political and judicial reforms, the
fiscal deficit, and needed improvements in security,
education and health. The government identified tourism,
agribusiness, and forestry as important sectors that could
create much-needed jobs. While some efforts to promote
tourism have paid off, little headway has been made in the
other sectors.



30. (SBU) Much needs to be done to declare Honduras "open for
business." Maduro needs to find a way to get his cabinet
(and the prickly legislative and judicial branches) to make
meaningful changes that will resolve key problems such as:
poor and expensive infrastructure; a weak legal system;
threats to personal security; weak education and health
conditions; land tenure problems; and opposition to large
foreign investments by well-connected vested interests.



--------------------------


Money Laundering and Bank Failures


--------------------------





31. (C) Strengthened money laundering legislation, with an
anti-terrorist financing clause, was passed in early 2002,
and the GOH followed up rapidly with creation of a Financial
Information Unit (FIU) for investigation of financial crimes.
Currently, over 150 potential cases of money laundering are
under investigation. However, without greater participation
from the slow and corrupt Public Ministry, responsible for
prosecuting such cases, results will be minimal.



32. (SBU) Weakness of the financial system remains a key
concern. The GOH took over the two most troubled banks in
May 2002 (one has since been closed), arranged for the
absorption of a third undercapitalized bank, and is actively
promoting mergers among the remaining 20 private banks.



--------------------------


Embassy Tegucigalpa


--------------------------





33. (SBU) Embassy Tegucigalpa is a medium-sized post,
employing 140 U.S. citizens and 300 Hondurans among 20 USG
agencies. Our Peace Corps program, with more than 220
volunteers, is one of the world's largest, and the USAID
mission had a FY03 budget of USD 45 million. The Mission
maintains a Consular Agent in Honduras' second city and
industrial center, San Pedro Sula.
Pierce