PARAGUAY POLITICAL AND ECONOMIC UPDATE, SEPTEMBER

UNCLAS SECTION 01 OF 02 ASUNCION 001144

SIPDIS

STATE FOR WHA/BSC AND EB/IFD/OIA
STATE PASS TO USAID FOR LAC/AA
STATE PASS TO USTR FOR LYANG
NSC FOR SUE CRONIN
TREASURY FOR OSIA MAUREEN WAFER
TREASURY FOR OTA WARFIELD, VAN KOCH, MILLAR
COMMERCE FOR ITA SARAH COOK
SOUTHCOM FOR POLAD DAN JOHNSON

E.O. 12958: N/A
TAGS: PGOV PHUM PREL KCRM ETRD ECON PA
SUBJECT: PARAGUAY POLITICAL AND ECONOMIC UPDATE, SEPTEMBER
4 - 10


1. (U) Summary
-- Duarte to Veto Public Bank Law
-- Deputies Block Investigation of Amambay Governor
-- Esso Scores Judicial Victory
-- Duarte-Frutos a Candidate for ANR Presidency
-- Castiglioni Meets Senate about US-GOP Relations

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Duarte to Veto Public Bank Law
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2. (SBU) President Duarte announced that he would veto the
first tier public bank law when it reaches his desk, a
significant signal of his commitment to real structural
reform. Earlier this year, the Senate passed the law, meant
to reform Paraguay,s largest, and bankrupt, state bank, but
introduced a series of changes that significantly weakened
the reform value of the law. President Duarte reportedly
pressured the Lower House to pass the original version
presented by the executive, but it too introduced a number of
changes that would arguably worsen the viability of the
current system and would cost the government millions in
excessive severage packages for current public bank
employees. Both houses of Congress are now controlled by a
coalition of parties that support the current government. In
fact, the Colorado Party holds the leadership of a number of
Congressional Commissions. As a result, President Duarte,s
announcement to veto the legislation carries a political
price and therefore sends a positive signal with respect to
the President,s commitment to fiscal responsibility and to
the rejection of actions by Congress that undermine serious
structural reform. The Minister of Finance and other
interested parties such as Economic Advisor Walde and the IDB
and IMF resident representatives lobbied President Duarte on
the importance of the reform of the state banks, while
populists in the Colorado Party pushed in the other
direction. That reform appears to have won out in this
highly visible case is a positive development.

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Deputies Block Investigation of Amambay Governor
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3. (U) Roberto Acevedo, the Amambay Department Governor, has
been recently accused of having business connections with
Brazilian drug trafficker Fahd Yamil. Acevedo hails from the
opposition Authentic Liberal Party (PLRA). Politicians from
the Colorado Party had proposed to discuss supposed links
between Acevedo and Yamil, establishing a special
investigative committee. On 9/2, it was reported that the
PLRA bloc in the Chamber of Deputies had prevented this
investigation in Congress from being opened claiming the
investigation was politically instituted. (COMMENT: Acevedo
publicly denounces drug traffickers in Pedro Juan Caballero,
the center for much of Paraguay's drug trafficking
activities, and supports US efforts. In August, he told
Polcouns newspaper reports of his alleged involvement with
Fahd Yamil were funded by drug traffickers seeking to destroy
his reputation and that Colorado Party officials similarly
sought to attack him for political gain. Post has seen no
credible evidence tying Acevedo to Fahd Yamil's drug
trafficking activities and consider credible his complaint
that charges are politically instituted. End Comment.)

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Esso Scores Judicial Victory
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4. (U) After fighting a losing battle for several years to
try to dismiss a former employee it accused of sexual
harassment, Esso Paraguay finally won the ability to
terminate the employee, albeit with the payment of a
significant severance package mandated by law, in a ruling by
the Supreme Court that Esso,s general manager said probably
would not have been possible under the previous court.
(NOTE: One of President Duarte,s early moves in 2003 after
taking office was to replace six of nine Supreme Court
justices, supposedly for corruption. Many observers question
whether the "new" court is much better, although Esso
considers this verdict a major success. End note.)
Paraguay,s inflexible labor laws grant employees with ten
years of service "stability" which means they cannot be
removed except for cause validated by the judicial system.
Esso complained that the former employee,s strong
connections to the judicial system (at least two relatives
are judges) stacked the system against Esso, which lost the
fight to terminate without paying severance. They then
pursued the argument that they could not reinstate the
employee given the level of animosity generated by the
circumstances. After losing in the lower courts and on
appeal, the Supreme Court ruled in Esso,s favor, effectively
closing the case. The indeminity that Esso will have to pay
under the labor law is significantly lower than the
settlement originally sought by the former employee.
According to Esso, the decision is a strong positive signal,
all the more so because, according to the general manager,
Esso did not undertake any efforts to lobby or influence the
courts other than their legal arguments.

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Duarte-Frutos a Candidate for ANR Presidency
--------------


5. (U) Two weeks ago, it was reported that President Nicanor
Duarte Frutos was planning to become a candidate for the
Colorado Party (ANR) presidency. ANR members called on
Duarte to officially announce his candidacy to limit the
campaigning. On 9/7, Duarte announced officially his
candidacy for the Party Presidency. ANR officials have
indicated that if Duarte wins, he would appoint an Executive
Board first vice president, who would become the acting
president, because he would not be able to assume the
position. Duarte's supporters have also announced their
intention to move up the election from June to February of
next year. Opposition Colorado leaders have told PolCouns
that they are exploring prospects for a unified list as well
as possible court petition challenging Duarte's right under
the Constitution to serve as both President of the Republic
and President of the Colorado Party. (NOTE: Post will report
more on this issue in septel. End Note.)


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Castiglioni Meets Senate about US-GOP Relations
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6. (U) Vice President Luis Castiglioni appeared before the
Senate on September 8 to discuss the reasons for SECDEF
Donald Rumsfeld's recent visit to the country. Castiglioni
explained that the visit was to strengthen US-Paraguayan
relations. During the hearing, Senator Jose Nicolas
Morinigo, of the leftist Country in Solidarity Party (PPS)
stated that he will petition for the Senate to revise the
bilateral agreement which allows for the presence of US
troops in Paraguay. In the past, senior MFA officials have
told us it has no intention of renegotiating the current
bilateral agreement for military cooperation that extends
through 2006. (NOTE: Post will report further on
Castiglioni's Senate visit in septel. End Note.)
KEANE