PARAGUAY'S NEW CENTRAL BANK PRESIDENT ON IMF, BANK

C O N F I D E N T I A L SECTION 01 OF 03 ASUNCION 000951

SIPDIS

STATE FOR WHA/BSC, WHA/EPSC, EB/IFD/OMA
STATE PASS TO USTR FOR LYANG
USAID FOR AA/LAC ADOLFO FRANCO
TREASURY FOR OSIA MAUREEN WAFER
COMMERCE ITA SARAH COOK
NSC FOR TOM SHANNON, MIKE DEMPSEY AND SUE CRONIN
SOUTHCOM FOR POLAD
US SOUTHERN COMMAND MIAMI, FLORIDA

E.O. 12958: DECL: 7/27/2015
TAGS: ECON EFIN PREL PINR PA
SUBJECT: PARAGUAY'S NEW CENTRAL BANK PRESIDENT ON IMF, BANK
REFORM, AND OPENNESS TO OTA TECHNICAL ASSISTANCE

Ref: ASUNCION 00939

Classified By: Ambassador John F. Keane for reasons 1.4 (b)
and (d)

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Summary
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1. (C) Summary: In an introductory call on July 20 with
Monica Perez, Paraguay's new Central Bank President, the
Ambassador described the in-country programs of Treasury's
Office of Technical Assistance (OTA),introduced OTA's
debt advisor, and extended the offer of OTA's banking team
to do an assessment with a view toward possible future
technical assistance. Mr. Perez was very receptive to the
offer of assistance, and cited the superintendent of banks
to include bank resolution and asset management, central
bank restructuring, banking regulation and inflation
modeling as areas of interest. Ms. Perez confirmed that
the GOP is seeking a follow-on IMF program. She told the
Ambassador that the GOP would seek a similar framework of
quantitative targets, but said the GOP, including President
Duarte, does not want a heavy legislative agenda. Ms.
Perez conveyed confidence and a command of the many
challenges she faces. The combination of a fresh outlook,
technical competence, and backing from the President
present the USG with an excellent opportunity to help shape
with OTA assistance the direction of financial sector
reform in Paraguay. End summary.

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Economic Reform and US Support
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2. (U) On July 20, the Ambassador, Econ Chief and the
Resident Debt Advisor from Treasury's Office of Technical
Assistance (OTA) met with Monica Perez, the new President
of Paraguay's Central Bank (BCP). The Ambassador requested
the meeting as an introductory call, to introduce Ms. Perez
to the work of OTA's various advisors (debt, budget,
taxation and enforcement),and to communicate an offer from
OTA's banking team to undertake a needs assessment for the
BCP to identify areas of possible collaboration. Ms. Perez
was open and forthcoming, and enthusiastically welcomed
OTA's offer of assistance.


3. (U) The Ambassador opened the meeting by underscoring
the investments the US has made in Paraguay based on
President Duarte's support for economic reform. He
described the substantial commitment on the part of OTA,
with three resident, and one intermittent, advisors from
four of the five OTA teams. He described the range of
topics covered by the banking team, and told Ms. Perez that
an assessment mission could take place as soon as August if
she were interested. The Ambassador described the work of
OTA's Resident Enforcement Advisor, who was unable to
participate in the meeting, and encouraged Ms. Perez to
continue fostering cooperation among the various entities
involved in combating money laundering.

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Debt Issues
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4. (SBU) Patricia Bacchi, OTA's resident debt advisor,
described her work, one focus of which has been the
drafting of a general debt law to make it possible for the
Finance Ministry to issue bonds and to encourage the
development of a domestic capital market. Perez said she
was happy to hear of progress on a draft debt law, and
suggested that we contact Finance Minister Bergen to
underscore the importance of creating a debt management
framework. She also agreed that a quantitative debt policy
based on a debt sustainability model was something Paraguay
needed to develop, in particular as a tool to fend off
unrealistic spending plans.

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IMF Program
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5. (C) Ms. Perez confirmed that the GOP is seeking a
follow-on IMF program. She told the Ambassador that the
GOP would seek a similar framework of quantitative targets,
but said the GOP, including President Duarte, does not want
a heavy legislative agenda. She argued that legal changes
are not in the executive's control, and said that too many
countries are "victims" of the IMF's tendency to seek
significant legislative changes. While qualifying her
appreciation of the political scene by noting her 13-year
absence from Paraguay, she pointed out that this next year
will probably be a difficult time to work with Congress
given municipal and internal party elections on the
schedule, as well as the very fragile alliance that was
formed to elect the current Congressional leadership
(reftel).

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Legislative Obstacles...And Risks
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6. (C) She cautioned that bad outcomes can result from
seeking major legislative changes, and gave as an example
the public banking law working its way through Congress
(with damaging changes to the version submitted by the
executive). She also mentioned the banking law submitted
in December 2004, the passage of which by June 30, 2005 was
a (now missed) performance criterion of the current IMF
program. No action has been taken on the law, which was
drafted with the help of the World Bank. Ms. Perez
characterized the law as flawed, and as a law championed by
the Ministry of Finance rather than by the BCP. She
described how President Duarte told Pamela Cox, the World
Bank's Vice President for Latin America and the Caribbean,
that the banking law would not be passed as it is, although
he said he was committed to a banking law in some form.
Ms. Perez prefers a law that "reflects Paraguay's
realities" and that is drafted after a careful review of a
number of laws, including the BCP charter.


7. (C) In that context, she referred to an agreement
within the current economic team to give each member
control of issues in his or her area. She criticized,
without naming names, various "actors" in the government,
often advisors with no individual responsibility, who push
initiatives like a recent draft law, now shelved at least
temporarily, that would have allowed for easy refinancing
of non-performing loans. The economic team, led by Finance
Minister Bergen, agrees that all new initiatives must pass
through the team.

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Structure of the Central Bank
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8. (C) In reference to the draft banking law, Ms. Perez
questioned the proposed structure of the central bank, and
said she had discussed her misgivings with the IMF and
World Bank. She said that the draft law contemplates a
semi-independent superintendent of banks, but without clear
legal protections for the Central Bank President, and
without a clear line of responsibility. The fear of
potential liability would lead to a defacto centralized
system. Ms. Perez identified the superintendent of banks
as a source of significant concern. She questioned the
quality of the information reaching the BCP's Board of
Directors, and complained that the vast majority of her
time is consumed by supervision issues, including with the
financial institutions in liquidation, leaving little time
to focus on policy. Ms. Perez expressed her strong
personal preference for a bank that is decentralized, but
with cross-checking, and expressed hope that US technical
assistance could involve someone from the Federal Reserve
to advise on these issues.

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Welcoming OTA Banking Technical Assistance
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9. (U) Ms. Perez enthusiastically welcomed the offer of
technical assistance, and was pleased to learn that OTA
provides its assistance on a grant basis. She signaled her
disapproval of the fact that roughly half of the second
phase of a World Bank financial sector loan yet to be
signed was slated for the payment of consultants. Perez
has heard that Taiwan may be interested in providing
banking technical assistance, and has already requested
technical assistance from the IMF, but said she would
prefer US expertise. While candidly acknowledging that the
BCP needs help in most areas, she said her priorities are:
the superintendent of banks (including bank resolution and
asset management),central bank restructuring, a review of
banking legislation with the view to eventually drafting a
new banking law, and technical assistance with inflation
modeling to inform monetary policy.

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Comment And Bio Note
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10. (C) Ms. Perez conveyed confidence and a command of the
many challenges she faces. She was remarkably candid and
open with the Ambassador, and acknowledged that she faces
resistance from members of her Board of Directors and some
other actors within the government, and faces constraints
such as an extremely rigid budget. Her close family ties
to the President and his recent public statements suggest
that she has his confidence and strong support. The
combination of a fresh outlook, technical competence, and
backing from the President present the USG with an
excellent opportunity to help shape with OTA assistance the
direction of financial sector reform in Paraguay. Having
studied in Germany and worked abroad for several years,
Perez shows directness and disciple not common in Paraguay.
Her skills and no nonsense approach will make her a
formidable player as long as she retains Duarte's support
and would appear a key ally on USG reform priorities.

KEANE