GUTIERREZ RETURN JUST ONE OF PALACIO'S PROBLEMS

C O N F I D E N T I A L SECTION 01 OF 04 QUITO 001340

SIPDIS

E.O. 12958: DECL: 06/08/2015
TAGS: PREL PGOV EC
SUBJECT: GUTIERREZ RETURN JUST ONE OF PALACIO'S PROBLEMS


Classified By: Ambassador Kristie A. Kenney, Reasons 1.4 (b),(d)


1. (C) SUMMARY: Forty-five days young, the Alfredo Palacio
government has hit its first snags. Two cabinet ministers
resigned this week (Septel) amidst charges they owed money to
the state. One other is backpedaling over accusations he
conspired to depose former President Lucio Gutierrez.
Military officers, convenient whipping-boys of late, are
growing frustrated over "inept" civilian government. Despite
the oil boom, GoE finances are questionable, and Palacio's
anti-establishment finance minister has spooked international
financial institutions (IFIs) capable of bridging gaps.
Quito's "forajidos" -- middle-class protesters who helped
force Gutierrez to flee -- have grown disillusioned over the
slow pace of political reform. And Amazon provinces are
threatening general strikes over alleged GoE inattention.


2. (C) Mix in rumors of Gutierrez's reappearance and voila,
political instability returns to Ecuador. Capitalizing on
Palacio's current troubles, the ex-president has announced
he's coming home, aiming to resume his battle against the
nation's political and economic oligarchy. Gutierrez might
face lynching in Quito, but his allies are many in Tena, his
Amazon birthplace. A final destabilizer is Palacio's seeming
lack of fortitude, confirmed by his wife. Our best
prediction? The president looks secure through summer, but
the looming budget shortfall might make for an awful autumn.
END SUMMARY.

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Problems of his own making...
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3. (SBU) "Debtor-gate" broke three weeks ago when Quito
daily El Comercio reported that Minister of Energy Fausto
Cordovez had been delinquent in repaying over $100,000 in
state debt (the octogenarian minister opportunistically paid
his bill shortly after the reporter solicited comment). The
scandal has had legs, however, with updated debtor lists
appearing daily and editorialists questioning the
administration's lack of due diligence over nominations.
Presidential Communications Director Carlos Cortez fell
first, submitting his resignation June 7; Cordovez followed a
day later, and media June 9 reported the departure of Roberto
Pinzon, president of parastatal oil company PetroEcuador.
Ultranationalist gringo-basher Mauricio Gandara too appears
on the list, as does FM Antonio Parra.


4. (SBU) Smelling blood, opposition figures, among them
ex-presidential brother Gilmar Gutierrez, have demanded
Palacio purge all deadbeats from the government. More
troublesome to the government, NGOs and citizen watchdog
groups have seconded the demand. The administration
responded by forming a commission, led by Administration
General Secretary Luis Herreria and Legal Subsecretary
Roberto Gonzalez, to investigate. The "accused" have
screamed that a witchhunt is afoot.


5. (C) Gandara, long a thorn in our foot, has begun to bring
problems to his boss as well. In June 6 public comments, the
diminutive but boisterous minister revealed that Palacio,
even before he assumed the presidency April 20, had requested
Gandara's collaboration in the eventual administration.
Media noted he had filed his "statement of assets," a
requirement for those assuming high government office, before
Gutierrez abandoned Carondelet Palace. Opposition cried foul
in response, calling the current government minister a
conspirator and citing as further proof Gandara's admission
he'd earlier lobbied Gutierrez's high command to withdraw
their support to the then-president. Believing the best
defense a good offense, Gandara is screaming "conspiracy"
himself, claiming Gutierrez allies are attempting to depose
Palacio by disparaging his economic team's policies and
practices, torpedoing international investors' confidence in
Ecuador. Police commander General Jose Vinueza confided to
the Ambassador that Palacio is livid over Gandara's
revelations.

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Added to external factors...
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6. (SBU) "Strained" describes relations between the new
president and the military, dating back to Palacio's
assumption of power April 20. After taking the oath of
office in Quito think-tank CIESPAL, a crowd of violent
protesters laid siege to the facility. For four hours
Palacio hunkered down while public forces, capable of
rescuing him, allegedly loitered about. Early scuttlebutt
(later disproved) claimed it was police, not army, who
eventually freed the president. Palacio purged the armed
forces high command days later, and a common headline since
has been "Where Was the Military." Media also alleged an
April 22 plot by commanders of nearby units to depose the
president; Defense Minister Solon Espinoza investigated and
later cleared the officers, however.


7. (C) Nonetheless, morale within the armed forces remains
questionable. Congress and media, demanding the military not
involve itself in civilian affairs, are debating changes to
Ecuador's constitution and organic armed forces law.
Concurrently, talking heads like retired Colonel Luis Herrera
argue the army only takes such stances upon orders from
civilian bosses. In private conversations with DAO and
Milgroup personnel, Ecuadorian officers lament the current
state of affairs, asserting the country would benefit from
benevolent military rule. Summer sees promotion boards
assembling; up for stars are numerous colonels hailing from
Gutierrez's year group and seen as sympathetic to the former
president. Were the promotion rate to fall significantly
below norms, the potential for protest is real.



8. (C) Three years of record oil prices have swelled
government coffers, despite declining PetroEcuador
production. Regrettably, steadily rising salary outlays have
meant the budget numbers aren't black. Media report daily
the GoE's needs for hundreds of millions in bridge financing
to cover expected fiscal gaps. Yet Palacio's economic team
is offering the IFIs vinegar, not honey. Economy Minister
Rafael Correa's populist schlock -- "pay the social debt, not
the foreign debt" -- has won him numerous admirers; as
perhaps this administration's most popular minister, he
enjoys the president's ear. Such vitriol makes him unpopular
in World Bank, IDB, and IMF circles, however. Former
Gutierrez Finance Minister Mauricio Yepez informed the
Ambassador that, without external assistance, Ecuador would
run out of cash in October.

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The "street's" discontent...
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9. (C) Palacio came to power boasting he was Ecuador's last,
best hope. Quito's forajidos demanded and deserved better
governance; he would make their dreams reality. Topping the
protesters' wishlist was a more direct democracy less
beholden to party strongmen, featuring a cleansed Congress
and depoliticized courts. Tactics envisioned included
referenda, popular assemblies, and a constitutional rework.
Forty-five days later, however, little has changed. Congress
removed 15 deputies, but most viewed the move as political
retribution, not good-faith reform. Palacio tapped Vice
President Alejandro Serrano to facilitate a national
political dialogue, but the VP told the Ambassador June 3 the
details remained fuzzy. The widely hailed "Consulta Popular"
(referendum) on political and constitutional reform will not
occur until December, since the administration needs time to
synthesize dialogue results and formulate consulta questions.
And Ecuador has yet to re-establish the Supreme Court, the
result of expected political bickering.


10. (C) Quito remain calm for now. Yet renewed protests
appear possible, especially if continued corruption scandals
amongst ministers, Congressional do-nothingness, and a
re-politicized court lead forajidos to believe Palacio is a
business-as-usual chief executive.


11. (U) One hundred miles east, streets aren't so calm.
Protesting against the newly named governor of Napo province,
Gutierrez sympathizers June 6 burned vehicles and trashed
government offices in capital Tena. In fellow Amazon
provinces Orellana and Sucumbios, the heart of Ecuador's oil
industry, leaders have called for a June 21 general strike to
protest Palacio's inattention to their needs (the president
earlier had declared a state of emergency in these provinces
in response to citizens' threats to take over key petroleum
infrastructure; Congress voted June 8 to revoke the special
measure). Pro-government parties in Congress publicly
announced their worries that Gutierrez allies would seek
political benefit from the public's discontent.

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An ex-leader's rumored return...
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12. (SBU) Ecuador's exiled ex-presidents have assumed one of
two postures. Jamil Mahuad (2000) and Gustavo Noboa (2003)
adopted low profiles in Boston and the Dominican Republic,
refraining from political activity, while Abdala Bucaram
(1997) continued to run his PRE party from Panama. Lucio
Gutierrez has fallen into the latter camp. Media and
opposition greeted with consternation the ex-president's June
5 decision to abandon asylee status in Brazil. News of his
travel to the United States spiked interest further,
especially after press erroneously reported he would address
the OAS and offer "his side of the story" to USG officials.
The story peaked (or perhaps not) with the June 8
distribution of a video in which Gutierrez outlined reasons
the oligarchy had deposed him.

13. (U) "I was collecting debts from those who had
bankrupted the country. I was breaking the elite's hold over
the Ecuadorian judiciary. And I was becoming a threat to the
oligarchy, for my efforts to help Ecuador's poor." Further,
he claimed the forajidos who attempted to prevent his
departure had aimed to kill him. Gutierrez confidant and
former Administration Secretary Fausto Cobo announced that
the ex-president's priority was returning to Ecuador soonest,
although he offered no dates.


14. (SBU) Pro-government/anti-Gutierrez forces aren't lying
down, and the ex-president likely will face a lynch mob
should he choose to return to Quito soon. In Congress, for
example, the Investigative Commission is gathering
information on alleged Gutierrez campaign violations in hopes
of jump-starting an eventual prosecution. Pachakutik
deputies seek charges against the former president for
complicity in the death of a Chilean forajido. And Popular
Democracy Congressman Ramiro Rivera is introducing a bill
aimed at preventing Gutierrez from seeking re-election.

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And the President's aversion to battle...
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15. (C) Save a short stint as health minister during the
Sixto Duran-Ballen administration (1993-97),heart surgeon
and now President Palacio had no political experience before
signing on with Gutierrez in 2002. While he obviously
relishes the presidency's limelight and accouterments, we're
not so certain he enjoys the accompanying back room
dealmaking and political bloodshed. First Lady Maria Beatriz
de Palacio confirmed our suspicions over breakfast with the
Ambassador June 7. "What was Alfredo doing, taking this job?
These people are crazy!" The First Lady was referring to the
scores of job seekers walking Carondelet halls of late, but
it might as well have been a description of the Ecuadorian
political scene. There would be no re-election campaign, if
she had her way -- eighteen months in Quito were plenty. The
First Lady revealed that Dr. Palacio recently had passed two
of three parts of the Florida medical licensing process,
raising his employment
possibilities considerably.

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Leaves this president weak and growing weaker
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16. (C) COMMENT: "Muddling through" long has described
presidential administrations in Ecuador. Palacio likely will
follow his predecessors' paths, dealing here, bribing there,
all in hopes of short-term survival. Of the destabilizers
mentioned above, nearly all look surmountable. A Cabinet
shuffle should stem protests on the debtors and conspirators
issues, for example. A salary bump should squelch military
discontent. Amazonians would build statues to Palacio in
exchange for highways and bridges. A well-organized national
dialogue and invitations to prominent youth leaders to join
the government ought calm the forajidos. And even a
Gutierrez return looks benign, since only native Tena would
seem to welcome him.


17. (C) We wrote "nearly" all, however. The looming
financial crisis appears the silver bullet that could bring
Palacio down, as earlier ones did Mahuad and Bucaram. Yet
the president's damage control team overlooks this, focusing
instead on crises du jour like Gutierrez. In upcoming
meetings with saner administration officials (read, not
Gandara and Correa),we will push for constructive IFI
engagement and sustainable administration economic and fiscal
policies. Should we have no luck, come November or December
the forajidos might again take to the streets. END COMMENT.
Kenney