SOCIAL SECURITY REFORM IN PRESIDENT'S HANDS

UNCLAS SECTION 01 OF 02 QUITO 001666

SIPDIS

SENSITIVE

E.O. 12958: N/A
TAGS: ECON ELAB PGOV EC
SUBJECT: SOCIAL SECURITY REFORM IN PRESIDENT'S HANDS


1. (U) Summary: President Palacio has ten days from July 11
to decide whether to approve or veto a Congressional bill
proposing the complete return of social security reserve
funds to the population. Currently, the funds, paid yearly
by employers and managed by the Ecuadorian Social Security
Institute (IESS),cannot be withdrawn until a worker's
retirement. Congress, in a populist move, proposes the full
return of the fund to workers within 90 days. However, the
IESS does not have these funds available, as they are
invested in various government bonds. The Central Bank has
warned that a complete withdrawal of the reserve funds could
lead to increased inflation and would affect the trade
balance. The reserve funds, intended to bolster savings,
total $734 million.


2. (SBU) Minister of Economy Rafael Correa has led a public
campaign against the bill. Veto of the bill would be
politically costly; a line-item (or partial) veto might well
be overturned by Congress, and implementation of the bill
would deny the government some $350 million in financing it
was counting on. Some observers believe the bill is an
attempt by former president Leon Febres Cordero to force the
GOE to yield to his influence. End Summary.

Congress Seeks 100% Return of Reserve Funds
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3. (U) On July 6, 75 Congress members voted in favor of a
bill allowing for the total return of IESS reserve funds
within 90 days of the bill's passage, for those who request
it. IESS affiliates could then, in the future, withdraw
these funds every three years. The reserve fund is one of
the main social security funds under the management of the
IESS. The fund was originally intended as an additional
salary paid by employers, that workers could withdraw every
three years. A reform in 2001 said that workers could only
withdraw money from these accounts once they retired.


4. (U) The bill has been criticized for being solely
intended to gain Congress popular support, and not
technically possible, as the IESS does not have the financial
resources needed to return the reserve funds in 90 days. The
bill also says that those who have been unemployed for over
six months, as well as beneficiaries over 60 (the retirement
age),will receive their reserve funds immediately.

President Must Decide on Populist Bill
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5. (U) Congress' bill, proposing the return of 100% of
Social Security reserve funds, was delivered to the
Presidency on July 11. The President has 10 days to study
the proposal and either approve or veto the bill. A total
veto from President Palacio would mean Congress cannot
reconsider the law for 12 months. The President may also
partially veto the bill and propose amendments. For example,
withdrawals from the reserve fund could be set at a 50%
maximum, instead of 100%. The bill would then return to
Congress, which would have 30 days to override a partial
presidential veto with a two-thirds majority, otherwise the
bill would be passed with the President's amendments. Once
the measure is approved, it would pass to the Official
Registry and go into effect. Palacio has said he will make a
technical, not political decision on the IESS issue. Based
on the public comments of several of his Ministers, it is
believed Palacio will submit a partial veto.


6. (U) The ID's Ernesto Pazmino has suggested a longer time
frame for the return of the funds as the IESS does not
currently have the total funds available; he publicly asked
the President for a partial veto of the bill. The Pachakutik
party is also in support of a partial veto. Congress members
who support the original bill, preparing for a Presidential
veto, are attempting to collect the 67 votes needed to
override the veto.

Ministry of Economy Leads Campaign For Veto
--------------


7. (U) Minister of Economy Rafael Correa has said that the
bill was not considered sufficiently, and in an attempt to
please the public, puts the nation's economy at risk. Correa
is in favor of a total or partial presidential veto. Correa
has led outreach to legislators and union leaders to explain
his Ministry's objections to the bill. Some Congress members
have reportedly threatened to censure Correa if the President
vetoes the bill partially or totally.

Central Bank and IESS Highlight Bill's Weaknesses
-------------- --------------


8. (U) According to a Central Bank study, the complete
return of IESS reserve funds would trigger a 3.7% increase in
inflation, as well as a 3% increase in imports, affecting the
trade balance. Consumption of goods and services would also
increase by 2.4%. The GOE would also lose some $350 million
in financing it was counting on for this year.


9. (U) Only $268 million of the total $734 million in
reserve funds are in the Central Bank and available
immediately, according to the IESS. Of the remaining funds,
$302 million are in State bonds, approximately $82 million
are invested in treasury certificates, $18.4 million are in
accumulation bonds, and $47.9 million are in fixed-term
deposit certificates. In order to return 100% of the reserve
funds, the IESS would need to withdraw approximately $450
million from its investment portfolio.

Workers Support Bill, Business Leaders Opposed
-------------- -


10. (U) Members of the United Workers Front and health
workers have recently protested in front of the Congress
building demanding the entire return of the reserve funds.
MPD party Congressional head Luis Villacis said on July 10
that his party, along with the unions, will ask the President
not to veto the bill. Villacis warned that if the President
decides on a total veto, it would provoke the mobilization of
the 1.6 million IESS affiliates, which would "endanger the
government's stability." President Palacio met with union
leaders on July 12 to explain the government's position, but
no agreement was reached.


11. (U) Most in the business community are opposed to the
complete return of reserve funds and are calling for a total
veto. A representative of Pichincha's Chamber of Small
Industries has said publicly that the bill would be
catastrophic for the country's economy if implemented.


12. (SBU) In a meeting with Econcouns July 13, President of
Banco de Guayaquil Guillermo Lasso said he believed the
proposal to return to reserve funds to affiliates was an
attempt by Leon Febres Cordero, former president of Ecuador
and head of the Social Christian Party (PSC),to force the
Palacio government to come to him for support. Febres
Cordero was the only one who could guarantee that a partial
veto would not be overridden, and the price Palacio would
have to pay him in order to keep his government financially
afloat would be high.

Comment
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13. (SBU) Reports that the GOE may obtain financing from
Venezuela to cover fiscal shortfalls suggest that the Palacio
government may be desperately seeking a way out of the fiscal
box in which it has been placed by the PSC and its leader.
Without cooperation by Febres Cordero, the distribution of
over $700 million to the population of Ecuador will likely
take place, and the GOE's already precarious fiscal position
will be worsened substantially.
HERBERT