A FIRST MEETING WITH PALACIO

C O N F I D E N T I A L SECTION 01 OF 03 QUITO 002057

SIPDIS

E.O. 12958: DECL: 09/01/2010
TAGS: PREL PGOV EFIN ECON VE EC
SUBJECT: A FIRST MEETING WITH PALACIO

REF: QUITO 01978

Classified By: ECON LARRY L. MEMMOTT, REASONS 1.4 (B,...


id: 39765
date: 9/2/2005 19:41
refid: 05QUITO2057
origin: Embassy Quito
classification: CONFIDENTIAL
destination: 05QUITO1978
header:
This record is a partial extract of the original cable. The full text of the original cable is not available.

021941Z Sep 05


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C O N F I D E N T I A L SECTION 01 OF 03 QUITO 002057

SIPDIS

E.O. 12958: DECL: 09/01/2010
TAGS: PREL PGOV EFIN ECON VE EC
SUBJECT: A FIRST MEETING WITH PALACIO

REF: QUITO 01978

Classified By: ECON LARRY L. MEMMOTT, REASONS 1.4 (B,D)


1. (C) Summary: In their first substantive discussion,
President Palacio told the Ambassador that he sees himself as
a counterweight to Venezuela's Chavez; that he intends to
take a hard line to keep civil order in Ecuador; that he
believes the international financial institutions (IFIs) will
support his government's economic policies, which will
include universal health care for Ecuadorians; that the
Occidental problem will be resolved this year (see septel)
and that his government will implement important political
reforms. While his ambition is laudable, it is clear that he
will be lucky to accomplish even one or two of these goals.
End Summary.


2. (SBU) At his invitation, Ambassador and Econcouns dined
with President Palacio, the first lady, his brother and
Ecuadorian Representative to the Interamerican Development
Bank Gustavo Palacio, and Secretary of the Presidency Luis
Herreria the evening of August 31. The conversation was
extremely cordial, and Palacio made very clear his desire to
develop a close relationship with the Ambassador and with the
USG.


3. (U) Palacio greeted the Ambassador by expressing his
great sympathy for the disaster in New Orleans and said he
had sent a letter to President Bush expressing his sympathy.
He noted that he had been to New Orleans many times for
medical conferences and felt real sorrow for the loss. Mrs.
Palacio pointed out that all three of their children live in
Miami, where she also lived for many years, so they
understand the horror of hurricanes.

Venezuela
--------------


4. (C) Palacio made clear his antipathy for Hugo Chavez at
several points during dinner. He described the offer by
Chavez of financing for Ecuador's budget as not even
economically advantageous to Ecuador, suggesting that the
8.5% nominal interest on the bonds which Chavez had offered
to buy would probably not be much better than market rates by
the time all costs were factored in. He said he had pointed
out to Chavez that the multilaterals were lending at 4%.
Chavez had responded that while that was true, they would not
lend to Ecuador. Palacio suggested that offering 8.5% when
4% was available elsewhere (even if not to Ecuador) was
"extortion." Further, he commented, he might even be taken
to court later for damaging Ecuadorian interests for
accepting an 8.5% interest rate. In the end, he had fired
his Minister of Finance for his continued promotion of this
deal, and his inability to ever put the offer down on paper
for objective analysis.


5. (C) Chavez' offer to loan Ecuador oil did not stand up to
Palacio's analysis, either. He said he had asked for oil of
a quality which Ecuadorian refineries could process (api 20).
Chavez had offered no better than 18.5 api, which might, or
might not, be light enough for Ecuador's outdated refineries
to handle (they can not refine 18 api crude). He had offered
to pay the crude back one barrel for one barrel. Chavez had
counter offered 1.4 barrels to one. While the Venezuelan
crude was of a higher quality than Ecuadorian, he concluded
this did not look like a great deal. Luckily, he said,
PetroEcuador production had recovered much more rapidly than
expected, and Ecuador would not likely need much, if any,
Venezuelan crude.


6. (C) As for Chavez himself, Palacio said a Latin American
counterweight was necessary to draw attention away from him.
Uribe had the charisma and the smarts to do it, but he was
"too far to the right" and too close to the U.S. to play the
role. Toledo was too weak internally, and Lula and Kirchner
would certainly not do it. The banner would have to be
carried by someone in the center- left, who would not
challenge Chavez directly, but simply divert attention from
him. Perhaps Michelle Bachelet, who he thought the likely
winner in Chile's upcoming presidential contest, could assume
that role, but she would need time to ascend to the
international stage. In the meantime, Palacio said, he
believed he could do it. But he would need U.S. assistance
to do so. Ambassador asked what kind of assistance. Palacio
responded that he would first need help "strategizing."

A Hard Line with Protesters
--------------

7. (C) The Ambassador asked Palacio if he was concerned about
possible future protests in other provinces in the mold of
the Manabi and Orellana/Sucumbios protests. Palacio
expressed satisfaction with the accomplishments of his new
Minister of Defense Osvaldo Jarrin in the later part of the
recent protests in the oil fields. Once Jarrin had taken
over, the military responded immediately to his orders to
push protesters from the oil and transportation facilities
they had taken over. "There will be no more strikes,"
Palacio vowed, saying he fully expected the military to
follow his hard line with protesters. The Ambassador noted
that Jarrin is well respected by those in the Embassy who
know him.


8. (C) Palacio said he is concerned about reports from his
police force that indoctrination and training is being
provided to young people at several locations in Ecuador to
build a cadre for revolutionary purposes. According to these
reports, Ecuador could have a real problem with insurgency in
a few years. Ecuadorian intelligence had not been able to
determine who was behind the protests in the oil patch, but
they were too well organized to be purely the work of
internal forces, Palacio suggested.


9. (C) It did not look like the World Bank would be likely to
help Ecuador on security in the oil fields, Palacio said.
Maybe the U.S. could help. After all, these installations
were right on the border with Colombia and potentially
vulnerable to FARC attack. The Ambassador promised to look
into possibilities.

Economic Policy
--------------


10. (SBU) Turning to economic policy, Palacio said that
concern over Ecuadorian economic policy by the international
community was mostly a reflection of the ill-advised public
posture of former Minister of Finance Rafael Correa. Still,
he had not understood the depth of the damage which had been
done to relations with the World Bank. He would work to
salvage that relationship. However, he did not think the
differences were really great. The IFIs understood his
economic policies and would support them. His tough line
with the protesters would help to keep the budget within
reasonable parameters.


11. (SBU) Still, he continued, there was no doubt that
Ecuador needed to invest more in social programs. Chile and
Costa Rica had social indicators far better than those of
Ecuador. Ecuador needed to catch up. There was too much to
do, and he had little time, so he intended to focus on his
long-term goal of universal health care, which had motivated
him to run for public office in the first place. He noted
that different countries had taken different approaches to
universal health care and Ecuador would need to find an
approach which fit its political situation. He also believed
that "economic reactivation" via government spending would be
crucial to get out of the current "economic crisis."


12. (SBU) Econcouns noted that Palacio had mentioned Chile
and Costa Rica as examples to be followed before. Perhaps we
could help bring him together with Chilean or Costa Rican
officials who had been involved in the reforms these
countries had implemented, to discuss their experiences.
Palacio responded enthusiastically.


13. (SBU) Palacio said he had another meeting with business
leaders scheduled for the next day. At their last meeting,
the week before, they had agreed on a shared agenda which
included customs reform, labor reform, and energy policy
reform. These were all issues which were important to
implementation of an FTA, he stated. The next day they would
discuss customs reform in depth. Econcouns noted that USAID
is very interested in working with the GOE on customs reform,
and would be pleased to assist. We are already working with
the Minister of Labor on labor reform and would like to see
that process accelerated.

Political Reform
--------------


14. (C) Palacio highlighted the need for political reform to
strengthen Ecuadorian democracy, especially election of
congressional deputies by district, so that voters would have
a clear idea who represented them. He said election by
district would definitely be on the referendum his government
would propose to Congress.

Comment: No Lack of Ambition Here
--------------


15. (C) Palacio has come a long way since taking over the
Presidency, and seems to be learning from some recent
mistakes. As he has gradually moved closer to us, he has
become more decisive in his decision making. However, he has
yet to understand that, as a caretaker government with no
mandate and only 16 more months to serve, his ambition to
become a major Latin American leader and counterweight to
Chavez would be unrealistic, even if he had the charisma
necessary to play the role. His ambition to implement
universal health care will also be extremely difficult to
fulfill, with Congress emboldened after recent presidential
missteps (septel). He is far too optimistic about prospects
for IFI financial support, given his proposal this week of a
2006 budget which grows by 14% over 2005(septel). It would
take great skill to keep the provinces calm without
disbursing significant new resources to them. Nonetheless,
our short term interests in Ecuador are likely to be
protected by a President who clearly understands how
important U.S. support and cooperation can be to him.
JEWELL

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