PARAGUAY: CENTRAL BANK PRESIDENT TESTING PRESIDENT

C O N F I D E N T I A L ASUNCION 000258

SIPDIS

SIPDIS

NAIROBI FOR MICHAEL FITZPATRICK
TREASURY FOR CKUSHLIS
STATE FOR WHA/EPSC, EB/IFD/OMA
STATE PASS TO USTR FOR MSULLIVAN
USAID FOR AA/LAC ADOLFO FRANCO
SOUTHCOM FOR POLAD BARBARA MOORE
NSC FOR SUE CRONIN

E.O. 12958: DECL: 03/08/2016
TAGS: ECON PREL EFIN PINR PA
SUBJECT: PARAGUAY: CENTRAL BANK PRESIDENT TESTING PRESIDENT
DUARTE'S SUPPORT

REF: A. A) ASUNCION 201

B. B) ASUNCION 35

C. C) 05 ASUNCION 1486

Classified By: ECON Patrick R. O'Reilly for reasons 1.4(b),(d).

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SUMMARY
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1. (C) In the Ambassador's introductory call on March 3,
Central Bank (BCP) President Monica Perez said that little
had changed with respect to the dispute between Perez and the
four other BCP Board members (reftels). She said she had
accomplished all she could in the current hostile
environment, and has told President Duarte that she will
resign if something isn't done to remove the worst of the
four Central Bank Board members by March 20. Perez asserted
that she still believes in Duarte's good intentions, and
commented that Duarte told her that he only trusts two
members of his cabinet: Perez and Finance Minister Bergen.
The others are his "friends" but he knows they "all have
their things." The Ambassador raised the anti-money
laundering law and noted both its importance to Paraguay's
anti-corruption efforts, and our view that passage of the law
is a litmus test of the GOP's political will. Perez supports
the law and promised to raise it with the economic team.
Perez was pleased to learn from IMF staff that her attempts
to cleanse the BCP's balance sheet and improve internal
controls had helped reduce the 2005 quasi-fiscal deficit to
0.2 percent of GDP, much lower than the 0.6-0.8 percent range
in 2004 and 2003. She warned that inefficient and expensive
monetary policy in Paraguay as well as the fact that the BCP
is undercapitalized could cause serious problems in the
future. President Duarte's reaction to Perez's private
ultimatum will be a window into his willingness and ability
to take on vested interests for the sake of reform and
modernization. End Summary.

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CENTRAL BANK TENSIONS UNABATED
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2. (C) On March 3, Ambassador Cason, accompanied by
Econcouns, had his introductory call on Central Bank (BCP)
President Monica Perez. Perez said that little had changed
with respect to the dispute between Perez and the four other
BCP Board members (reftels). The working environment remains
hostile, and she said she meets resistance at every turn,
leading her to never sign documents without thorough vetting
by her few trusted advisors, no matter the claimed urgency.
The environment is exhausting, and leads to long nights and
weekends of work for her and her inner circle. She admitted
that she would not continue forever, and had badly
underestimated the mess she would encounter when she accepted
the job.


3. (C) Perez told the Ambassador that she had told President
Duarte that she had accomplished all that she could with the
current hostile Board, and that continued progress reforming
the bank, and her continued tenure as the President, were
contingent on the removal of two of the Board members,
specifically Diego Martinez and Raul Ayala. A third Board
member, Fernando Silva, is problematic, but is from the
Liberal Party and too protected politically to be removed.
In any case, Perez characterized Silva as "not too bright"
and therefore less difficult to deal with than the other two.
The fourth member is less political and she believed him not
to be malicious.


4. (C) Tactics used to frustrate Perez include frequent
attacks in the press by the other Board members, the floating
of rumors of Perez alliances with political enemies of
President Duarte, and the leaking of rumors of her
resignation, leading to persistent calls from the press
seeking comment. For her part, Perez said that she generally
avoids the press given her impatient, direct nature, fearing


that she would be drawn into telling it like it is, which
would not be good for the institution or for President
Duarte.

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A MARCH 20 ULTIMATUM
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5. (C) According to Perez, President Duarte assured her that
he would act to remove Martinez and/or Ayala, but asked for
her patience beyond the establishment of the new leadership
of the Colorado Party (ANR),expected to occur on March 8 and

9. A key issue at stake will be the position of powerful
Colorado Senator Galaverna. Perez said that Minister of
Public Works Jose Alderete will become the President of the
Colorado Party (ref A) and that Galaverna will be sidelined.
Perez asserted that Galaverna is unhappy since he senses the
effort to reduce his influence. She also mentioned as an
aside that one of Galaverna's girlfriends is a dentist in the
Central Bank's medical unit, although Perez said she hasn't
met her.


6. (C) While Perez reiterated that she continues to believe
in Duarte's good intentions, she told the Ambassador that if
the President doesn't act to remove the two directors by
about March 20, she will resign. Note: In the past (refs B
and C),Perez had told us that she would only go if
impeached. By her own admission, the stress was beginning to
affect her health, and she has evidently decided only to stay
if she can continue her efforts to reform the bank. End
note. Interestingly, Perez commented that President Duarte
told her that he only trusts two members of his cabinet:
Perez and Finance Minister Bergen. The others are his
"friends" but he knows they "all have their things."

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MONEY LAUNDERING LAW AND IMF PROGRAM
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7. (C) The Ambassador raised the anti-money laundering law
and noted both its importance to Paraguay's anti-corruption
efforts, and our view that passage of the law is a litmus
test of the GOP's political will. Perez supports the law and
promised to raise it in a meeting with the visiting IMF team
and the GOP Economic Team later that afternoon. She
suggested that the possibility existed that a reference to
the law could be included in the IMF program documents, even
if not as a performance criterion or benchmark. She told us
that the interagency group on money laundering only met three
or four times in 2005, and that the BCP has been trying to
call another meeting.

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MAKING HEADWAY CLEANING UP THE BANK
-- BUT STILL UNDERCAPITALIZED
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8. (C) Perez was proud of the fact that, despite the constant
resistance of the Board members and others within the BCP,
her efforts to clean up the Bank's balance sheet had achieved
positive results. The IMF staff team informed Perez that in
2005 the quasi-fiscal deficit of the BCP was 0.2 percent of
GDP, much lower than the 0.6-0.8 percent range in 2004 and

2003. She said that the controls she has implemented are
working. More needs to be done, though. Perez lamented that
conducting monetary policy in Paraguay is both inefficient
and very expensive. With the lack of a domestic government
bond market, the BCP issues its own instruments on which it
pays interest. Combined with the fact that the bank is
significantly undercapitalized after the series of bank
failures of the late 1990s, the bank has been running
quasi-fiscal deficits for a number of years. Perez warned
that if improvements are not made, and the bank not
recapitalized, the situation would eventually "explode."

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COMMENT

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9. (C) Perez's ultimatum, if firm, represents another litmus
test for President Duarte. With the ANR elections over and
spectacularly successful for Duarte, and with the naming of
the ANR leadership this week, there will be fewer obvious
excuses for inaction. With Monica Perez a clear reformer who
is having a direct impact on certain vested interests, if the
President acts to renew the Board and keep Perez, it will be
a strong signal of his commitment to reform and
modernization. If she goes, it may be difficult for the
President to find a comparably able and committed replacement.

CASON


CASON