PARAGUAY: GOP BRISTLES AT CHARGEQS SUPPORT OF CENTRAL

C O N F I D E N T I A L ASUNCION 000029

SIPDIS

STATE FOR WHA/BSC, WHA/EPSC, EB/IFD/OMA


STATE PASS TO USTR FOR MARY SULLIVAN
USAID FOR AA/LAC ADOLFO FRANCO
TREASURY FOR OSIA CHRIS KUSHLIS and OTA
COMMERCE ITA FOR SARAH COOK
NSC FOR SUE CRONIN
SOUTHCOM FOR POLAD

SIPDIS

C O R R E C T E D C O P Y (To correct several grammar errors)

E.O. 12958: N/A DECL: 1.6X6
TAGS: ECON PREL PA
SUBJECT: PARAGUAY: GOP BRISTLES AT CHARGEQS SUPPORT OF CENTRAL
BANK PRESIDENT REFORM EFFORTS

REF: A. ASUNCION 1486

B. ASUNCION 951

Classified by CDA Kevin M. Johnson for reasons 1.5 (b) and (d).
--------------
Summary
--------------


1. (U) After a private meeting between Central Bank President Monica
Perez and Charge on January 1, Charge paid an official visit to Perez'
office to publicly voice support for Perez' efforts to curb corruption
in the Central Bank. Charge's remarks were widely covered in the local
press, and met with immediate reaction from close advisors to President
Duarte Frutos and Minister of Industry and Commerce Raul Vera, a past
President of the Bank. President Duarte Frutos (NDF) also alluded to
the comments on a local radio program on January 9. Later that day,
Vice Foreign Minister called Charge to voice GOP displeasure over his
public remarks during this highly political moment. Post public
support for transparency at this difficult time was intended to aid
reform efforts. While complaining about ChargeQs public comments, NDF
also increased support for Perez' reforms, at least for now. Perez
called U.S. public support "decisive". End Summary.

--------------
Charge Comes To Call
--------------


2. (SBU) On January 1, Charge met privately with Central Bank President
(BCP) Monica Perez, who told him that advisors of President Duarte
Frutos (NDF) were pressuring her not to take action against members of
the BCP board that she alleges participated in corrupt activities
through manipulation of the BCP's monetary budget. She said that a
report by the government Controller's office supporting her position
had "dark forces" worried that she was serious about fighting
corruption. After their private meeting, Charge paid an official visit
on Perez at her BCP office on January 3 to voice Embassy support for
Perez. (Note: The French Ambassador had supported Perez publicly and
criticized her opponents on the BCP board two weeks earlier. End Note.)
CDA spoke to reporters after the BCP meeting, delivering general
comments emphasizing U.S. support for transparency and strengthened
institutions, themes to which he noted NDF also commits himself. Note:
CDA was careful to use NDFQs own words and to praise his efforts,
including his naming of Perez to this key post. End Note. CDA
intentionally refrained from discussing the details of this ongoing
domestic political drama, in which Perez is pitted against the BCP
Board of Directors (ref A). Resulting media coverage of CDAQs visit
was straightforward, and quoted his remarks faithfully. The symbolism
and timing of the visit, however, prompted all three naional dailies
to play the story prominently on their front pages the morning of
January 4. The resulting coverage clearly implied Embassy support for
Perez versus those blocking reform (as Charge intended). See para 10
for transcript of ChargeQs remarks.

--------------
Tea With Walde And Goiburu
--------------


3. (SBU) On the afternoon of January 4, CDA was invited to the home of
Minister Carlos Walde, Chief Economic Advisor to NDF. Also attending
the meeting was Carlos Miguel Goiburu, NDF's Chief Legal Advisor.
Accompanying CDA were A/DCM and Econoff. Walde spent a large part of
the meeting discussing the technical aspects of Perez' objections to
reform of the BCP budget, specifically her concerns about the use of
the monetary budget to avoid transparency in BCP operations (ref A).
He expressed concern over the possible loss of BCP "independence"
should all aspects of the budget be subject to Congressional approval.
CDA stated that he did not wish to be drawn into a discussion of the
technical details of BCP budgets, but that his larger concern was the
fight against corruption. Walde said that CDAQs public comments were
not helpful, and CDA asked both Walde and Goiburu to state specifically
which comments were deemed inappropriate, reminding them that his
comments echoed earlier remarks by NDF. Neither Walde nor Goiburu
could point out specific remarks they found objectionable, and Goiburu,
having heard Charge on the radio, said the remarks were "not a
problem."


4. (SBU) Walde complained about Perez' style and stubbornness, noted
that CDAQs comments complicated things for NDF, but agreed that the BCP
Board, which is fighting Perez, is corrupt. Note: An added difficulty
for NDF is that in comments in December, he also called the Banks'
Directors corrupt, shameless, and called for their resignations. End
Note. Walde told CDA that he agreed with Perez about corruption at the
Bank and that the BCP directors needed to be removed, but stated that
she was being too aggressive in her approach. "My tactic would be to
remove some of the directors, just enough so that I had control of the
board", he said. Walde noted the political sensitivity in combating
corruption; being overly aggressive could provoke a backlash harmful to
larger efforts being undertaken by NDF's government. CDA encouraged
both Walde and Goiburu to look carefully at his statements, as he did
not believe that any of his remarks were inflammatory. At the close of
the meeting both Walde and CDA expressed a hope for a positive
resolution to the BCP controversy.

--------------
Minister Vera States His Case
--------------


5. (SBU) On the heels of CDAQs visit with Walde and Goiburu, CDA
received a request from Minister of Industry and Commerce and former
Central Bank President Raul Vera for a private meeting. The two met on
the afternoon of January 5 at CDA's residence. Econoff also attended
the meeting. Vera thanked CDA for the opportunity to speak privately.
He expressed concern over a recently prepared report by the GOP
Controller's office, which he said noted irregularities at the BCP
during his tenure as BCP President. He stated that the report was
incomplete, and launched into a lengthy explanation of his perspective,
frequently drawing CDA's attention to the documentation he prepared for
the meeting. CDA restated that the technical aspects of BCP budgeting
were a matter for the GOP to sort out, and that an interagency solution
was probably the most viable. Vera expressed dismay at the
Controller's report, alleging that it was not comprehensive. He also
implied that Perez' desire to see him implicated in corruption stemmed
from a personal grievance that dated back to his tenure as BCP
President, when Perez was also a BCP official. He lamented the impact
of accusations on his career and on his family. At the end of the
meeting, CDA reiterated his support for transparency and
accountability. Vera thanked CDA, and said that he would also be
making his case to the French and Italian Ambassadors.

--------------
NDF Gets The Message...?
--------------


6. (C) On January 5, NDF met Perez, Finance Minister Bergen and
Presidential advisors Walde and Goiburu at his residence. Perez told
CDA that the meeting was tense and NDF changed his position starkly.
Meeting separately with Walde and Goiburu and then with her, Perez said
NDF claimed to have been "misinformed" by Walde and others. Then
meeting all four together, NDF told them the ControllerQs report on BCP
activities had to be respected, and told Perez and Finance Minister
Bergen (in the presence of the opponents to this approach) to consult
on implementing the reportQs recommendations. NDF then told Perez to
tell the press of his decision, asking her how she would put it. She
told him she would say that she was supporting NDF's transparency and
anti-corruption efforts. According to Perez, NDF asked what Perez
would say if the press asked about ChargeQs comments. She said she
would note support for "Duarte's transparency agenda." NDF told her
"great," and that is indeed what she told the press. Perez told Charge
that US support had been "decisive" in moving NDF on this issue.

--------------
...And Criticizes the Messenger
--------------


7. (SBU) On the morning of January 6, NDF spoke to an Asuncion radio
station (Radio Mil) in which he criticized "meddling" by foreign
embassies in reference to their expressions of support for Monica
Perez. "I don't believe this is an expression that is appropriate for
an ambassador," Duarte Frutos said, without making direct reference to
any specific diplomatic mission. NDF also stated, "Even if his
position is correct, a diplomat should not get involved in the
government's administrative matters and I've asked the MFA to remind
all Embassies of this." The president reportedly went into no further


detail. BCP President Perez told CDA that NDF called her shortly after
speaking to the press. He asked her if "her friends" (USG) were
pleased with his decision at the January 5 meeting, and she told him we
were fine. He told her that he had been asked on the radio about
Embassy comments, and had criticized them for "political reasons." She
said he made light of the criticisms. Later on January 6, Acting FM
Gimenez called CDA to communicate GOP concerns over his public remarks,
adding that this was a sensitive electoral moment. Charge asked
Gimenez which comments the GOP considered out-of-line, but Gimenez only
repeated that it was a sensitive time and that he would also call other
embassies. Note: A formal note arrived on January 9 requesting all
diplomatic missions adhere to the Vienna conventions when registering
concerns over host government policies. End Note.


8. (U) NDFQs radio comments received front-page play in all three
national dailies the morning of January 7, with two of the three papers
assuming that Duarte's comments were directed at the U.S. Embassy.
"The executive (branch) criticizes American diplomat", circulation
leader ABC's headline read. "Executive criticizes meddling by the
American embassy," said La Nacion. "Someone has to go" reads a
presidential quote in large type immediately below photos of CDA Kevin
Johnson and French Ambassador Denis Vene, although the quotation was
misleadingly played completely out of context by "Ultima Hora." NDF
was actually referring Central Bank Directors.


9. (U) January 7 papers also briefly noted that the Foreign Ministry
sent notes to all diplomatic missions. ABC Color said the note was "to
remind them that any disquieting commentary should be sent through the
Ministry of Foreign Relations, as is stipulated in Article 41 of the
Vienna Convention." After this Saturday morning coverage however,
there has been no further press play on the matter.

-------------- -
Charge's January 3 Remarks At The Central Bank
-------------- -


10. (U) Quote: We believe it was a very intelligent decision by
President Duarte to name a prominent professional such as Dr. Perez for
as important an institution as the Central Bank. So when the President
made that decision, we thought that was very good news, indeed. We
think it is important to support the person, in this case at the
Central Bank, who is combating corruption. Part of the transformation
of Paraguay will result from the strengthening of its institutions, an
important factor for any modern country, and for Paraguay to be a
prosperous country. The United States is always interested in having
prosperous friends. End Quote. Both major newspapers concluded
coverage by reporting CDA's comments on the Millennium Challenge
Account program specifically benefiting those countries with an
articulated will and strategy to combat corruption and strengthen
institutions.

--------------
Comment: Defending The Reform Agenda
--------------


11. (C) The current situation at the Central Bank remains highly
politicized, and its outcome remains uncertain. This is a difficult
moment for NDF, who is embroiled in a nasty campaign for the Colorado
Party presidency and is under pressure to refrain from any action that
might impact his political allies. Post feels that it is important to
provide counter-pressure in support of Perez' and other efforts to stem
corruption. The keen interest shown by Walde, Goiburu, Vera, and NDF
illustrates the seriousness with which this matter is viewed by GOP
principals. Given the stakes, there is bound to be further pressure
exerted against Perez and her small team of trusted advisors. In
addition to the type of public support given by CDA U.S. Treasury's
Office of Technical Assistance (OTA) will soon assign a resident
advisor to the BCP. In addition, OTA has agreed to provide an
intermittent legal advisor at Perez' request to help her team review
Paraguay's Monetary Budget Law.


12. (C) Comment Continued: Post is keenly aware of the need to pick
our spots in helping NDF remember his promises to promote reform. Post
weighed in at a key moment when NDF was wavering and we've had at least
short-term success. Duarte's measured complaint about our public
comments bolsters his macho image, but is unlikely to have any lasting
effect. The Cabral case and now this more minor ruffle can be useful

reminders to Duarte that he can't take our support for granted.
JOHNSON