PALACIO DISAPPOINTS MANY ONE YEAR ON

C O N F I D E N T I A L QUITO 001042

SIPDIS

SIPDIS

E.O. 12958: DECL: 04/27/2016
TAGS: PREL PGOV PHUM EC
SUBJECT: PALACIO DISAPPOINTS MANY ONE YEAR ON


Classified By: PolChief Erik Hall for reasons 1.4 (b&d)


1. (C) Summary: This week marked the one-year anniversary of
Alfredo Palacio's ascension to the Presidency. He ducked the
opportunity to tout the accomplishments of his first year in
office or set forth a positive agenda for his remaining
months. Instead, ministers were trooped before the press to
defend the rather meager achievements of this government.
Meanwhile, media chronicled the regime's many missteps and
failures and Ecuadorian opinion-makers reached rare consensus
that booting out Palacio's predecessor on April 20, 2005 had
not made the situation better. The public reacted mostly
with indifference, with no street mobilizations from any
quarter. Trying to seize the moment, such as it was,
Palacio's Government Minister lamely called for political
dialogue on a national accord to boost political stability.
The proposed accord is the ninth in a series of failed
Palacio government attempts to promote reform or the prospect
of reform. Although a good idea, the accord is unlikely to
prosper. End Summary.

Few Accomplishments for Accidental President
--------------


2. (U) Media fought to outdo each other in summing up
President Palacio's disappointing record during his first
year in office. Politically, Palacio was held to account for
failing to deliver on his promise to "re-found the republic,"
and for the severe instability of his Cabinet (four ministers
of government, three Ministers of Economy and Finance, two
Foreign Ministers, etc.). Congress and the Electoral
Tribunal have already blocked eight separate attempts to
promote a referendum or constituent assembly. Polls reported
that 65% of respondants believed changing presidents
mid-stream had not been worth it, and 82% believed the
country was no better off a year later. On the economic
front, Palacio was hammered for introducing the hydrocarbons
law, which has put the FTA in doubt. The series of
disruptive provincial strikes have extracted from the central
government un-budgeted transfers to local governments. Only
the successful return to the international bond market and FM
Carrion's vigorous defense of sovereignty were considered
advances by commentators.

Last Try at Reform
--------------


3. (U) The national accord proposal defended by Government
Minister Felipe Vega consists of a proposed negotiation
between political elites, the government, civil society and
others to agree on a common minimum agenda that the next
government could pursue without fear of being toppled mid-way
through its term. Still vague in outline, the accord would
include agreements to promote rule of law, social
development, sovereignty, and control over natural resources.
The proposal has been received with deafening silence by
most sectors, with the exception of front-running candidate
Leon Roldos, who told the press "I don't believe in consensus
because there is such corruption in the economy and politics
that no agreement will ever be reached."

Effect on USG Interests
--------------


4. (C) Our own accounting of the Palacio government's
performance and effect on USG interests is more mixed, and
somewhat moderated by our low expectations of such caretaker
governments.

Positive:

-- Palacio maintained excellent cooperation against Colombian
irregulars discovered in Ecuador.

-- Palacio's government also beefed up its security presence
on the northern border with Colombia.

-- The GOE stepped up cooperation in the fight against
narco-trafficking, dramatically increasing drug seizures and
expanding cooperation on the high seas.

-- The GOE also dramatically stepped up its efforts to combat
trafficking in persons.

-- Palacio permitted judicial institutions to be
reconstituted without political interference, resulting in a
new, more credible Supreme Court and a new Constitutional
Tribunal.

-- The GOE has moved to recall high-interest bonds and
replace them with lower-interest debt.

Negative:

-- Undermined from the start by his undemocratic ascent to
power, Palacio overreached when promising changes he could
not deliver.

-- By immediately attacking the legitimacy of Congress, and
delaying the reform dialogue process, Palacio lost the
limited window of opportunity that might have existed.

-- Palacio's three Ministers of Finance have maintained at
least that many different, often contradictory, economic
policies. Fiscal policy has deteriorated substantially, and
the gutting of the Fiscal Responsibility Law damages
prospects for responsible fiscal policy in the future, even
after Palacio leaves office.

-- The new hydrocarbons law unilaterally modifies the
contractual terms of all the significant oil companies in
Ecuador, quite possibly leading to numerous arbitration cases
that the GOE will likely lose, and certainly stifling
investment in a sector that could be attracting billions of
dollars in foreign investment.

-- Erratic policy on the free trade negotiations with the
United States, including unfounded concerns by President
Palacio himself on intellectual property rights issues,
delayed progress at negotiations and damaged support for the
agreement in Ecuador.

-- The GOE has fumbled the Oxy case repeatedly, bringing
Ecuador to the verge of possible expropriation of the largest
foreign investor in the country.

All Palacio's Fault?
--------------


5. (C) All Ecuadorian presidents, whether brought to power
through elections or after street action, embody citizen
hopes, however fleeting, for dramatic changes to a
disappointing and dysfunctional political system. Those
hopes are built artificially high either by the two-round
presidential election system or by the passions unleashed by
street protests, fueling steep drop-offs of public support
beginning shortly after assuming office. It is also worth
noting that public confidence in all government institutions
is extremely low (with the exception of local government, the
human rights ombudsman, and the Armed Forces). Palacio's
approval ratings (around 15%, down from a high of 59% upon
taking office),have dipped below even those of the president
of Congress.


6. (C) In addition to complicating governance, this cycle
often causes embattled presidents, blamed by the media and
public for perceived failures, to launch public relations
counter-offensives and populist initiatives, often under the
sway of opportunistic sycophants intent on defending their
president. This phenomenon led to Gutierrez' downfall, and
may today be centralizing policy-making in the office of
Palacio's powerful Secretary of Public Administration, Jose
Modesto Apolo, recently elevated to primacy and Cabinet rank.


Looking Ahead
--------------


7. (C) Ironically, the more ineffective and marginal the
Palacio government becomes, the more assured it is of
reaching the end of its term. Indigenous anti-FTA protesters
are still regrouping, and hopeful an accord is never reached.
While no longer at great risk of being toppled, we are
entering a particularly sensitive period for USG interests.
Powerless to impose its own vision, and in a vain search for
legitimacy, this government is prone to offering populist
proposals that run counter to USG interests, such as the
recently approved hydrocarbon law or a possible negative
ruling on the Occidental Petroleum dispute.


8. (C) On the democracy front, the national accord is not a
bad idea and could conceivably help promote greater
democratic stability for the next government. But coming
from an unpopular government without allies, and during the
run-up to a presidential campaign, it is very unlikely to
prosper. Chances for bridge-building among Ecuador's
atomized political elites always increase after the first
round of presidential ballots, when the remaining two
candidates have an incentive to craft a program to attract
the also-rans and thereby emerge with a working alliance in
Congress. Nevertheless, Palacio will not even be represented
in that election, so even if a "pact" is put in place, it
won't be his.


9. (C) USG trade interests, set back in the short run, could
possibly improve under the next government which takes office
in January 2007. We are already noting a change in
Ecuadorian perceptions of the issue, which had been portrayed
by ideological opponents as a USG imposition. Instead,
Ecuadorians are now increasingly hearing from those whose
interests will be hurt without an FTA.


10. (C) We need to continue to engage with Palacio and his
ministers to salvage and protect USG interests, while
simultaneously preparing the ground for more productive
relations with his successor. Beyond simply assuring that
elections in October and November are free, fair and
inclusive; and engaging early with presidential contenders;
the latter must also include measures to strengthen
democratic stability, to help break the vicious cycle
Ecuador's president's face on taking office.


11. (C) We share an interest in democratic stability with
Ecuadorians of goodwill, but also with other members of the
international donor community. We intend to engage fully
with these nations and international institutions to promote
joint vigilance and coordination, and possibly joint
statements or other actions, to encourage political dialogue
and stabilizing political reforms.
JEWELL