PARAGUAY A RELUCTANT PARTICIPANT IN BANCO DEL SUR

C O N F I D E N T I A L ASUNCION 000449

SIPDIS

SIPDIS

STATE FOR WHA/BSC, WHA/EPSC, EB/IFD/ODF
TREASURY FOR OSIA AND OTA
STATE PASS USTR FOR SUE CRONIN
USAID FOR DAA/LAC MARK SILVERMAN
NSC FOR DAN FISK
SOUTHCOM FOR POLAD BARBARA MOORE

E.O. 12958: DECL: 06/05/2027
TAGS: ECON EFIN ETRD PA PGOV PINR PREL
SUBJECT: PARAGUAY A RELUCTANT PARTICIPANT IN BANCO DEL SUR

Classified By: Classified By: CHARGE Michael J. Fitzpatrick for reasons
1.4 (b) and (d).

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Summary
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1. (C) Vice Minister of Economy Jorge von Horoch told econoff
that Paraguay agreed to join Banco del Sur at a meeting of
Finance Ministers in Asuncion on May 22, along with
Venezuela, Brazil, Argentina, Ecuador and Bolivia. Technical
discussions will continue in Buenos Aires on June 1. Von
Horoch downplayed Paraguay,s interest in the bank, but said
the government felt it had little choice but to go along with
its neighbors. Von Horoch said Paraguay and Brazil have
found much common ground in the talks with both countries
sharing the goal of a self-sustaining and professionally run
Banco del Sur as insulated as possible from political
manipulation by Chavez or other member countries. Capital
contributions have not been defined, although von Horoch did
not think this would pose an insurmountable obstacle, even
though Paraguay will not use its reserves and would only be
able contribute $10 or $20 million from regular budget funds.
Paraguay,s Central Bank shares von Horoch,s lack of
enthusiasm, but President Duarte,s public comments in
support of Banco del Sur make clear that Paraguay, unlike
Uruguay, will be a founding member. END SUMMARY.


2. (C) Econoff discussed Paraguay,s position on the proposed
Banco del Sur with Vice Minister of Economy Jorge von Horoch
on May 29. Von Horoch is a member of the GOP,s interagency
working group on Banco del Sur, which includes
representatives from the Ministry of Finance, the Ministry of
Foreign Affairs, the Central Bank, and Paraguay,s
second-tier state-owned development bank (AFD). He will
participate in the technical level discussions to take place
in Buenos Aires on June 1 where participants will address
outstanding issues in advance of the projected signing of
what von Horoch characterized as a &founders, document8 at
the end of June. The signing could take place in Asuncion at
the Mercosur Summit, although von Horoch said that Venezuelan
President Hugo Chavez is pushing for a signing in Venezuela.

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Paraguay has Joined ...
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3. (C) Paraguay,s Finance Minister, Ernst Bergen, signed the
&Asuncion Declaration8 on May 22 approving the creation of
Banco del Sur after a meeting of a number of the region,s
Finance Ministers in Asuncion. Venezuela, Brazil, Ecuador,
Argentina and Bolivia also signed the document. Uruguay,s
Minister of Finance participated in the meeting, but did not
sign the document. According to Von Horoch, Uruguay did not
participate in prior meetings and is maintaining the position
(privately and now publicly) that it will not be a founding
member of the Bank, citing not enough time to fully study the
proposal before the expected end-June signing. Von Horoch
admitted that Uruguay is clearly taking a wait-and-see
attitude and may join in the future if the Bank turns out to
be a serious development bank and not a political tool of
Venezuela.

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But is &Not Excited8
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4. (C) Von Horoch told econoff that Paraguay is ¬ excited
at all8 about the project, but feels that it has no choice
but to go along given the support from Brazil and Argentina.
He pointed to Paraguay,s landlocked status and resulting
reliance on Brazil and Argentina as markets and for access to
markets further afield as having a major impact on
Paraguay,s foreign policy, including with respect to Banco
del Sur. He cited as an example Argentina,s reaction when
an outbreak of Foot and Mouth disease caused Chile to
temporarily ban Argentine imports. Paraguay was free to
continue exporting, but Argentine customs inspectors began
causing long delays in processing Paraguayan trucks on their
way to Chile. Similar examples from both Argentina and
Brazil leave Paraguay painfully aware of its vulnerability to
commercial reprisals from its neighbors. As a result, von
Horoch said Paraguay must tread lightly with its regional
partners.


5. (C) Nevertheless, the GOP is wary of Chavez,s intentions
and does not want to see the Bank become an instrument for
political influence and largess. Paraguay also doesn,t
really need a new source of development funds ) domestic
debt is relatively low and the established development banks
provide more than enough development funding. Paraguay,s
problem is domestic, with the opposition-controlled Congress
refusing to approve many of the loans offered by the IDB and
World Bank. Paraguay would like to see a professional bank
operating objectively with self-sustaining lending
operations. Von Horoch cited the example of the European
Union,s European Investment Bank as a model for a regional
bank that supports integration efforts.

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Common Ground with Brazil
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6. (C) Von Horoch said that while Paraguay and Brazil are not
coordinating their views, both have been quick to find common
ground at the meetings as they work to limit the possibility
that Banco del Sur could become a foreign policy tool for
Venezuela. Von Horoch said that Paraguay has achieved the
adoption of two important points: one vote per country, and
membership open to all South American countries, although he
doubts Chile, Peru or Colombia would join. Paraguay and
Brazil also supported the current vision of Banco del Sur as
a development bank without an IMF-like monetary crisis
support role. Von Horoch characterized relations between
Venezuela and Brazil in the process as a &silent struggle,8
with Brazil working towards a goal similar to that of
Paraguay: namely a Banco del Sur as insulated as possible
from political manipulation by Chavez or other member
countries. Paraguay wants the bank to be self-sustaining and
managed professionally.

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Capital Contributions Undefined
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7. (C) The amount and modality of each country,s
contribution of capital to the new bank has not yet been
defined. However, one vote per country would usually imply
equal capital contributions. Brazilian Minister of Economy
Guido Mantega expressed that sentiment in statements to the
press after the May 22 meetings in Asuncion. Von Horoch told
econoff that Paraguay is both opposed to using its reserves
and unable to do so under current law, which requires
reserves to be deposited in AAA-rated, liquid assets.
Several proposals have been discussed, although none have
been put on paper. One proposal involved summing GDP,
exports and reserves and subtracting debt, each term with
some pre-determined coefficient, to determine a country,s
obligation. Von Horoch said that since Paraguay would have
to contribute out of current resources, the maximum
contribution would be far less than $50 million.


8. (C) Despite these problems, von Horoch didn,t think that
capital contributions would pose a significant obstacle. He
said that Venezuela and Argentina have both informally
suggested that they might deposit up to ten percent of their
respective reserves in Banco del Sur ) an amount that could
reach $6 billion ) as initial working capital. Those
resources could help the bank begin to operate. Options for
the founding countries include creating an under-capitalized
bank or granting countries like Paraguay generous long-term
horizons to fully fund their capital obligations.

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COMMENT
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9. (C) Post,s Resident Banking Advisor from Treasury,s
Office of Technical Assistance has heard similarly
pessimistic views about Banco del Sur from members of the
Central Bank,s Board of Directors. They view the bank as
largely unnecessary and likely to be inefficient and
politically influenced. The Treasury Advisor, who has
previous World Bank experience, told Econoff that in his
personal view, Banco del Sur will probably end up with a
bloated bureaucracy making long-terms loans on projects with
very low returns. Von Horoch,s strong characterization that
Paraguay has little choice but to go along with Brazil and
Argentina is true to a point, but President Duarte has been
clear in his public statements that he supports Banco del Sur.
FITZPATRICK