PARAGUAYAN UPDATE ON ITAIPU NEGOTIATIONS

C O N F I D E N T I A L ASUNCION 000295

SIPDIS

STATE FOR WHA/BSC MDRUCKER, BFRIEDMAN AND MDASCHBACH,
WHA/EPSC FCORNEILE

E.O. 12958: DECL: 07/26/2027
TAGS: ECON PREL EAGR EPSC PA
SUBJECT: PARAGUAYAN UPDATE ON ITAIPU NEGOTIATIONS

REF: ASUNCION 00042

Classified By: DCM Michael J. Fitzpatrick; reasons 1.4 (b) and (d).


1. (SBU) The Paraguayan government confirmed May 8 that
President Fernando Lugo's May 7 meeting with Brazilian
President Inacio Lula about Itaipu bi-national dam ended
without any agreements. In more than two-and-a-half hours of
discussion, Paraguay maintained its key negotiating points
about fair price, freedom to commercialize excess
electricity, and debt restructuring (reftel). According to
Paraguayan press reports, although Brazil initially expressed
willingness to explore different compensation mechanisms for
Paraguay's electricity surplus, it contended in the meeting
that per the statues of the 1973 Itaipu Treaty, revisions are
only possible after 2023, when the treaty is set to expire.
Regarding the debt restructuring issue, the Paraguayan press
reported that Brazil maintained that they paid for the entire
construction of Itaipu and Paraguay must pay its share. The
next bilateral meeting on Itaipu will be at the ministerial
level and is scheduled for June 10-15 in Paraguay.


2. (SBU) Days before the Presidential meeting, the Paraguayan
press reported Brazil made several counter-offers that
Paraguay refused. The offers included: advanced payments for
future electricity transfers; a refinancing of Itaipu's debt
by extending the maturity of outstanding loans; and up to 2
billion USD in soft loans to finance the construction of a
transmission line from Itaipu to Asuncion.


3. (C) Brazilian Embassy Political Counselor Ricardo Ayrosa
told Emboff May 8 that the negotiations did not result in
anything because the countries' positions are far apart, and
Brazil was not surprised by this outcome. He said President
Lugo is taking a more pragmatic view, and is aware of
Paraguay's limitations. Ayrosa thought Paraguay's main
negotiator Ricardo Canese and Foreign Minister Lacognata,
however, were pushing Lugo to maintain a hard negotiating
position. Ayrosa said Paraguay's strategy is very risky, and
that Lugo loses no matter what. If Lugo backs down now, he
will be criticized for not holding the line; and if he goes
forward, he will likely fail. Ayrosa also said Paraguay's
expectations are way too high, and identified the Paraguayan
press as being particularly unhelpful in that regard.
According to him, Brazil will continue discussions in
Paraguay, and hope to have something before the July MERCOSUR
Summit in Asuncion, which Lula will attend.


4. (C) COMMENT: Paraguay's negotiating team counts on Lugo's
personal relationship with Lula to advance its demands and
compensate for the country's limitations (reftel). Brazil, as
expected, is making counter-offers to steer the negotiation
in its direction, so the negotiations have stalled, and
Paraguay's room for maneuver is limited. As Lugo and his team
uncompromisingly push forward, the risk of failure increases
-- as does the likelihood of a political fallout for Lugo if
he cannot soon show concrete results. END COMMENT.

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