US embassy cable - 04SANTODOMINGO5186

C O N F I D E N T I A L SECTION 01 OF 04 SANTO DOMINGO 005186 
 
SIPDIS 
 
STATE FOR WHA/CAR, WHA/EPSC, WHA/OAS, EB/OMA; 
NSC FOR SHANNON AND MADISON;LABOR FOR ILAB; USCINCSO ALSO 
FOR POLAD;TREASURY FOR OASIA-LAMONICA 
USDOC FOR 4322/ITA/MAC/WH/CARIBBEAN BASIN DIVISION 
USDOC FOR 3134/ITA/USFCS/RD/WH; DHS FOR CIS-CARLOS ITURREGUI 
 
E.O. 12958: DECL: 09/14/2014 
TAGS: PGOV, PREL, EFIN, DR 
SUBJECT: DOMINICAN POLITICS #2: FERNANDEZ, CRISIS AND 
OPTIMISM 
 
 
Classified By: DCM Lisa Kubiske.  Reason:  1.4 (b) and (d). 
 
 1. (U)  Following is no. 2 in our Politics 2004 series, our 
scenesetter for the visit September 16-17 to the Domincan 
Republic of OAS Amb. John Maisto.  Amb. Maisto will 
participate in public events at the MFA Diplomatic School and 
the "Foundation for Global Democracy and Development," both 
to deal with aspects of the Special Summit of the Americas. 
Amb. Maisto and the Ambassador will call on Dominican 
President Leonel Fernandez on September 16. 
 
Dominican Republic -- Fernandez, Crisis and Optimism 
 
(U) The Dominican Republic, just 70 miles from Puerto Rico 
across the treacherous Mona Passage, is a heavyweight in the 
Caribbean, a strong trading partner, and a helpful ally in 
the Caribbean.  The USG has used its prestige and resources 
to assure that elections here are conducted fairly and with 
close international observation.  We made possible the 
OAS-led election observation for the May presidential 
elections with our $325,000 contribution, and we spent more 
than $1 million in USAID funds to support the highly 
effective civil society observations that put some 6,000 
trained Dominican observers in the field.  Leonel Fernandez 
knows that we were vital in keeping the elections honest and 
thereby in providing his victory. 
 
(U) Leonel Fernandez took office on August 16 with a 
resounding inaugural speech promising a new orientation to 
Dominican government, stern enforcement of laws against 
corruption, resolute measures to confront economic crisis, 
and a new, socially conscious and market-friendly approach to 
government.  He said that the country would pursue peace and 
security through multilateral means, at the UN and the 
Organization of American States. 
 
(SBU) The inaugural celebration brought a giddy rush of 
confidence in the future.  With this optimism, the peso has 
strengthened nearly 20 percent against the dollar, and the 
Central Bank has been able to place its certificates for much 
longer terms at rates suggesting hopes that 40 percent 
inflation will evaporate. The president,s economic manager, 
Technical Secretary Temistocles Montas, sent technicians to 
huddle with the IMF and then traveled last week with chief 
negotiator Julio Ortega to the Paris Club and then to New 
York for financial advice.  On Thursday, the day of your 
arrival in Santo Domingo, they will be calling on Treasury 
Deputy Assistant Secretary Nancy Lee. 
 
A New Broom Sweeps,  Somewhat 
 
(SBU) Fernandez appointed to his cabinet a range of 
reasonably qualified, experienced supporters from his own 
party and from allied parties and factions.  Many, such as 
Montas, Central Bank Governor Hector Valdez Albizu and 
Agriculture Minister Amilcar Romero, are in the same jobs 
that they held in Fernandez I, 1996-2000.  Others are not far 
away -- Vicente Bengoa, Superintendent of Banks while the 
Baninter and other massive scandals were cooking away 
undetected, is now Minister of Finance.  Last time they were 
in office during boom times, when few questions were asked. 
In the new, grim reality, they will be subjected to closer 
scrutiny by everyone. 
 
(SBU) In contrast to these mostly relatively unimaginative 
appointments, Fernandez made excellent choices in 
appointments in law enforcement, especially Francisco 
Dominguez Brito as Attorney General and human rights 
specialist Gen. Perez Sanchez as Police Chief.  New head of 
the Armed Forces Sigfrido Pared Perez is an earnest, honest 
careerist. 
 
(SBU) Fernandez made four appointments to high ranked 
advisory jobs without managerial responsibility that raised 
the hackles of the press -- Mejia,s administration had 
formally charged all four appointees formally with 
embezzlement but never brought their cases to trial. 
Fernandez believes these four were the victims of political 
persecution and had not committed crimes. 
 
Urgent Problems 
 
(U) This new/old administration is struggling with urgent 
problems.  Chief among them: 
- - (SBU) Getting back to the table with the IMF.  The 
Fernandez team worked hard over the summer, with cooperation 
from Mejia,s people, to construct a "fiscal reform package," 
passage of which is likely to be a prerequisite for renewed 
negotiations with the IMF. The Congress has lost a lot of 
time debating an increasingly toothless package.  Worse, 
protectionist sugar interests have grafted into it a 25 pct 
tax on soft drinks and refreshments made with fructose -- a 
measure that runs directly counter to the spirit and letter 
of the bilateral free trade agreement, as well as to WTO 
commitments.  Fernandez has already announced some measures 
to cut government expenditures -- a smaller government 
payroll and reduced subsidies -- but he will have to make 
more drastic cuts to repair the budget, currently running at 
an estimated annual deficit for 2004 equivalent to more than 
7 percent of GDP. 
 
- - (SBU) Convincing the Paris Club.  The Paris Club one-year 
deal struck last March for USD 189 million in rescheduling 
was contingent on government measures for "comparability of 
treatment" for private sector creditors.  On September 6 the 
Paris Club atook a relatively flexible approach while urging 
Montas and Ortega to secure a new IMF agreement and to clear 
arrears.  To date the government hasn,t identified its 
approach to "comparable treatment," though it has an offer of 
a syndicated USD 100 million loan through Citibank that might 
be construed to fulfill the requirement. 
 
- - (SBU) Getting to restructuring.  There are Dominican 
arrears all over the world, including to bilateral creditors, 
IFIs, and the private sector.  Fernandez,s team says 
earnestly that they will clear these, as required by the IMF 
and the Paris Club, and they,ve found funds with which to 
avoid catastrophic defaults on sovereign bonds and sovereign 
guarantees, although only by a matter of hours.  For the 
rest, they have not identified to us the sources of funding. 
There is talk about a relatively mysterious "USD 500 million" 
to be volunteered by a combination of Spanish tourism 
investors, commercial banks, and friendly countries such as 
Brazil and Venezuela.  No one has seen the color of the money. 
 
- - (C) Solving the crisis of energy supply and pricing.  The 
electricity sector is almost completely without capital -- 
Fernandez has borrowed USD 50 million from domestic banks, 
enough to pay a small percentage of overdue government debts 
so generators can purchase fuel over the next three months. 
He says he has asked Venezuela,s Hugo Chavez to sell him 
petroleum at a 25 percent discount over six months, with 
15-year terms for financing.  At best, this might be a 
six-month respite; at worst, it could provide a point of 
leverage for Chavez,s regional political agenda (note, 
however, that Fernandez has shown absolutely no sympathy for 
Chavez,s views).  Similarly, Fernandez,s advisors are 
seeking to target the huge subsidy on cooking gas so that 
only households collect it, but they need at least four 
months to build the data base to target deliveries and 
implement a new system.  The 16,000 or so transport drivers 
using that same gas in their vehicles will lose the subsidy 
and could organize fierce opposition to the scheme. benefits. 
 
- - (SBU) Free trade -- on board or just talk?  In his 
relatively general discussions of globalization, Fernandez 
has been happy to endorse investment in education, science, 
and other long-term measures to improve competitiveness.  He 
used these themes on the second day of his administration, 
when at a signing of a grant made by U.S. Agriculture 
Secretary Ann Veneman the press asked him about the free 
 
SIPDIS 
trade agreement with the U.S. and the Central Americans 
(DR-CAFTA).  In the face of a determined month-long slander 
campaign against DR-CAFTA mounted by the sugar lobby, he has 
made no public comment.  In response to the congressional 
maneuver of the 25 percent tax on fructose drinks, he has 
left management of the issue to his cabinet.  First the 
Finance Minister told Congress to go ahead, because the 
administration would table a repeal proposal.  When the 
Ambassador made clear the sweeping political consequences in 
the U.S. of voting such a tax, Technical Secretary Montas 
formally asked the Senate to drop the measure.  Senators 
publicly labeled the Montas letter "unacceptable," asserting 
that the President himself has the responsibility of 
communicating with the legislature. 
 
- - (C) Corruption and Banking Fraud.  Fernandez has very 
good people in law enforcement, and first in-depth 
discussions suggest that the Central Bank Governor and legal 
staff will be steely in their pursuit of the cases against 
"Ramoncito" Baez and others at Baninter and other banks, 
whose embezzlement of breath-taking sums (equivalent to 20 
pct of 2003 GDP) put the economy into its current severe 
disequilibrium.  The Attorney General has barred "Ramoncito" 
from leaving the country.  Assistant Secretary Noriega and 
Amb. Hertell have urged the need for effective prosecution 
and exemplary punishment.  U.S. authorities have been working 
with the Central Bank to help this happen.  We need for 
Fernandez to hear it yet again.  It is widely believed that 
he accepted favors and emoluments from Baez, as retainer 
payments for "legal advice."  Fernandez has not made any 
comments about the case, and his people regularly tell us 
that since the cases are in the judicial system, the 
administration can say nothing. 
 
Your Presence and Your Message 
 
(U) Fernandez will welcome your public message of coordinated 
efforts across the hemisphere in favor of social development 
and institution building.  He likes the big picture and he 
wants to be a regional leader. 
 
(C)  In our opinion, it is the tough private message you can 
bring him that will do the relationship the most good.  He 
needs to hear from an experienced practitioner that financial 
repair cannot wait on dreamy scheming; he needs to hear that 
adjustment means imposing austerity quickly and decisively so 
that the country will have a chance to regain equilibrium in 
time for it to do offer him the prospects for re-election in 
2006.  He must hear again from us that corruption undermines 
democratic institutions. And perhaps most urgently -- 
although the hour may now be too late -- he needs to hear 
that it is time to declare a firm position on DR-CAFTA, or 
risk losing support in the United States -- not only for his 
trading policy, but very possibly for other, more 
far-reaching interests of the Dominican Republic. 
 
In the last analysis, we want Ferandez on our side and 
engaged with us in pursuit of prosperity, rather than 
wandering off into a fuzzy pan-Latino vision that leaves his 
people short of opportunity and still foundering in debt and 
corruption. 
 
2. (U)  Drafted by Michael Meigs. 
 
3. (U)  This report and others in the series are available at 
our SIPNET classified site 
http://www.state.sgov.gov/p/wha/santodomingo< /a>  along with 
extensive other material. 
KUBISKE