US embassy cable - 05ASUNCION417

UNCLAS ASUNCION 000417 
 
SIPDIS 
 
DEPT OF TREASURY WASHDC 
DEPT OF COMMERCE WASHDC 
DEPT OF JUSTICE WASHDC 
NATIONAL SECURITY COUNCIL WASHINGTON DC 
USSOUTHCOMMAND MIAMI FL 
 
STATE FOR WHA/BSC, WHA/EPSC, EB/IFD/OMA 
STATE PASS TO USTR FOR SCRONIN, LYANG 
TREASURY FOR OSIA MAUREEN WAFER 
COMMERCE ITA SARAH COOK 
NSC FOR MIKE DEMPSEY 
SOUTHCOM FOR POLAD 
USAID FOR AA/LAC ADOLFO FRANCO 
 
E.O. 12958: N/A 
TAGS: ECON, EFIN, EINV, KMCA, PGOV, PREL, PA 
SUBJECT: PARAGUAY: SENATE PASSES PUBLIC BANKING LAW 
OPENING WAY FOR FOURTH IMF REVIEW 
 
 
1.  In a special session on March 8, the Paraguayan 
Senate passed the public banking law establishing a 
single second tier public bank, complying with a 
performance criterion and opening the way for the 
fourth review of Paraguay's International Monetary Fund 
program.  The Senate debated for about seven hours, but 
did not make major changes to the bill.  While the 
Senate struck an article that applied the same 
prudential norms applicable to private banks to the 
public bank, it included language giving the executive 
branch the power to draft implementing regulations. 
The Minister of Finance told Econchief that he was 
pleased with the outcome, and that the Ministry would 
draft implementing regulations to apply appropriate 
prudential norms to the bank. 
 
2.  The resident IMF representative told Econchief that 
the version passed by the Senate had been reviewed by 
the IMF's Monetary and Financial Systems Department 
(MFD), which deemed the bill in compliance with the IMF 
program.  He also noted that not all public banks are 
subject to the same prudential norms as private banks. 
 
3.  The Ministry of Finance lobbied hard for the law's 
passage, and Diego Abente, a former Member of Congress 
and Political Advisor to the Finance Minister, believes 
that the law will have an easier time in the Chamber of 
Deputies, where it is expected to be considered in 
early April.  Some private observers disagree, though, 
and believe the law may face some attempts to legislate 
easy access to credit for small farmers and businesses. 
 
4.  The Second Tier bank, known as the Financial Agency 
for Development (AFD by its Spanish initials) would 
become the sole public wholesale bank, channeling 
longer-term funds from the IFIs and perhaps from 
domestic entities such as the social security fund to 
both public and private retail banks.  The AFD would 
subsume three small entities that currently act as 
wholesale lenders for the provision of financing for 
small businesses and rural farmers. 
 
5.  The second part of the public banking reform 
process will be the consideration by the Senate of the 
draft law consolidating the seven public retail (first 
tier) banks into a single entity.  The Senate is now 
expected to consider the first tier law on April 5. 
The existing retail public banks are dominated by the 
bankrupt Banco National de Fomento (BNF), which has non- 
performing loans (NPLs) on the order of 55 percent of 
total loans.  The other six entities are relatively 
small credit agencies and do not act as banks.  The 
first tier reform is expected to be much more 
contentious, as any perceived tightening of credit to 
small farmers and businesses will likely face 
resistance. 
 
KEANE