US embassy cable - 05ASUNCION726

UNCLAS SECTION 01 OF 03 ASUNCION 000726 
 
SIPDIS 
 
STATE FOR WHA/BSC, WHA/EPSC, EB/IFD/OMA 
STATE PASS TO USTR FOR SCRONIN, LYANG 
USAID FOR AA/LAC ADOLFO FRANCO 
TREASURY FOR OSIA MAUREEN WAFER 
COMMERCE ITA SARAH COOK 
NSC FOR MIKE DEMPSEY 
SOUTHCOM FOR POLAD 
US SOUTHERN COMMAND MIAMI, FLORIDA 
 
SENSITIVE 
 
E.O. 12958: N/A 
TAGS: ECON, EFIN, ETRD, PREL, PGOV, PINR, PA 
SUBJECT: AMBASSADOR CALLS ON NEW FINANCE MINISTER WHO 
ESPOUSES POLICY CONTINUITY 
 
REF: 05 Asuncion 675 
 
1.  (U) Sensitive But Unclassified - please protect 
accordingly. 
 
2.  (SBU) Summary:  In a meeting with the Ambassador and 
Treasury technical advisors on May 26, new Minister of 
Finance Ernst Bergen assured the Ambassador that the GOP 
would maintain the same fiscally conservative policies and 
the same focus on advancing structural reform as his 
predecessor, Dionisio Borda.  Minister Bergen confirmed that 
the GOP would be seeking a new IMF program, to include the 
possibility of a program for the duration of President 
Duarte's term (2008).  Bergen pointed to increased 
infrastructure spending and more private investment as the 
ways to achieve President Duarte's goal of spurring job 
creation.  Bergen plans to reinvigorate coordination with 
the private sector through a Development Council, although 
Bergen said he would not lower taxes.  The Ambassador 
introduced three of the Treasury technical advisors and the 
Resident Legal Advisor, and each gave overviews of their 
work.  Bergen expressed appreciation for their 
contributions.  While it remains too early to predict, there 
is no clear reason to expect any significant reduction in 
the Economic Team's efforts to maintain macroeconomic 
stability and continue pressing on with structural reforms. 
End Summary. 
 
3.  (U) On May 26, the Ambassador met with Paraguay's new 
Minister of Finance, Ernst Bergen.  As noted in reftel, on 
May 19 President Duarte asked then-Minister of Industry and 
Commerce Bergen to move to Finance to replace former 
Minister Borda, who had resigned.  One purpose of the 
meeting was to introduce members of the USG technical 
assistance team, several of whom work in the Ministry of 
Finance.  Economic Counselor, Treasury Department Office of 
Technical Assistance (OTA) Enforcement, Debt and Tax 
advisors, and the Department of Justice Resident Legal 
Advisor accompanied the Ambassador to the meeting.  The 
USAID Mission Director also attended to update Minister 
Bergen on the status of Tropical Forest Conservation Act 
negotiations. 
 
4.  (SBU) Minister Bergen began the meeting by assuring the 
Ambassador that he would maintain the same fiscally 
conservative policies and the same focus on advancing 
structural reform as his predecessor, Dionisio Borda.  As a 
businessman, he said he understood well the need for 
predictability, and that a change in ministers did not have 
to mean a change in policies.  Bergen emphasized that Borda 
is a close friend who would be available for expert 
consultations.  He pointed to the fact that he had retained 
nearly all of Borda's team as evidence that his assertion 
was sincere.  Note: The Ministry's Chief Counsel and the 
Vice Minister of Economy resigned, as did four of Borda's 
closest advisors.  The rest of the team has stayed.  Bergen 
mentioned that the former Vice Minister of Economy probably 
would act in an advisory capacity.  End Note. 
 
5.  (SBU) The Ambassador asked Bergen how he planned to 
implement the President's vision of continued reforms and 
prudent policies while creating more jobs.  Bergen said 
there are two ways to generate jobs: 1) infrastructure 
spending, where he hopes to accelerate the implementation of 
existing loans and projects; and 2) private sector 
investment, which he said requires continued macro 
stability, a new IMF program, and what he called a "strong 
alliance" with the private sector.  Minister Bergen also 
told us that President Duarte had authorized him to seek a 
new IMF program, including the possibility of a program that 
would last through the end of the President's term, which 
ends in 2008.  (Bergen announced the GOP's intention to seek 
a new IMF program publicly as well.) 
 
6.  (SBU) Minister Bergen mentioned the newly created 
Development Council, which is supposed to be a forum for 
more organized public-private sector interaction on economic 
policy.  Bergen emphasized, though, that greater cooperation 
with the private sector did not entail ceding policy making 
responsibility to the sector, and he specifically ruled out 
tax reductions.  He acknowledged that he cannot work 
miracles, but said the process could be reinvigorated.  He 
asserted that the private sector needs to be more proactive, 
and that the GOP needs to encourage that through regular 
dialogue.  The Ambassador noted that Paraguay's rigid labor 
code poses an obstacle to formal job creation and asked if 
the GOP planned to address it.  Minister Bergen stated that 
President Duarte supports labor reform, and said he planned 
to address the labor code within the Development Council. 
 
7.  (SBU) Minister Bergen also mentioned the binational 
entities controlling the two major international dams - 
Itaipu, shared with Brazil, and Yacyreta, shared with 
Argentina.  Bergen noted that the interest rates on the 
entities' debt are unjustifiably high (over 12 percent for 
Itaipu).  He pointed out that the entities' debt surpasses 
many times over Paraguay's own debt burden and that the 
excessive interest payments need to be addressed to free up 
more resources for development.  Note: Renegotiating the 
entities' debt will involve Brazil and Argentina.  For 
example, Brazilian state banks reportedly keep on the order 
of 300 basis points as an intermediary fee.  End note. 
 
8.  (SBU) In response to the Ambassador's question about the 
source of resources to boost infrastructure spending, Bergen 
said he wanted to facilitate the more rapid implementation 
of already existing projects, which are often mired in 
bureaucracy or political infighting or held back by a lack 
of human resources capacity.  The Ambassador also asked 
about Bergen's plans for the several special units created 
by Minister Borda, which include a public investment 
oversight unit (UCIP), a business climate unit, a 
transparency unit and others.  Bergen said he wanted to 
better institutionalize the units and that he planned to 
move UCIP to report to the Vice Minister of Economy rather 
than directly to him.  The business climate unit will likely 
be moved to the MIC, and the fate of some of the others 
remains under consideration. 
 
9.  (U) The Ambassador introduced the advisors from 
Treasury's Office of Technical Assistance (OTA) and each 
gave a brief overview of their work.  Minister Bergen 
expressed appreciation for the valuable assistance.  On 
debt, he signaled his strong support for deepening 
Paraguay's capital market and dematerializing bonds.  Note: 
Even today, the Minister of Finance must personally sign the 
authorization for each coupon payment. End note.  He 
indicated that both the new Minister of Industry and 
Commerce, Raul Vera, and the incoming President of the 
Central Bank, Monica Perez, would support that effort, and 
he noted the importance of the signals an active secondary 
market can provide to policy makers. 
 
10.  (U) OTA's Resident Enforcement Advisor provided an 
overview of efforts to create various vetted investigative 
units, including an Inspector General within Finance, as 
well as investigative units within the Tax Department and 
Customs.  Bergen expressed his support and arranged on the 
spot a follow-on meeting for the OTA enforcement and 
intermittent tax advisors with a Ministry legal official to 
move the issue forward. 
 
------- 
Comment 
------- 
 
11.  (SBU) Bergen's no-nonsense leadership style was evident 
from his actions in the meeting.  He makes decisions quickly 
when he can, but is not afraid to hold back if an issue 
needs further study.  He believes in empowering his 
subordinates and decentralizing his control more than 
Minister Borda did.  Bergen is a wealthy Mennonite 
businessman, and his preference for quick action and 
minimized bureaucracy were clear.  Time will tell how well 
his style works within the Ministry of Finance, which is 
much larger and subject to much greater outside pressures 
than the Ministry of Industry and Commerce. 
 
12.  (SBU) Bergen's close relationship with the President 
has led many commentators, including Borda himself (septel), 
to warn that the change in leadership presages the creation 
of an artificial and unsustainable economic bubble for the 
purpose of creating jobs in advance of intra-party elections 
in May 2006.  Bergen has publicly denied that such a plan 
exists, adding that he would resign before participating in 
that policy.  As noted reftel, in the President's speech 
naming Bergen, he stated the Bergen would maintain fiscal 
responsibility. 
 
13.  (SBU) It is significant that Minister Bergen has kept 
most of Borda's team of Vice Ministers, especially Andres 
Neufeld of the Tax Department and Margarita Diaz de Vivar, 
the Director of Customs.  His new Vice Minister of Economy, 
Jorge von Horoch, was with Bergen at the MIC as his Vice 
Minister of Industry.  Von Horoch is well known to the 
Embassy as a strong leader and orthodox thinker.  Von 
Horoch, who received this year's award for outstanding 
Fulbright Scholar and who was once an FSN in the Economic 
Section, was a stalwart supporter of IPR enforcement while 
at the MIC. 
 
14.  (SBU) Bergen does want to do a better job of cajoling 
the private sector to invest more and create jobs, but his 
tools are limited.  While it remains too early to predict, 
there is no clear reason to expect any significant reduction 
in the Economic Team's efforts to maintain macroeconomic 
stability and continue pressing on with structural reforms. 
 
KEANE