US embassy cable - 05ASUNCION750

C O N F I D E N T I A L SECTION 01 OF 02 ASUNCION 000750 
 
SIPDIS 
 
STATE PASS TO USAID FOR AA/LAC ADOLFO FRANCO 
USTR FOR SCRONIN, LYANG 
TREASURY FOR OSIA MAUREEN WAFER 
COMMERCE ITA SARAH COOK 
NSC FOR KBRIER 
SOUTHCOM FOR POLAD 
 
E.O. 12958: DECL: 06/06/2015 
TAGS: ECON, EFIN, ETRD, PREL, PGOV, PINR, PA 
SUBJECT: DEBTORS AT THE DOOR 
 
REF: ASUNCION 726 
 
Classified By: Ambassador John F. Keane for reasons 1.4 (b) and (d) 
 
1.  (C)  Summary:  Finance Minister Ernst Bergen shared his 
concerns with me about a renewed attempt by industrialists 
and bankers to raid government coffers.  They seek a rollover 
and/or forgiveness of debts owed by industrialists to banks 
dating back to the mid-1990's, with the GOP picking up the 
financial obligations.  End Summary. 
 
2.  (C) On June 3, Finance Minister Bergen called to reassure 
me that the GOP has no intention of supporting an effort by 
some members of congress hastily to approve a controversial 
bill facilitating the rollover and forgiveness of debts by 
industrial firms that are in arrears and about to be declared 
bankrupt and/or liquidated for other related reasons.  He 
said that he has discussed it with the President and Minister 
of Industry and Commerce Vera, as well as with IMF reps, and 
that the bill will be carefully studied because it gives the 
GOP pause. 
 
3.  (C) I thanked the Minister for his call and noted that, 
although I had not seen the bill's text, press articles 
describing its contents indicated that the bill has elements 
which concerned me, and are contrary to the GOP's stated 
objectives, and perhaps to its IMF agreement.  Potential 
problems include A) it would reward deadbeats and by 
extension serve as a disincentive to those who had met their 
financial obligations;  B) it would encourage pressure from 
other sectors to demand similar write-offs and concessional 
re-financing terms; and C) it would impact the GOP's 
financial plan because it involved state backed guarantees or 
funds transfers from state entities to the private sector 
banks. 
 
4. (C) I noted that a World Bank expert invited by the 
previous Minister of Finance (Borda) had recommended strongly 
that Paraguay modify its bankruptcy regime to facilitate the 
liquidation and auctioning off of assets so they could be 
re-employed productively by capable firms, rather than 
infusing new capital into "failures."  (Due to flaws in the 
bankruptcy regime and the difficulty in executing contracts 
in Paraguay, when businesses cease to service debts, their 
assets are frozen by the courts, people are laid off, but 
cannot be fired, and assets go unutilized for years, to the 
point of being beyond salvage, and preventing the 
re-employment of the laid off workers.)  I closed by 
reiterating my thanks for his informing me of the GOP's 
intention and offering to assist him in anyway he thought 
useful. 
 
5.  (C) Bergen replied that he agreed with my points, and 
asked that we at the Embassy in our contacts with members of 
congress note our concerns about the potential impact on the 
investment climate of this draft bill and other recent 
unfortunate legislation (e.g., a law passed on June 2 which 
restores the Christmas bonus to public sector retirees, 
thereby undercutting the pension reform of late 2003; and the 
draft tourism law, which would fix travel agency's fees at 6% 
of the cost of airline tickets.) 
 
6.  (C) Separately, Econcouns obtained a copy of the draft 
law from an IDB consultant and former Central Bank economist. 
 The law has several problematic sections, including one that 
specifies that refinanced loans would be classified as 
category one (loans with the highest probability of repayment 
that count the least against a bank,s capital).  It would 
allow financial entities in liquidation to pay off their 
debts to the state by transferring refinanced loans to the 
government.  It would set the interest rate on such loans 
(18% in local currency) and it would effectively forgive 70 
percent of interest arrears (both normal and penalty) for 
borrowers from those entities currently in liquidation. 
Another article would suspend the requirement to set aside 
provisions for assets acquired in foreclosure but not yet 
sold. 
 
7.  (C) A clear thrust of the draft law is to free up capital 
in Paraguay,s financial institutions, most of which are 
already very liquid (at least those not in liquidation).  The 
consultant opined that, given the continuing reluctance of 
many financial institutions to lend, the law would not 
encourage further lending.  Instead, the accounting trick of 
reclassifying non-performing loans to category one would free 
up additional capital that would most likely be withdrawn, 
leaving weaker institutions.  He also speculated that the 
backers of the new law may be testing the new economic team, 
seeing the departure of Borda as creating an opportunity to 
push this law. 
 
8.  (C) Comment:  Some members of congress are sprinting to 
satisfy favored constituencies as the internal party 
elections of both the Liberals and Colorados approach. 
Unfortunately, in many cases the majority goes along.  For 
its part, the GOP evidently lacks a strategy or an effective, 
reliable mechanism to engage constructively with Congress to 
limit damage, much less to achieve legislative objectives. 
On the other hand, when President Duarte Frutos engages on 
legislative issues he is often able to carry the day. 
Regrettably, his attention  on the legislative agenda is 
intermittent. 
KEANE