US embassy cable - 05QUITO1666

UNCLAS SECTION 01 OF 02 QUITO 001666 
 
SIPDIS 
 
SENSITIVE 
 
E.O. 12958: N/A 
TAGS: ECON, ELAB, PGOV, EC 
SUBJECT: SOCIAL SECURITY REFORM IN PRESIDENT'S HANDS 
 
1.  (U) Summary:  President Palacio has ten days from July 11 
to decide whether to approve or veto a Congressional bill 
proposing the complete return of social security reserve 
funds to the population.  Currently, the funds, paid yearly 
by employers and managed by the Ecuadorian Social Security 
Institute (IESS), cannot be withdrawn until a worker's 
retirement.  Congress, in a populist move, proposes the full 
return of the fund to workers within 90 days.  However, the 
IESS does not have these funds available, as they are 
invested in various government bonds.  The Central Bank has 
warned that a complete withdrawal of the reserve funds could 
lead to increased inflation and would affect the trade 
balance.  The reserve funds, intended to bolster savings, 
total $734 million. 
 
2.  (SBU) Minister of Economy Rafael Correa has led a public 
campaign against the bill.  Veto of the bill would be 
politically costly; a line-item (or partial) veto might well 
be overturned by Congress, and implementation of the bill 
would deny the government some $350 million in financing it 
was counting on.  Some observers believe the bill is an 
attempt by former president Leon Febres Cordero to force the 
GOE to yield to his influence.  End Summary. 
 
Congress Seeks 100% Return of Reserve Funds 
------------------------------------------- 
 
3.  (U) On July 6, 75 Congress members voted in favor of a 
bill allowing for the total return of IESS reserve funds 
within 90 days of the bill's passage, for those who request 
it.  IESS affiliates could then, in the future, withdraw 
these funds every three years.  The reserve fund is one of 
the main social security funds under the management of the 
IESS.  The fund was originally intended as an additional 
salary paid by employers, that workers could withdraw every 
three years.  A reform in 2001 said that workers could only 
withdraw money from these accounts once they retired. 
 
4.  (U) The bill has been criticized for being solely 
intended to gain Congress popular support, and not 
technically possible, as the IESS does not have the financial 
resources needed to return the reserve funds in 90 days.  The 
bill also says that those who have been unemployed for over 
six months, as well as beneficiaries over 60 (the retirement 
age), will receive their reserve funds immediately. 
 
President Must Decide on Populist Bill 
-------------------------------------- 
 
5.  (U) Congress' bill, proposing the return of 100% of 
Social Security reserve funds, was delivered to the 
Presidency on July 11.  The President has 10 days to study 
the proposal and either approve or veto the bill.  A total 
veto from President Palacio would mean Congress cannot 
reconsider the law for 12 months.  The President may also 
partially veto the bill and propose amendments.  For example, 
withdrawals from the reserve fund could be set at a 50% 
maximum, instead of 100%.  The bill would then return to 
Congress, which would have 30 days to override a partial 
presidential veto with a two-thirds majority, otherwise the 
bill would be passed with the President's amendments.  Once 
the measure is approved, it would pass to the Official 
Registry and go into effect.  Palacio has said he will make a 
technical, not political decision on the IESS issue.  Based 
on the public comments of several of his Ministers, it is 
believed Palacio will submit a partial veto. 
 
6.  (U) The ID's Ernesto Pazmino has suggested a longer time 
frame for the return of the funds as the IESS does not 
currently have the total funds available; he publicly asked 
the President for a partial veto of the bill.  The Pachakutik 
party is also in support of a partial veto.  Congress members 
who support the original bill, preparing for a Presidential 
veto, are attempting to collect the 67 votes needed to 
override the veto. 
 
Ministry of Economy Leads Campaign For Veto 
------------------------------------------- 
 
7.  (U) Minister of Economy Rafael Correa has said that the 
bill was not considered sufficiently, and in an attempt to 
please the public, puts the nation's economy at risk.  Correa 
is in favor of a total or partial presidential veto.  Correa 
has led outreach to legislators and union leaders to explain 
his Ministry's objections to the bill.  Some Congress members 
have reportedly threatened to censure Correa if the President 
vetoes the bill partially or totally. 
 
Central Bank and IESS Highlight Bill's Weaknesses 
--------------------------------------------- ---- 
 
8.  (U) According to a Central Bank study, the complete 
return of IESS reserve funds would trigger a 3.7% increase in 
inflation, as well as a 3% increase in imports, affecting the 
trade balance.  Consumption of goods and services would also 
increase by 2.4%.  The GOE would also lose some $350 million 
in financing it was counting on for this year. 
 
9.  (U) Only $268 million of the total $734 million in 
reserve funds are in the Central Bank and available 
immediately, according to the IESS.  Of the remaining funds, 
$302 million are in State bonds, approximately $82 million 
are invested in treasury certificates, $18.4 million are in 
accumulation bonds, and $47.9 million are in fixed-term 
deposit certificates.  In order to return 100% of the reserve 
funds, the IESS would need to withdraw approximately $450 
million from its investment portfolio. 
 
Workers Support Bill, Business Leaders Opposed 
--------------------------------------------- - 
 
10.  (U) Members of the United Workers Front and health 
workers have recently protested in front of the Congress 
building demanding the entire return of the reserve funds. 
MPD party Congressional head Luis Villacis said on July 10 
that his party, along with the unions, will ask the President 
not to veto the bill.  Villacis warned that if the President 
decides on a total veto, it would provoke the mobilization of 
the 1.6 million IESS affiliates, which would "endanger the 
government's stability."  President Palacio met with union 
leaders on July 12 to explain the government's position, but 
no agreement was reached. 
 
11.  (U) Most in the business community are opposed to the 
complete return of reserve funds and are calling for a total 
veto.  A representative of Pichincha's Chamber of Small 
Industries has said publicly that the bill would be 
catastrophic for the country's economy if implemented. 
 
12.  (SBU) In a meeting with Econcouns July 13, President of 
Banco de Guayaquil Guillermo Lasso said he believed the 
proposal to return to reserve funds to affiliates was an 
attempt by Leon Febres Cordero, former president of Ecuador 
and head of the Social Christian Party (PSC), to force the 
Palacio government to come to him for support.  Febres 
Cordero was the only one who could guarantee that a partial 
veto would not be overridden, and the price Palacio would 
have to pay him in order to keep his government financially 
afloat would be high. 
 
Comment 
------- 
 
13.  (SBU) Reports that the GOE may obtain financing from 
Venezuela to cover fiscal shortfalls suggest that the Palacio 
government may be desperately seeking a way out of the fiscal 
box in which it has been placed by the PSC and its leader. 
Without cooperation by Febres Cordero, the distribution of 
over $700 million to the population of Ecuador will likely 
take place, and the GOE's already precarious fiscal position 
will be worsened substantially. 
HERBERT