US embassy cable - 05ASUNCION951

C O N F I D E N T I A L SECTION 01 OF 03 ASUNCION 000951 
 
SIPDIS 
 
STATE FOR WHA/BSC, WHA/EPSC, EB/IFD/OMA 
STATE PASS TO USTR FOR LYANG 
USAID FOR AA/LAC ADOLFO FRANCO 
TREASURY FOR OSIA MAUREEN WAFER 
COMMERCE ITA SARAH COOK 
NSC FOR TOM SHANNON, MIKE DEMPSEY AND SUE CRONIN 
SOUTHCOM FOR POLAD 
US SOUTHERN COMMAND MIAMI, FLORIDA 
 
E.O. 12958: DECL: 7/27/2015 
TAGS: ECON, EFIN, PREL, PINR, PA 
SUBJECT: PARAGUAY'S NEW CENTRAL BANK PRESIDENT ON IMF, BANK 
REFORM, AND OPENNESS TO OTA TECHNICAL ASSISTANCE 
 
Ref: ASUNCION 00939 
 
Classified By: Ambassador John F. Keane for reasons 1.4 (b) 
and (d) 
 
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Summary 
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1. (C) Summary:  In an introductory call on July 20 with 
Monica Perez, Paraguay's new Central Bank President, the 
Ambassador described the in-country programs of Treasury's 
Office of Technical Assistance (OTA), introduced OTA's 
debt advisor, and extended the offer of OTA's banking team 
to do an assessment with a view toward possible future 
technical assistance.  Mr. Perez was very receptive to the 
offer of assistance, and cited the superintendent of banks 
to include bank resolution and asset management, central 
bank restructuring, banking regulation and inflation 
modeling as areas of interest.  Ms. Perez confirmed that 
the GOP is seeking a follow-on IMF program.  She told the 
Ambassador that the GOP would seek a similar framework of 
quantitative targets, but said the GOP, including President 
Duarte, does not want a heavy legislative agenda.  Ms. 
Perez conveyed confidence and a command of the many 
challenges she faces.  The combination of a fresh outlook, 
technical competence, and backing from the President 
present the USG with an excellent opportunity to help shape 
with OTA assistance the direction of financial sector 
reform in Paraguay.  End summary. 
 
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Economic Reform and US Support 
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2.  (U) On July 20, the Ambassador, Econ Chief and the 
Resident Debt Advisor from Treasury's Office of Technical 
Assistance (OTA) met with Monica Perez, the new President 
of Paraguay's Central Bank (BCP).  The Ambassador requested 
the meeting as an introductory call, to introduce Ms. Perez 
to the work of OTA's various advisors (debt, budget, 
taxation and enforcement), and to communicate an offer from 
OTA's banking team to undertake a needs assessment for the 
BCP to identify areas of possible collaboration.  Ms. Perez 
was open and forthcoming, and enthusiastically welcomed 
OTA's offer of assistance. 
 
3.  (U) The Ambassador opened the meeting by underscoring 
the investments the US has made in Paraguay based on 
President Duarte's support for economic reform.  He 
described the substantial commitment on the part of OTA, 
with three resident, and one intermittent, advisors from 
four of the five OTA teams.  He described the range of 
topics covered by the banking team, and told Ms. Perez that 
an assessment mission could take place as soon as August if 
she were interested.  The Ambassador described the work of 
OTA's Resident Enforcement Advisor, who was unable to 
participate in the meeting, and encouraged Ms. Perez to 
continue fostering cooperation among the various entities 
involved in combating money laundering. 
 
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Debt Issues 
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4.  (SBU) Patricia Bacchi, OTA's resident debt advisor, 
described her work, one focus of which has been the 
drafting of a general debt law to make it possible for the 
Finance Ministry to issue bonds and to encourage the 
development of a domestic capital market.  Perez said she 
was happy to hear of progress on a draft debt law, and 
suggested that we contact Finance Minister Bergen to 
underscore the importance of creating a debt management 
framework.  She also agreed that a quantitative debt policy 
based on a debt sustainability model was something Paraguay 
needed to develop, in particular as a tool to fend off 
unrealistic spending plans. 
 
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IMF Program 
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5.  (C) Ms. Perez confirmed that the GOP is seeking a 
follow-on IMF program.  She told the Ambassador that the 
GOP would seek a similar framework of quantitative targets, 
but said the GOP, including President Duarte, does not want 
a heavy legislative agenda.  She argued that legal changes 
are not in the executive's control, and said that too many 
countries are "victims" of the IMF's tendency to seek 
significant legislative changes.  While qualifying her 
appreciation of the political scene by noting her 13-year 
absence from Paraguay, she pointed out that this next year 
will probably be a difficult time to work with Congress 
given municipal and internal party elections on the 
schedule, as well as the very fragile alliance that was 
formed to elect the current Congressional leadership 
(reftel). 
 
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Legislative Obstacles...And Risks 
--------------------------------- 
 
6.  (C) She cautioned that bad outcomes can result from 
seeking major legislative changes, and gave as an example 
the public banking law working its way through Congress 
(with damaging changes to the version submitted by the 
executive).  She also mentioned the banking law submitted 
in December 2004, the passage of which by June 30, 2005 was 
a (now missed) performance criterion of the current IMF 
program.  No action has been taken on the law, which was 
drafted with the help of the World Bank.  Ms. Perez 
characterized the law as flawed, and as a law championed by 
the Ministry of Finance rather than by the BCP.  She 
described how President Duarte told Pamela Cox, the World 
Bank's Vice President for Latin America and the Caribbean, 
that the banking law would not be passed as it is, although 
he said he was committed to a banking law in some form. 
Ms. Perez prefers a law that "reflects Paraguay's 
realities" and that is drafted after a careful review of a 
number of laws, including the BCP charter. 
 
7.  (C) In that context, she referred to an agreement 
within the current economic team to give each member 
control of issues in his or her area.  She criticized, 
without naming names, various "actors" in the government, 
often advisors with no individual responsibility, who push 
initiatives like a recent draft law, now shelved at least 
temporarily, that would have allowed for easy refinancing 
of non-performing loans.  The economic team, led by Finance 
Minister Bergen, agrees that all new initiatives must pass 
through the team. 
 
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Structure of the Central Bank 
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8.  (C) In reference to the draft banking law, Ms. Perez 
questioned the proposed structure of the central bank, and 
said she had discussed her misgivings with the IMF and 
World Bank.  She said that the draft law contemplates a 
semi-independent superintendent of banks, but without clear 
legal protections for the Central Bank President, and 
without a clear line of responsibility.  The fear of 
potential liability would lead to a defacto centralized 
system.    Ms. Perez identified the superintendent of banks 
as a source of significant concern.  She questioned the 
quality of the information reaching the BCP's Board of 
Directors, and complained that the vast majority of her 
time is consumed by supervision issues, including with the 
financial institutions in liquidation, leaving little time 
to focus on policy.  Ms. Perez expressed her strong 
personal preference for a bank that is decentralized, but 
with cross-checking, and expressed hope that US technical 
assistance could involve someone from the Federal Reserve 
to advise on these issues. 
 
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Welcoming OTA Banking Technical Assistance 
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9.  (U) Ms. Perez enthusiastically welcomed the offer of 
technical assistance, and was pleased to learn that OTA 
provides its assistance on a grant basis.  She signaled her 
disapproval of the fact that roughly half of the second 
phase of a World Bank financial sector loan yet to be 
signed was slated for the payment of consultants.  Perez 
has heard that Taiwan may be interested in providing 
banking technical assistance, and has already requested 
technical assistance from the IMF, but said she would 
prefer US expertise.  While candidly acknowledging that the 
BCP needs help in most areas, she said her priorities are: 
the superintendent of banks (including bank resolution and 
asset management), central bank restructuring, a review of 
banking legislation with the view to eventually drafting a 
new banking law, and technical assistance with inflation 
modeling to inform monetary policy. 
 
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Comment And Bio Note 
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10.  (C) Ms. Perez conveyed confidence and a command of the 
many challenges she faces.  She was remarkably candid and 
open with the Ambassador, and acknowledged that she faces 
resistance from members of her Board of Directors and some 
other actors within the government, and faces constraints 
such as an extremely rigid budget.  Her close family ties 
to the President and his recent public statements suggest 
that she has his confidence and strong support.  The 
combination of a fresh outlook, technical competence, and 
backing from the President present the USG with an 
excellent opportunity to help shape with OTA assistance the 
direction of financial sector reform in Paraguay.  Having 
studied in Germany and worked abroad for several years, 
Perez shows directness and disciple not common in Paraguay. 
Her skills and no nonsense approach will make her a 
formidable player as long as she retains Duarte's support 
and would appear a key ally on USG reform priorities. 
 
KEANE