US embassy cable - 05QUITO2057

C O N F I D E N T I A L SECTION 01 OF 03 QUITO 002057 
 
SIPDIS 
 
E.O. 12958: DECL: 09/01/2010 
TAGS: PREL, PGOV, EFIN, ECON, VE, EC 
SUBJECT: A FIRST MEETING WITH PALACIO 
 
REF: QUITO 01978 
 
Classified By: ECON LARRY L. MEMMOTT, REASONS 1.4 (B,D) 
 
1.  (C) Summary:  In their first substantive discussion, 
President Palacio told the Ambassador that he sees himself as 
a counterweight to Venezuela's Chavez; that he intends to 
take a hard line to keep civil order in Ecuador; that he 
believes the international financial institutions (IFIs) will 
support his government's economic policies, which will 
include universal health care for Ecuadorians; that the 
Occidental problem will be resolved this year (see septel) 
and that his government will implement important political 
reforms.  While his ambition is laudable, it is clear that he 
will be lucky to accomplish even one or two of these goals. 
End Summary. 
 
2. (SBU) At his invitation, Ambassador and Econcouns dined 
with President Palacio, the first lady, his brother and 
Ecuadorian Representative to the Interamerican Development 
Bank Gustavo Palacio, and Secretary of the Presidency Luis 
Herreria the evening of August 31.  The conversation was 
extremely cordial, and Palacio made very clear his desire to 
develop a close relationship with the Ambassador and with the 
USG. 
 
3.  (U) Palacio greeted the Ambassador by expressing his 
great sympathy for the disaster in New Orleans and said he 
had sent a letter to President Bush expressing his sympathy. 
He noted that he had been to New Orleans many times for 
medical conferences and felt real sorrow for the loss.  Mrs. 
Palacio pointed out that all three of their children live in 
Miami, where she also lived for many years, so they 
understand the horror of hurricanes. 
 
Venezuela 
-------- 
 
4. (C) Palacio made clear his antipathy for Hugo Chavez at 
several points during dinner.  He described the offer by 
Chavez of financing for Ecuador's budget as not even 
economically advantageous to Ecuador, suggesting that the 
8.5% nominal interest on the bonds which Chavez had offered 
to buy would probably not be much better than market rates by 
the time all costs were factored in.  He said he had pointed 
out to Chavez that the multilaterals were lending at 4%. 
Chavez had responded that while that was true, they would not 
lend to Ecuador.  Palacio suggested that offering 8.5% when 
4% was available elsewhere (even if not to Ecuador) was 
"extortion."  Further, he commented, he might even be taken 
to court later for damaging Ecuadorian interests for 
accepting an 8.5% interest rate.  In the end, he had fired 
his Minister of Finance for his continued promotion of this 
deal, and his inability to ever put the offer down on paper 
for objective analysis. 
 
5. (C)  Chavez' offer to loan Ecuador oil did not stand up to 
Palacio's analysis, either.  He said he had asked for oil of 
a quality which Ecuadorian refineries could process (api 20). 
 Chavez had offered no better than 18.5 api, which might, or 
might not, be light enough for Ecuador's outdated refineries 
to handle (they can not refine 18 api crude).  He had offered 
to pay the crude back one barrel for one barrel.  Chavez had 
counter offered 1.4 barrels to one.  While the Venezuelan 
crude was of a higher quality than Ecuadorian, he concluded 
this did not look like a great deal.   Luckily, he said, 
PetroEcuador production had recovered much more rapidly than 
expected, and Ecuador would not likely need much, if any, 
Venezuelan crude. 
 
6. (C) As for Chavez himself, Palacio said a Latin American 
counterweight was necessary to draw attention away from him. 
Uribe had the charisma and the smarts to do it, but he was 
"too far to the right" and too close to the U.S. to play the 
role.  Toledo was too weak internally, and Lula and Kirchner 
would certainly not do it.  The banner would have to be 
carried by someone in the center- left, who would not 
challenge Chavez directly, but simply divert attention from 
him.  Perhaps Michelle Bachelet, who he thought the likely 
winner in Chile's upcoming presidential contest, could assume 
that role, but she would need time to ascend to the 
international stage.  In the meantime, Palacio said, he 
believed he could do it.  But he would need U.S. assistance 
to do so.  Ambassador asked what kind of assistance.  Palacio 
responded that he would first need help "strategizing." 
 
A Hard Line with Protesters 
--------------------------- 
7. (C) The Ambassador asked Palacio if he was concerned about 
possible future protests in other provinces in the mold of 
the Manabi and Orellana/Sucumbios protests.  Palacio 
expressed satisfaction with the accomplishments of his new 
Minister of Defense Osvaldo Jarrin in the later part of the 
recent protests in the oil fields.  Once Jarrin had taken 
over, the military responded immediately to his orders to 
push protesters from the oil and transportation facilities 
they had taken over.  "There will be no more strikes," 
Palacio vowed, saying he fully expected the military to 
follow his hard line with protesters.  The Ambassador noted 
that Jarrin is well respected by those in the Embassy who 
know him. 
 
8. (C) Palacio said he is concerned about reports from his 
police force that indoctrination and training is being 
provided to young people at several locations in Ecuador to 
build a cadre for revolutionary purposes.  According to these 
reports, Ecuador could have a real problem with insurgency in 
a few years.  Ecuadorian intelligence had not been able to 
determine who was behind the protests in the oil patch, but 
they were too well organized to be purely the work of 
internal forces, Palacio suggested. 
 
9. (C) It did not look like the World Bank would be likely to 
help Ecuador on security in the oil fields, Palacio said. 
Maybe the U.S. could help.  After all, these installations 
were right on the border with Colombia and potentially 
vulnerable to FARC attack.  The Ambassador promised to look 
into possibilities. 
 
Economic Policy 
--------------- 
 
10. (SBU) Turning to economic policy, Palacio said that 
concern over Ecuadorian economic policy by the international 
community was mostly a reflection of the ill-advised public 
posture of former Minister of Finance Rafael Correa.  Still, 
he had not understood the depth of the damage which had been 
done to relations with the World Bank.  He would work to 
salvage that relationship.  However, he did not think the 
differences were really great.  The IFIs understood his 
economic policies and would support them.  His tough line 
with the protesters would help to keep the budget within 
reasonable parameters. 
 
11. (SBU) Still, he continued, there was no doubt that 
Ecuador needed to invest more in social programs.  Chile and 
Costa Rica had social indicators far better than those of 
Ecuador.  Ecuador needed to catch up.  There was too much to 
do, and he had little time, so he intended to focus on his 
long-term goal of universal health care,  which had motivated 
him to run for public office in the first place.  He noted 
that different countries had taken different approaches to 
universal health care and Ecuador would need to find an 
approach which fit its political situation.  He also believed 
that "economic reactivation" via government spending would be 
crucial to get out of the current "economic crisis." 
 
12. (SBU) Econcouns noted that Palacio had mentioned Chile 
and Costa Rica as examples to be followed before.  Perhaps we 
could help bring him together with Chilean or Costa Rican 
officials who had been involved in the reforms these 
countries had implemented, to discuss their experiences. 
Palacio responded enthusiastically. 
 
13. (SBU) Palacio said he had another meeting with business 
leaders scheduled for the next day.  At their last meeting, 
the week before, they had agreed on a shared agenda which 
included customs reform, labor reform, and energy policy 
reform.  These were all issues which were important to 
implementation of an FTA, he stated.  The next day they would 
discuss customs reform in depth.  Econcouns noted that USAID 
is very interested in working with the GOE on customs reform, 
and would be pleased to assist.  We are already working with 
the Minister of Labor on labor reform and would like to see 
that process accelerated. 
 
Political Reform 
---------------- 
 
14. (C) Palacio highlighted the need for political reform to 
strengthen Ecuadorian democracy, especially election of 
congressional deputies by district, so that voters would have 
a clear idea who represented them.  He said election by 
district would definitely be on the referendum his government 
would propose to Congress. 
 
Comment:  No Lack of Ambition Here 
---------------------------------- 
 
15. (C) Palacio has come a long way since taking over the 
Presidency, and seems to be learning from some recent 
mistakes.  As he has gradually moved closer to us, he has 
become more decisive in his decision making.  However, he has 
yet to understand that, as a caretaker government with no 
mandate and only 16 more months to serve, his ambition to 
become a major Latin American leader and counterweight to 
Chavez would be unrealistic, even if he had the charisma 
necessary to play the role.  His ambition to implement 
universal health care will also be extremely difficult to 
fulfill, with Congress emboldened after recent presidential 
missteps (septel).  He is far too optimistic about prospects 
for IFI financial support, given his proposal this week of a 
2006 budget which grows by 14% over 2005(septel).  It would 
take great skill to keep the provinces calm without 
disbursing significant new resources to them.  Nonetheless, 
our short term interests in Ecuador are likely to be 
protected by a President who clearly understands how 
important U.S. support and cooperation can be to him. 
JEWELL