US embassy cable - 05ASUNCION1144

UNCLAS SECTION 01 OF 02 ASUNCION 001144 
 
SIPDIS 
 
STATE FOR WHA/BSC AND EB/IFD/OIA 
STATE PASS TO USAID FOR LAC/AA 
STATE PASS TO USTR FOR LYANG 
NSC FOR SUE CRONIN 
TREASURY FOR OSIA MAUREEN WAFER 
TREASURY FOR OTA WARFIELD, VAN KOCH, MILLAR 
COMMERCE FOR ITA SARAH COOK 
SOUTHCOM FOR POLAD DAN JOHNSON 
 
E.O. 12958: N/A 
TAGS: PGOV, PHUM, PREL, KCRM, ETRD, ECON, PA 
SUBJECT: PARAGUAY POLITICAL AND ECONOMIC UPDATE, SEPTEMBER 
4 - 10 
 
1. (U) Summary 
      -- Duarte to Veto Public Bank Law 
      -- Deputies Block Investigation of Amambay Governor 
      -- Esso Scores Judicial Victory 
      -- Duarte-Frutos a Candidate for ANR Presidency 
      -- Castiglioni Meets Senate about US-GOP Relations 
 
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Duarte to Veto Public Bank Law 
------------------------------ 
 
2. (SBU) President Duarte announced that he would veto the 
first tier public bank law when it reaches his desk, a 
significant signal of his commitment to real structural 
reform.  Earlier this year, the Senate passed the law, meant 
to reform Paraguay,s largest, and bankrupt, state bank, but 
introduced a series of changes that significantly weakened 
the reform value of the law.  President Duarte reportedly 
pressured the Lower House to pass the original version 
presented by the executive, but it too introduced a number of 
changes that would arguably worsen the viability of the 
current system and would cost the government millions in 
excessive severage packages for current public bank 
employees.  Both houses of Congress are now controlled by a 
coalition of parties that support the current government.  In 
fact, the Colorado Party holds the leadership of a number of 
Congressional Commissions.  As a result, President Duarte,s 
announcement to veto the legislation carries a political 
price and therefore sends a positive signal with respect to 
the President,s commitment to fiscal responsibility and to 
the rejection of actions by Congress that undermine serious 
structural reform.  The Minister of Finance and other 
interested parties such as Economic Advisor Walde and the IDB 
and IMF resident representatives lobbied President Duarte on 
the importance of the reform of the state banks, while 
populists in the Colorado Party pushed in the other 
direction.  That reform appears to have won out in this 
highly visible case is a positive development. 
 
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Deputies Block Investigation of Amambay Governor 
--------------------------------------------- --- 
 
3. (U) Roberto Acevedo, the Amambay Department Governor, has 
been recently accused of having business connections with 
Brazilian drug trafficker Fahd Yamil.  Acevedo hails from the 
opposition Authentic Liberal Party (PLRA).  Politicians from 
the Colorado Party had proposed to discuss supposed links 
between Acevedo and Yamil, establishing a special 
investigative committee.  On 9/2, it was reported that the 
PLRA bloc in the Chamber of Deputies had prevented this 
investigation in Congress from being opened claiming the 
investigation was politically instituted.  (COMMENT: Acevedo 
publicly denounces drug traffickers in Pedro Juan Caballero, 
the center for much of Paraguay's drug trafficking 
activities, and supports US efforts.  In August, he told 
Polcouns newspaper reports of his alleged involvement with 
Fahd Yamil were funded by drug traffickers seeking to destroy 
his reputation and that Colorado Party officials similarly 
sought to attack him for political gain.  Post has seen no 
credible evidence tying Acevedo to Fahd Yamil's drug 
trafficking activities and consider credible his complaint 
that charges are politically instituted. End Comment.) 
 
---------------------------- 
Esso Scores Judicial Victory 
---------------------------- 
 
4. (U) After fighting a losing battle for several years to 
try to dismiss a former employee it accused of sexual 
harassment, Esso Paraguay finally won the ability to 
terminate the employee, albeit with the payment of a 
significant severance package mandated by law, in a ruling by 
the Supreme Court that Esso,s general manager said probably 
would not have been possible under the previous court. 
(NOTE: One of President Duarte,s early moves in 2003 after 
taking office was to replace six of nine Supreme Court 
justices, supposedly for corruption.  Many observers question 
whether the "new" court is much better, although Esso 
considers this verdict a major success.  End note.) 
Paraguay,s inflexible labor laws grant employees with ten 
years of service "stability" which means they cannot be 
removed except for cause validated by the judicial system. 
Esso complained that the former employee,s strong 
connections to the judicial system (at least two relatives 
are judges) stacked the system against Esso, which lost the 
fight to terminate without paying severance.  They then 
pursued the argument that they could not reinstate the 
employee given the level of animosity generated by the 
circumstances.  After losing in the lower courts and on 
appeal, the Supreme Court ruled in Esso,s favor, effectively 
closing the case.  The indeminity that Esso will have to pay 
under the labor law is significantly lower than the 
settlement originally sought by the former employee. 
According to Esso, the decision is a strong positive signal, 
all the more so because, according to the general manager, 
Esso did not undertake any efforts to lobby or influence the 
courts other than their legal arguments. 
 
-------------------------------------------- 
Duarte-Frutos a Candidate for ANR Presidency 
-------------------------------------------- 
 
5. (U) Two weeks ago, it was reported that President Nicanor 
Duarte Frutos was planning to become a candidate for the 
Colorado Party (ANR) presidency.  ANR members called on 
Duarte to officially announce his candidacy to limit the 
campaigning.  On 9/7, Duarte announced officially his 
candidacy for the Party Presidency.  ANR officials have 
indicated that if Duarte wins, he would appoint an Executive 
Board first vice president, who would become the acting 
president, because he would not be able to assume the 
position.  Duarte's supporters have also announced their 
intention to move up the election from June to February of 
next year.  Opposition Colorado leaders have told PolCouns 
that they are exploring prospects for a unified list as well 
as possible court petition challenging Duarte's right under 
the Constitution to serve as both President of the Republic 
and President of the Colorado Party.  (NOTE: Post will report 
more on this issue in septel. End Note.) 
 
 
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Castiglioni Meets Senate about US-GOP Relations 
--------------------------------------------- -- 
 
6. (U) Vice President Luis Castiglioni appeared before the 
Senate on September 8 to discuss the reasons for SECDEF 
Donald Rumsfeld's recent visit to the country.  Castiglioni 
explained that the visit was to strengthen US-Paraguayan 
relations.  During the hearing, Senator Jose Nicolas 
Morinigo, of the leftist Country in Solidarity Party (PPS) 
stated that he will petition for the Senate to revise the 
bilateral agreement which allows for the presence of US 
troops in Paraguay.  In the past, senior MFA officials have 
told us it has no intention of renegotiating the current 
bilateral agreement for military cooperation that extends 
through 2006. (NOTE: Post will report further on 
Castiglioni's Senate visit in septel. End Note.) 
KEANE