VZCZCXYZ0001
OO RUEHWEB

DE RUEHAC #0675/01 3411833
ZNY CCCCC ZZH
O R 071833Z DEC 09
FM AMEMBASSY ASUNCION
TO RUEHC/SECSTATE WASHDC IMMEDIATE 0274
INFO MERCOSUR COLLECTIVE

C O N F I D E N T I A L ASUNCION 000675 
 
SIPDIS 
WHA/FO CMCMULLEN, WHA/BSC MDRUCKER, BFRIEDMAN, MDASCHBACH 
 
E.O. 12958: DECL: 2034/12/07 
TAGS: PGOV PREL ECON SNAR PA
SUBJECT: SCENESETTER FOR A/S VALENZUELA'S VISIT TO PARAGUAY 
 
CLASSIFIED BY: Perry Holloway, DCM; REASON: 1.4(B), (D) 
 
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SUMMARY 
 
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¶1. (C)  Embassy Asuncion warmly welcomes WHA Assistant Secretary 
Arturo Valenzuela December 17-18. Your visit will serve as a boost 
to Paraguay's nascent democracy.  An inexperienced President 
Fernando Lugo promised the electorate he would deliver change, but 
he has dashed expectations by failing to define or execute a 
national agenda.  At this point, Lugo is his own worst enemy, 
mostly due to his weak leadership style.   Because Lugo has not 
reached out to Congress or the political parties for support, his 
initial reform attempts have failed (or have never even gotten off 
the ground).  Now, with declining popularity, growing concerns 
about the country's security situation and never-ending paternity 
scandals, the pressure is on Lugo to deliver concrete results. 
Your visit will reaffirm U.S. support for Paraguay's democratic 
institutions and economic growth, and can serve to encourage 
Paraguay to continue playing a helpful, neutral role in the region. 
The inclusion of Paraguay in your first trip to the region will 
give Paraguayans the validation they seek from the United States, 
and might keep them focused on solving the country's problems and 
developing democratic institutions.  END SUMMARY. 
 
 
 
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LOCAL AND REGIONAL POLITICS 
 
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¶2. (C)  Fernando Lugo's administration represents the first 
interruption in Colorado Party rule in 61 years. By voting 
overwhelmingly for change, the Paraguayan people gave the former 
Catholic bishop a mandate for political, economic, and social 
reform.  That mandate, however, came with high expectations, and 
the widespread perception is that Lugo has failed to deliver. 
Lugo's biggest obstacles:  virtually no political support in a 
divided Congress; endemic corruption throughout government (which 
Lugo inherited); a dysfunctional judicial system; and a weak inner 
circle of advisors who constantly jockey for influence and personal 
gain.  Lugo has strained relations with both the Liberal Party 
(which is the largest party in his loose political coalition), as 
well as with his ambitious Liberal Party Vice President, Federico 
Franco.  Lugo's goals of strengthening democratic institutions, 
promoting economic growth, and bringing about reform seem 
increasingly out of reach.  As frustration grows, so do rumors that 
Lugo could be impeached (via constitutional means) before 
completing his term.  So far, Lugo has weathered the storms he has 
faced (including several paternity scandals), and we do not believe 
that impeachment is imminent for several reasons.  Paraguay is a 
conservative country that resists change.  Moreover, there is 
virtually a political deadlock over what would happen if Lugo were 
to be impeached and Vice Presidential elections were called, which 
lends itself to a certain political stability in which the status 
quo continues. 
 
 
 
¶3. (C) Lugo is a leftist at heart, but a pragmatist of mind. He 
maintains close relations with Venezuela, Bolivia, and Ecuador, but 
also with the United States, Chile, Brazil, and Colombia. He said 
in late July that Paraguay's "first circle" is MERCOSUR, and that 
Paraguay does not seek to join the Bolivarian revolution, as 
evidenced by Paraguay not becoming a member of Bolivarian 
Alternative for the Americas (ALBA).  Lugo is sensitive to 
interference in Paraguayan internal affairs, and resents Chavez' 
heavy hand in the region.  However, Lugo certainly feels pressure 
(from within the region and from his own leftist advisors) not to 
get too cozy with the United States.  Lugo met with President Bush 
in Washington in October 2008; he saw President Obama as well as a 
congressional delegation led by Congressman Engel at the Summit of 
the Americas in Trinidad and Tobago.  To date, he has ensured that 
Paraguay plays a fairly neutral role in regional politics, shying 
away from either extreme. 
 
 
 
¶4. (C) Regional tensions over the Colombia-U.S. Defense Cooperation 
Agreement (DCA) manifested in Paraguay's decision to decline the 
 
DOD-sponsored New Horizons humanitarian exercise planned for 2010. 
(NOTE: However, at a September UNASUR meeting, Lugo defended 
Colombia's right to sign a base access agreement with the U.S. and 
said the DCA was a bilateral issue between Colombia and the U.S. 
END NOTE).  The Paraguayan congressional response to the 
cancellation of New Horizons was overwhelmingly pro-U.S., and the 
Chamber of Deputies passed a resolution lamenting Lugo's decision. 
On Honduras, the Paraguayan government has officially refused to 
recognize election results and insists on Zelaya's restitution. 
(COMMENT: With a little bit of time, Paraguay, like Brazil, might 
back away from this position, but U.S. pressure regarding Honduras 
could easily be counterproductive.  It will be difficult to 
construct good will with the Lugo government on this issue.  END 
COMMENT). 
 
 
 
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THE ECONOMIC REALITY 
 
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¶5. (U) Paraguay's macroeconomic indicators show the country is 
weathering the financial crisis, and the economy is expected to 
grow by about four percent by the end of 2009. Exports markedly 
slowed in the first half of 2009 as a result of lower prices and 
weaker external demand for Paraguay's main export commodities (soy, 
grains, cattle), but recovered in the second half of the year. 
Unemployment is over 20 percent, and with a population growth rate 
above two percent per annum, the economy is not creating enough 
jobs to meet demand. Paraguay boasts vast hydroelectric resources, 
including the massive Itaipu hydroelectric dam built and operated 
jointly with Brazil, but fails to capitalize on those resources. 
The Lugo government purports to welcome foreign investment, but 
widespread corruption and a weak judicial system are deterrents. 
There is significant commercial activity involving the import of 
goods from Asia and to a lesser extent the United States for 
re-export to neighboring countries, mainly Brazil. The underground 
economy, which is not included in the national accounts, is 
probably twice the formal economy in size.  Many private sector 
representatives worry that Lugo is undermining the business 
environment. 
 
 
 
¶6. (U) Bilateral trade with the United States has increased over 
the last six years. The U.S. imported from Paraguay about USD 78.4 
million in 2008, and exported over USD 1.6 billion, up from USD 1.2 
million in 2007.  U.S. Representative Engel introduced trade 
preference legislation (ATPA) in the U.S. Congress in April which 
would give Paraguay increased access to U.S. markets.  Paraguay's 
lower house recently passed a resolution expressing its support for 
Engel's bill, and the private sector is lobbying heavily for trade 
preferences.  More than a dozen U.S. multinational firms have 
subsidiaries in Paraguay, and some 75 U.S. businesses have agents 
or representatives in Paraguay. Cargill, ADM, Coca Cola, and Exxon 
Mobile are the largest U.S. companies operating in country. With 
around USD 400 million in private investment stock, the U.S. is 
Paraguay's largest foreign investor. 
 
 
 
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PUBLIC SECURITY ISSUES 
 
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¶7. (SBU) Security and social issues are top concerns of Lugo's 
constituents. Violent crime is increasing in urban and rural areas, 
and the public generally believes that Paraguayan security forces 
(particularly the corrupt police) do not meet their security needs. 
The "landless" farmer movement -- active for many years in Paraguay 
- has organized protests and land invasions, calling for reform by 
illegally occupying large, privately-held ranches.  However, the 
protests have been small in number, and have had a minimal impact 
at best. 
 
 
 
¶8.  (C) Kidnappers claiming to be members of the Paraguayan 
People's Army (EPP) seized wealthy rancher Fidel Zavala October 15 
 
causing a national clamor. Individuals are hanging white ribbons on 
cars and houses demanding Zavala's release and highlighting 
national insecurity under President Lugo. Amidst security concerns 
and following several months of rumored changes, Lugo removed the 
Military Service Commanders and Commander of Military Forces (Chief 
of Defense) from their positions in early November.  Many political 
analysts believe that Lugo's fate is tied to that of Zavala, and 
that Zavala's death could trigger impeachment proceedings against 
Lugo for not managing security issues well. 
 
 
 
¶9. (SBU) The Tri-Border Area (TBA) of Paraguay, Argentina and 
Brazil is a hub for transnational criminal activity including drug 
trafficking, trafficking in persons (TIP), arms trafficking, 
intellectual piracy, and money laundering, including terrorist 
financing. Paraguay is a major transshipment point for cocaine from 
Bolivia to Brazil; it is the second largest marijuana producer in 
the region. Paraguay remains a regional haven for money laundering. 
Paraguayan authorities often experience difficulties enforcing the 
law because of hostile geography, corruption, chronic 
understaffing, and the political and judicial power some drug 
traffickers wield. Paraguay took a giant step forward on money 
laundering, intellectual property violations, and trafficking in 
persons by passing a tougher penal code that went into effect in 
July. 
 
 
 
¶10. (SBU) The DEA works closely with Paraguay's underfunded 
Anti-Narcotics Secretariat (SENAD) on counternarcotics issues, with 
support from State's International Narcotics and Law Enforcement 
(INL) program.  DEA efforts focus on SENAD's Sensitive 
Investigative Unit (SIU), and intensified this year via an 
increased presence in country after Bolivia expelled the DEA.  In 
addition to counternarcotics, the INL program (USD 253,000 in 
FY2009; USD 500,000 requested for FY2010) also supports other 
Paraguayan institutions in combating narcotics trafficking, money 
laundering, IPR violations, and trafficking in persons. 
 
 
 
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OTHER U.S. ASSISTANCE TO PARAGUAY 
 
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¶11. (SBU) U.S. assistance in Paraguay is consistent with many of 
Lugo's goals. The centerpiece of our assistance is Phase Two of the 
Millennium Challenge Corporation's Threshold Program (Umbral in 
Spanish), which the Paraguayan Congress approved July 31. The 
Threshold Program, worth USD 30 million, focuses on 
anti-corruption. USAID/Paraguay's FY09 budget is USD 17.15 million 
and focuses on Economic Growth; Health Care; Sustainable Management 
of Natural Resources and Protected Areas; and Democratic 
Strengthening.  A USD 6.6 million 1207 program will begin early 
next year, focusing on municipal government, economic development, 
and security issues in eastern Paraguay.  USG support for the 
Paraguay Military Forces is limited but robust. One highlight is 
the U.S. Armed Forces' USD 4.1 million donation of Global Peace 
Operations Initiative (GPOI) funds and technical assistance to 
Paraguay's United Nations Global Peace Keeping Operations Program 
(UNPKO).  Another highlight is US Special Forces training for 
Paraguay's Joint Special Forces Battalion (BCFE), which 1208 monies 
equipped at a cost of well over USD 5.7 million. 
 
 
 
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COMMENT 
 
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¶12. (C) While Lugo's impeachment is not (now) imminent, his 
popularity has dropped to 25%.  With growing concerns about the 
country's security situation and never-ending paternity scandals, 
the pressure is on Lugo to deliver concrete results.  Our programs 
are designed to help him do just that, should Lugo provide the 
necessary political will to carry them through.  In this 
increasingly sensitive environment, our approach must be measured. 
Political actors across the spectrum look to us for cues, and our 
 
influence is much greater than our footprint here. We have been 
careful to express public support for Paraguay's democratic 
institutions-not for Lugo personally-and to make sure Lugo 
understands the benefits of a close relationship with the United 
States-without allowing him to use Embassy support as a political 
life preserver when it serves him. With all sides eager for Embassy 
signals about "whither Lugo," we must be careful to steer clear of 
domestic politics or we will influence them to our detriment.  Your 
visit will reaffirm U.S. support for Paraguay's democratic 
institutions and economic growth, and can serve to encourage 
Paraguay to continue playing a helpful, neutral role in the region. 
Under Lugo, Paraguay has demonstrated that it is not a would-be 
Venezuela or Bolivia.  Likewise, it is not the next Honduras, as we 
do not think a coup is a realistic possibility in this conservative 
country, given its weak but institutional military and aversion to 
that part of its recent history.  But Paraguay does merit our 
attention, and the significance of your visit to Asuncion on your 
first trip to the region will not be missed.  END COMMENT. 
AYALDE