ECUADOR TO REVERSE ECONOMIC POLICY?

C O N F I D E N T I A L SECTION 01 OF 02 QUITO 000900

SIPDIS

E.O. 12958: DECL: 04/25/2015
TAGS: PGOV PREL PINR EC
SUBJECT: ECUADOR TO REVERSE ECONOMIC POLICY?


Classified By: Amb. Kristie A. Kenney for reasons 1.4 (b) and (d).


1. (U) Summary: Public pronouncements by and reports from
private meetings with the new Ecuadorian Minister of Finance
and Economy suggest that the GOE's economic policy will be
making a U-turn. Fiscal responsibility is to be replaced
with increased social spending. The intent to pay off debt
early has been replaced with a political preference for
default. End Summary.


2. (U) Rafael Correa, the new (and young) Minister of
Finance of the Palacio government has already made a big
splash on the morning talk show circuit. On as many as three
programs a day since his appointment three days ago, he has
preached the benefits of a new solidly left economic policy.
He has stated that Ecuador cannot continue paying debt at
current rates and that he would favor a "political"
re-negotiation; that the earnings from petroleum should be
used for social spending; that state pension funds should be
invested in Petroecuador; and that Petroecuador's fields
should not be operated by private companies. Although he is
one of dollarization's most forceful opponents, Correa stated
publicly that he recognizes that dollarization cannot be
reversed.


3. (U) Correa is 43. He earned a Masters degree and a Ph.D.
in Economics at the University of Illinois at
Urbana-Champaigne. Offered a USAID scholarship to study in
the U.S., he instead accepted a scholarship from the Belgian
government and earned a Masters degree (also in economics) at
the Universite Catholique de Louvain. Correa has taught
economics at various Ecuadorian universities ever since 1983,
only leaving Ecuador to earn his graduate degrees abroad.


4. (U) Correa debated the merits of the U.S.-Andean FTA
against EconCouns three months ago at a local university.
Correa argued that David Ricardo was wrong about comparative
advantage, that free trade with the U.S. is a dangerous
mistake (though free trade with Europe would be much more
sensible, he said),that dollarization has been a disaster
for Ecuador, and that the Washington consensus has been
applied in Ecuador and Latin America for 20 years and has
failed. During the debate and in discussion before and
afterward it was clear that Correa is highly intelligent, but
also extremely stubborn and unwilling to reconsider
entrenched ideas and positions.


5. (C) Central Bank President Mauricio Pareja asked to meet
with Econcouns on April 22. He expressed concern about the
effects Correa's statements were already having on markets,
stating that some capital flight has already taken place and
he fears more is likely. He asked for advice in approaching
Correa. Econcouns suggested that he enter the meeting in a
listening mode, and then, rather than arguing policy, attempt
to provide Correa with the information necessary for him to
realize for himself how erroneous his initial policy
inclinations were.


6. (C) Pareja called Econcouns April 23 to report on his
meeting. He said that Correa started the meeting by asking
Pareja to develop alternative scenarios for a default on
foreign debt. Pareja responded that he could do so, of
course, but that default was by no means necessary. Correa
asked whether there were any funds available to the GOE for
expenditure, and Pareja affirmed that the GOE had
approximately 200 million in its general account. All state
accounts had been frozen in the days before the overthrow of
Gutierrez to ensure that government officials could not make
last minute withdrawals. Further, there is more than $300
million in the oil stabilization fund (FEIREP),which could
be accessed if the legal restrictions on the funds were
eliminated. (Note: These funds are mostly reserved for debt
repayment, but were churned through the Social Security Fund
and used for current expenditures under the Gutierrez
government. End Note.) Pareja's sense was that, overall,
the meeting had gone reasonably well. He said, however, that
Correa commented that he had no choice but to continue with
his public statements. They had agreed to meet again on
Monday to review accounts in greater detail.


7. (C) Econcouns has been in constant contact with
Citibank's local manager Francisco Aristigueta since the
political crisis began. According to Aristigueta, capital
flows have been remarkably small. A few clients had begun
moving money out of the country on Thursday, and that trickle
had continued on Friday. There have been no signs of a run
on banks. However, Aristigueta and Pareja both believe that
if Correa continues on the path he has set out for himself
publicly, capital flight will pick up and a run on the banks
is possible.


8. (U) IDB, IBRD, and IMF representatives all expressed
concern about the situation at a meeting with Econcouns on
April 22. IDB and IBRD both have substantial loan outlays
coming up, which hinge on the GOE's demonstrating commitment
to the responsible policies of the past two years - the
opposite of what Correa is announcing. They are also quite
concerned about the prospect of default. They laughed a bit
to themselves about CAF, though, which has $2 billion in
exposure in Ecuador. The three agreed on a joint request to
meet the new minister and introduce themselves, and also
agree with Econcouns that listening was the best mode for the
first meeting. The representatives intend to offer
individual organizational follow-ups to brief Correa on their
individual programs.


9. (U) Econcouns requested a meeting with Correa on April 21
and 22. So far, there has been no response. We will renew
the request again on April 25.
KENNEY