External Debt Report Will Be Released in December

UNCLAS QUITO 002998 SIPDIS SENSITIVE SIPDIS DEPT FOR WHA/AND AND EB/TPP/ABT TREASURY FOR STEPHEN GOOCH E.O. 12958: N/A TAGS: EFIN ECON EC SUBJECT: External Debt Report Will Be Released in December ¶1. (SBU) Summary. The GOE's External Debt Commission will release its report in mid-December, and the Correa administration could look to the report to identify whether any of Ecuador's debt is "illegitimate." The President of the Commission, Alfredo Castillo, asserted that much of Ecuador's debt is "immoral" and has been foisted on Ecuador by the IMF and World Bank for corrupt projects. However, he said that the Commission's report would focus on recommendations to ensure that Ecuador make better use of future financing. End Summary. ¶2. (U) Ricardo Patino, whom President-elect Correa has identified as his Economic Minister, has rattled financial markets by suggesting that a Correa administration might restructure its external debt and would not pay "illegitimate" debt. Patino said that a Correa government would rely in part on a forthcoming report of a commission established a few months ago by President Palacio to review Ecuador's foreign debt and make recommendations. ¶3. (SBU) On December 7, EconCouns met with Alfredo Castillo, President of the Special Commission to Investigate External Debt established by President Palacio. Castillo led off with a long discussion on how most of Ecuador's debt was "immoral." Castillo began by discussing how Ecuador had begun to take on debt in the 1970s, when Ecuador was still ruled by a military regime. He asserted that most of Ecuador's external debt was foisted on Ecuador by the duplicitous IMF and World Bank for corrupt, poorly implemented projects. He said that some of Ecuador's external debt was forced on the GOE by local banks that speculated against the currency (a reference to Ecuador 1999 banking crisis). Castillo said relatively little about the GOE's borrowing from private sector lenders, and towards the end of the conversation allowed that the World Bank may have improved the quality of its lending in recent years. ¶4. (SBU) When asked if the report would identify "illegal" debt, Castillo replied that the Commission would not seek criminal charges and that the report will focus on changes the GOE should make to ensure better use of future loans. ¶5. (U) Castillo said that a 100-page report summarizing the Commission's work will be released in a week or two (presumably between December 14-22). He said that the Commission's entire report totals 1,000 pages. ¶6. (SBU) EconCouns informed the local IMF and World representatives of Castillo's comments about loans from their institutions, and the possibility that the impending report would reflect those views. Both lamented the timing of the report, fearing it would politicize the issue of multilateral lending to Ecuador at a time the multilateral lenders are preparing to engage the incoming Correa administration. The IMF rep noted that while the Ecuadorian public sector should have a surplus in 2007, the central government continues to face a cash shortfall. He thought that the multilateral lenders (World Bank, IDB, CAF) might be able to persuade the Correa administration that they would be well-placed to help finance any central government budget gaps, rather than have the GOE use it liquidity problems as an excuse to default on its debt obligations. ¶7. (SBU) Comment. Castillo, a long-term leftist political activist, was appointed to this commission as a face-saving reward when Palacio felt compelled to remove him as Minister of Government. The commission was packed with similarly left-leaning intellectuals, making an outcome along these lines a foregone conclusion from the start. While Castillo's comments may in part reflect his personal views, we expect that in good measure they anticipate the main themes of the forthcoming report. The bad news is that his comments suggest that the report will lay out a negative assessment of international debt, reinforcing the critical predisposition of Correa's more radical advisors. The mixed news is that while the report will apportion much of the blame on international lenders, it will probably also suggest that corrupt Ecuadorian practices bear part of the blame for inefficient use of the funds. The possible good news is that a report covering a 40-year time span may not contain much actionable information on currently active debt, and if so may not provide much grist for any current push to identify "illegitimate" debt. Jewell