Identifier
Created
Classification
Origin
06QUITO3072
2006-12-20 10:08:00
CONFIDENTIAL
Embassy Quito
Cable title:  

CORREA DEBT MANAGEMENT: ECUADORIAN OBSERVERS

Tags:  EFIN ECON PGOV KBIO PINR EC 
pdf how-to read a cable
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DE RUEHQT #3072/01 3541008
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FM AMEMBASSY QUITO
TO RUEHC/SECSTATE WASHDC IMMEDIATE 5930
INFO RUEHBO/AMEMBASSY BOGOTA 6273
RUEHCV/AMEMBASSY CARACAS 2239
RUEHLP/AMEMBASSY LA PAZ DEC LIMA 1238
RUEHGL/AMCONSUL GUAYAQUIL 1600
C O N F I D E N T I A L QUITO 003072 

SIPDIS

SIPDIS

TREASURY FOR STEVE GOOCH

E.O. 12958: DECL: 12/20/2016
TAGS: EFIN ECON PGOV KBIO PINR EC
SUBJECT: CORREA DEBT MANAGEMENT: ECUADORIAN OBSERVERS
EXPECT PRAGMATISM

Classified By: A/DCM Alexi Panehal. Reason: 1.4 B and D.

C O N F I D E N T I A L QUITO 003072

SIPDIS

SIPDIS

TREASURY FOR STEVE GOOCH

E.O. 12958: DECL: 12/20/2016
TAGS: EFIN ECON PGOV KBIO PINR EC
SUBJECT: CORREA DEBT MANAGEMENT: ECUADORIAN OBSERVERS
EXPECT PRAGMATISM

Classified By: A/DCM Alexi Panehal. Reason: 1.4 B and D.


1. (C) Summary. President-elect Correa and Economic
Minister-designate Patino continue to talk about rescheduling
Ecuador's external debt. However, former and current
Ministry of Economy officials agree that Correa will be
pragmatic and conclude that it is not in Ecuador's interest
to default. Consensus of opinion is that the risk of default
is low, although the likelihood of some debt restructuring is
high. See para 15-19 for biographic notes. End summary.


2. (U) President-elect Rafael Correa and his Economic
Minister nominee, Ricardo Patino, have continued to spook the
international financial market by talking about restructuring
Ecuador's debt, although they have been vague in their media
statements as to what they might actually do. On December
14, while in Argentina Correa was quoted as looking for a
restructuring Ecuador's commercial, multilateral and
bilateral debt with discounts up to 75 percent. On the same
day, while in Chile, he was quoted as saying that an external
debt restructuring would be "very friendly." Patino, in an
interview on December 1, when asked if external debt would be
renegotiated replied "definitely," but when pressed as to
what would be renegotiated, asked for time to study the
situation.

Cost-Benefit Calculation Argues Against Default
-------------- --


3. (SBU) EconCouns asked a number of former and current
Ministry of Economy officials, including one who may serve as
an economic advisor to Correa, for their views on how a
Correa administration will manage Ecuador's debt, given
Correa's and Patino's statements about debt restructuring.


4. (C) Current Vice Minister for Finance Gene Alcivar, who
has been coordinating with Correa's Ministry of Finance
transition team, said that he does not expect that Correa
would default. Instead, he believes that Correa would see if
spending needs can be met with available resources, and if
not, enter into discussions with debt holders to see what

flexibility there might be.


5. (C) Pablo Proano was Vice Minister of Finance until
October and may serve as an advisor to Correa. Proano said
that the cost of servicing Ecuador's external debt in 2007 is
marginal, and Correa realizes that the gains of defaulting
are negligible. Indeed, Proano argues that Correa should
lower his anti-debt rhetoric and issue international debt in
2007 to meet his financing needs. Instead, Proano said, the
real debt management challenge is domestic GOE debt, since
over $1 billion in short-term debt has to be rolled over in

2007. He expects Correa will focus his debt restructuring on
two domestic issues: a) persuading the Ecuadorian Social
Security Institute (IESS -- by far the largest holder of GOE
domestic debt) to replace short term debt with long-term
bonds, and b) canceling over $1 billion in GOE debt to the
Central Bank (the bonds were issued to Ecuador Deposit
Guarantee Agency (AGD) during the 1999 banking crisis and
were assumed by the Central Bank).


6. (C) Ramiro Galarza, who was Vice Minister of Finance
under former President Lucio Gutierrez, also believes that
Correa realizes that there is little benefit in defaulting,
and will not choose to do so. However, Galarza believes that
the Correa administration will be heavily stocked with senior
officials who have no government experience, and that
inexperience will lead to financial mismanagement which could
eventually force the Correa administration to miss payments
to international lenders.


7. (C) Gilberto Pazmino, who also served as Vice Minister
for Finance under Gutierrez, also asserted that Correa would
not default, although he believes that Correa would attempt
to renegotiate debt with foreign bond holders. Pazmino did
not speculate how Correa would bring about the negotiations,
but he doubts Correa would pursue a simple market-based
restructuring of issuing new debt at current low interest
rates to retire Ecuador's expensive 2012 bonds, which pay 12
percent.


8. (C) Fausto Ortiz is the Ministry of Economy transition
coordinator for Correa and rumored to be the next Vice
Minister for Finance. According to a Latin Source article by
former Economy Minister Magdalena Barriero, Ortiz said that
liquidity constraints would not force a default in 2007, and

that he favors market-based debt management, including
possibly swapping current GOE debt for less expensive debt.
A London-based financial analyst reports that Ortiz received
assurances from Correa that Correa will not default unless
absolutely necessary.

Liquidity Crunch
--------------


9. (C) Although the Ecuadorian public sector will run a
surplus of around 4.5% of GDP this year, the Ministry of
Economy faces a cash shortfall, since windfall petroleum
income is locked up in petroleum reserve funds and President
Palacio has increased spending at the end of his term.
Current Vice Minister Alcivar confirmed that the GOE is hard
pressed to pay the extra monthly salary that is paid in
December (13th month salary). Separately, Ramiro Galarza,
who is unofficially assisting the current Finance team,
reported that the GOE could barely scrape up the cash to make
a December payment to external bondholders, and will be late
in making a payment to an unnamed multilateral development
bank (invoking a contractual provision that allows it to
delay payment up to 30 days).


10. (C) Pablo Proano was not concerned that the current
liquidity squeeze would force Correa's hand on debt
management. He said that in its first few months the Correa
administration will not be prepared to implement any spending
projects, and therefore will only need to make basic salary
and debt expenditures. He said that Correa's ministerial
nominees have no government experience and therefore will be
very slow and ineffective in implementing government
programs. He added that this would relieve pressure on the
Ministry of Economy to provide financing, although it would
make it difficult for Correa to implement his agenda.


11. (C) Galarza echoed Proano's comment that an
inexperienced Correa team will be very slow in implementing
Correa's social spending agenda, and implied that would
affect Correa's ability to maintain popular support. Unlike
Proano, he thought that the Correa economic team would not be
able to effectively manage a complex cash management
situation made worse by significant arrears, which could lead
to an accidental default.

Alternate Sources of Financing
--------------


12. (C) Multilaterals: EconCouns asked several
interlocutors about additional sources of financing (such as
multilateral lenders) the Correa administration could draw
upon to cover budget gaps. Fausto Ortiz simply said that he
would identify spending and financing options for the Correa
administration, and whether it looked to support from
institutions like the World Bank or IDB would be political
decision. Proano said that he hopes Correa would look to the
multilateral lenders for support, although he noted Correa's
sour experience with the World Bank, which refused to make a
project disbursement during Correa's brief tenure as Minister
of Finance in mid-2005. Proano said that the World Bank and
IDB would have to be flexible in their approach to Correa,
and be willing to help address his agenda instead of
attempting to impose their priorities on Correa.


13. (C) IESS: As noted in para 5, Proano thought much of
the Correa administration's financing needs could be met by
loans from the IESS and international lenders. Conversely,
Galarza thought that an inexperienced Correa finance team
would not work effectively with IESS, particularly if the GOE
was in danger of defaulting on its external debt.


14. (C) Petroleum Reserves: Proano said that in a crunch,
the emergency provisions of the petroleum funds would allow
the government to draw on those funds to make debt payments.
On the other hand, Galarza opined that it would be difficult
for Correa to draw on the petroleum reserve funds since
working level Ministry of Economy officials would be
reluctant to sign necessary paperwork for fear of being
prosecuted.

Personalities and Bio Notes
--------------


15. (C) Correa: Both Galarza and Pazmino were certain that
the Ministry of Economy would have little room to establish
economic policy, and would instead respond to Correa's

instructions. Pazmino opined that Correa would not respond
well if his subordinates challenged his views, asserting that
if someone disagrees with Correa's perspective, Correa would
quickly turn a policy disagreement into a personal challenge.
Former Economy Minister Magdalena Barreiro, who also served
as Vice Minister under Correa at the Ministry of Economy,
said that at times Correa welcomed input, but at other times
she and fellow Vice Minister Patino would commiserate when
Correa refused to follow their advice. Barreiro also said
that Correa is far more inclined to listen to guidance from
those who are to the left of his position than those who are
to the right.


16. (C) Patino: Proano volunteered that he is concerned
that Patino will be a weak Minister of Economy. He said that
Patino initially served as Correa's chief of staff when
Correa was at the Ministry of Economy, and subsequently
become Vice Minister of Economy, where he only served for a
month. As chief of staff, he did a good job of setting an
agenda and helping to develop consensus. However, Proano
stressed, Patino spent relatively little time at the
Ministry, and during that time had essentially no exposure to
financial issues. In addition, Proano doubts that Patino has
the administrative capacity to effectively manage the
Ministry of Economy. Proano noted that the Minister of
Finance sits on over a 100 different boards, and an
ineffective Minister quickly lets his participation on those
boards define his agenda, rather than advancing his own
agenda. Proano believes that Patino will fall into that
pattern.


17. (C) Pazmino reported that when he was attempting to
negotiate Ecuador's bilateral debt in the Paris Club, he was
harshly criticized by Patino in letters and the media. At
that time Patino was working for an NGO that questioned the
legality of Ecuador's debt.


18. (C) Fausto Ortiz. Ortiz is rumored to be Correa's
nominee for Vice Minister of Finance. One financial analyst
reports that Ortiz privately confirmed that he will accept
the position. However, he has not been publicly named by
either Correa or Patino. Ortiz previously served in the
Ministry of Economy for about a year, about half the time as
Under Secretary for Budget, and the rest as Vice Minister for
Finance. Galarza opined that he would be a solid Vice
Minister, but believed that Ortiz alone would not be
sufficient to bring good management and policies to the
Ministry.


19. (C) Proano. Proano studied with Correa at the
University of Illinois and worked at the Ministry of Economy
under Correa and Patino. He describes himself as a friend of
Correa, although he asserts that he does not share Correa's
ideological views. He was Vice Minister of Finance until
October, and after resigning, returned to teach at the
Catholic University in Quito. He told EconCouns that he was
offered a position in the Correa administration, but
declined, offering instead to serve as an informal advisor.
Galarza described Proano as a solid official, but doubted
that he has the presence to advance his own views in a Correa
administration.

Comment
--------------


20. (C) It is striking that a sizeable number of experienced
former finance officials are unanimous that Correa
understands the cost of a default is high and will not
willingly default. However, neither they nor we know how
Correa will manage his debt policy once he assumes the
Presidency. We suspect Correa will adapt his views on debt
management to the economic and political pressures that he
will face in office. He may very well be pragmatic, as our
contacts have suggested. However, he and his Minister of
Economy also have a strong anti-debt bias, and in a difficult
situation those instincts may prevail.
JEWELL