VIDEO OF ECONOMY MINISTER PATINO IMPLIES MARKET

C O N F I D E N T I A L QUITO 001182 SIPDIS SIPDIS DEPT OF COMMERCE WASHDC TREASURY FOR SGOOCH E.O. 12958: DECL: 05/21/2017 TAGS: EFIN ECON PGOV PREL PINR EC SUBJECT: VIDEO OF ECONOMY MINISTER PATINO IMPLIES MARKET MANIPULATION -- OR DOES IT? Classified By: Ambassador Linda Jewell for Reasons 1.4(b) and (d) ¶1. (U) Summary. Recently released excerpts of a video of a February meeting between Economy Minister Patino and former Economy Minister Rodas imply (but do not confirm) that if Patino frightened the international bond market, Rodas could have earned $50 million. Patino and Rodas separately asserted that the released portions of the video were taken out of context. End summary. ¶2. (U) Quinto Pazmino, a fired political advisor to Economy Minister Ricardo Patino, provided a television station an excerpt of a video recording of a February 8 meeting between Patino and former Minister of Economy Armando Rodas and two U.S.-based financial advisors. The video first aired on May ¶21. The quality of the audio is poor, but a transcript produced by the media reads as follows (informal embassy translation): Patino: But this signifies that you charge a bonus (prima) of $150 million or more; you could charge a bonus of $250 million or so. Rodas: We could earn $50 million. Patino: $50 million. For this I would have to announce ...eh... put fear into the market, if not, no. If I say: "I'll pay you tomorrow," you couldn't do it, or that is, the only way that you could earn ... Rodas: Exactly... Patino: If you want to win over the market (ganar el mercado),you have to want that I scare it... Patino and Rodas Respond in the Media -- -- -- -- -- -- -- -- -- -- -- -- -- ¶3. (U) Both Patino and Rodas, in separate media statements, asserted that the aired portion of the video was taken out of context. Rodas called for the release of the rest of the video. President Correa on May 21 publicly reaffirmed his confidence in Patino, and asserted that the video had been doctored. ¶4. (U) Patino, who was in Paraguay for a Banco del Sur meeting, focused his response on Pazmino's credibility, arguing that he was fired for corruption. ¶5. (U) Rodas asserted that he facilitated a meeting between Patino and the financial advisors, who developed a "transparent" proposal that could have saved Ecuador $150 million (he did not elaborate on the proposal). Rodas also argued that the advisors did not hold Ecuador debt (and therefore would not have profited from market manipulation), but instead would have made money from commissions from brokering a deal. Rodas said Patino told them he would study the proposal, but they never received a response. The interviewer asked Rodas the implication of the released conversation about scaring the market, but Rodas replied by emphasizing that the intent of his proposal was to save Ecuador money on the bond market. ¶6. (U) Pazmino, in his own media appearance, said that he was not present at the meeting between Patino and Rodas, and did not know if the discussion between them involved legal or illegal activities. Most of his media appearance was devoted to arguing that he had been wrongfully dismissed. Patino Authorized the Video Recording -- -- -- -- -- -- -- -- -- -- -- -- -- ¶7. (U) The meeting between Patino and Rodas took place in a hotel rather than Patino's office. Patino said that he authorized the video recording to "discover how some international financial entities act in an unethical manner with the bonds.8 Rodas said that he did not know the meeting was being recorded. Pazmino said that he obtained a copy of the video since the persons who recorded the video approached him to obtain payment. Those persons provided him with a copy of the video, and he urged Patino to pay. According to Pazmino, Patino never paid for the videos. Congress Requests an Explanation -- -- -- -- -- -- -- -- -- -- -- ¶8. (U) On May 22, Ramses Torres, head of the Congressional Oversight Committee, called for Patino to appear before Congress to explain the meeting he had with Rodas. Background ) Mixed Signals on Debt, Timely Payment -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- ¶9. (U) In the month before the February 8 Patino-Rodas meeting took place, Patino had spooked the commercial bond market by suggesting that Ecuador might default or force a debt restructuring, and then suggesting that it might continue to service its debt. On February 15, a few days after the meeting, Ecuador made a surprising on-time $135 million interest payment. On February 12 Vice Minister of Finance Fausto Ortiz told the media that Ecuador would make the payment, but would take advantage of a clause that would allow Ecuador to make the payment up to 30 days late. However, on February 14, the Ministry of Economy authorized the payment, which was made on time. ¶10. (C) Ortiz told EconCouns on February 14 that Ecuador was making the payment on time because "we have the cash" and because delaying the payment would require Ecuador to make costly penalty payments. He did not specify where the cash came from or why he was reversing a position that he had announced a couple days before. However, shortly after making the February 15 payment, Ecuador received a $250 million disbursement from the Andean Development Fund (CAF), which may have given the government the flexibility to make the payment. ¶11. (U) Since the February payment, rumors have circulated in Ecuador and in the foreign financial press that the government manipulated the market through its statements and subsequent timely payment in order to benefit Venezuelan banks, which held a large exposure in insurance instruments against an Ecuador default. A congressional deputy, Gloria Gallardo called for Patino to testify as part of a congressional inquiry and impeachment process. However, Gallardo was removed from Congress among 56 other deputies for unrelated reasons before initiating the inquiry. Comment -- -- -- ¶12. (C) The implication from the released portion of the tape is that if Patino spooked the market, Rodas and or the accompanying advisors could have made up to $50 million. Those excerpts reinforce a view that was already circulating in Ecuador that the government deliberately manipulated the bond market with its contradictory statements and actions. Up to now, our view has been that the government's contradictory actions and comments were most likely due to its failure to have a credible plan in place to restructure Ecuador's debt, compounded by the government's inexperience and incomplete understanding of the consequences of default. ¶13. (C) At this time we do not have a clear indication of what actually transpired at the meeting, given Patino's and Rodas's statements that those comments were taken out of context. However, this is the first time that there has been a wide-spread story suggesting corruption or malfeasance at the top level of the Correa administration, which has defined itself as opposing the corrupt practices of prior governments. The government now faces a major challenge to its credibility which could have far-reaching implications. End comment. JEWELL