ECUADOR REPORT ASSERTS MUCH ECUADORIAN DEBT IS

C O N F I D E N T I A L QUITO 001121 SIPDIS E.O. 12958: DECL: 12/04/2018 TAGS: EFIN ECON PGOV EC SUBJECT: ECUADOR REPORT ASSERTS MUCH ECUADORIAN DEBT IS ILLEGAL AND ILLEGITIMATE REF: QUITO 1062 Classified By: Classified by Charge Andrew Chritton. Reason: 1.4 b an d d. ¶1. (C) Summary. On November 20, President Correa presided over the issuance of a report that was highly critical of Ecuador's debt obligations. Correa stated that Ecuador would not pay "illegal debt" but did not indicate which debt, if any, was illegal. The debt report, which is very polemical, asserts that a broad range of commercial, multilateral, and bilateral debt is "illegal" and "illegitimate." Ecuador has already initiated arbitration against one of the loans, issued by Brazil, that was cited in the report. However, it said it would continue to service the debt until the arbitration panel issued its finding, which might foreshadow Ecuador,s approach with other loans. End summary. ¶2. (U) On November 20, the Government of Ecuador (GOE) publicly released the report from the Commission for the Integral Audit of Public Credit. President Correa presided over the event, which was attended by most of his cabinet. The public event focused on assertions of illegalities and irregularities in the issuance of debt from commercial lenders to the GOE. At the conclusion of the event, Correa said that Ecuador "will not pay illegitimate, illegal and corrupt debt," but did not specify which debt, if any, would not be paid. (This event followed the November 14 GOE announcement that it was delaying a commercial bond interest payment pending the release of the report, reftel.) Polemical Report... -------------- ¶3. (C) The debt report was released in a slick 172-page book. One investment bank characterized it as "closer to a political manifesto than the bona fide technical report the government purports it to be." The first line of the opening presentation establishes the mind-set of the debt commission: "The incalculable damage caused to the country's economic situation and the Ecuadorian people by public indebtedness, omnipresent as a system of pressure-submission and the consequent commitment to deliver public resources for its service ... (led to the creation of the debt commission)." A leading Ecuadorian newspaper briefly reviewed each member of the debt commission, noting that everyone had a history of criticizing debt. ¶4. (C) The body of the report avoids, for the most part, the highly charged language of the opening presentation, but is highly selective in emphasizing allegedly improper or harmful elements of debt without showing any effort to collect information from other perspectives. The report includes a long section on commercial debt, which reaches back to the 1970s and has been subject to multiple restructurings, as well as shorter sections on multilateral, bilateral and domestic debt. ¶5. (SBU) The report cites numerous instances of alleged illegalities, with the arguments typically built around alleged violations of the Ecuadorian constitution or law (such as charging interest on interest) or by signing agreements before the authorizing decree was issued. Some of the alleged illegitimacies include high interest rates, onerous commissions, provisions that favor the lender over the borrower, and violations of sovereignty. ¶6. (SBU) The section on multilateral lenders includes a lengthy discussion on the conditionality of the loans and the role they played to support commercial debt restructuring. The section on bilateral debt criticized loans from Brazil, Spain, and Italy. There was only brief, passing mention of USAID cooperation with multilateral projects. ...without Recommendations -------------- ¶7. (SBU) The published report did not include any recommendations. However, a bootleg version of the report that circulated before the official release included a lengthy list of recommendations. These include suspension of payment on commercial bonds, initiating legal proceedings to cancel several agreements that underlie the commercial debt, suspension of payment for multilateral and bilateral debt issued as collateral for Brady bonds, and a unilateral sovereign declaration cancelling 42 multilateral loans that were audited by the commission. First Step - Arbitration against Brazil -------------- ¶8. (U) On November 20, Ecuador announced that it was initiating arbitration against the Brazilian development bank BNDES in the Paris International Chamber of Commerce, contesting the loan BNDES issued to finance a controversial project executed by the Brazilian construction firm Odebrecht. In response, Brazil recalled its Ambassador. On November 24, Coordinating Minister for Strategic Sectors Galo Borja announced that Ecuador would continue to service its debt to BNDES until the arbitral panel issued its finding. Status of Commercial Debt Still Open -------------- ¶9. (U) Ricardo Patino, Coordinating Minister for Political Policy and president of the debt commission, reported that President Correa would decide whether Ecuador would make the pending commercial bond interest payment. He said that Correa would announce his decision during his December 13 Saturday radio broadcast (the 30-day grace period to make the interest payment expires on December 15). Patino added that the GOE had hired Washington, DC-based attorney Paul Richler and another unidentified U.S. law firm to advise them on the commercial debt (Richler had previously worked for the GOE on an arbitration case and as a lobbyist for renewal of the Andean Trade Preference Act). Comment -------------- ¶10. (C) The November 14 decision to take advantage of a 30-day grace period before making a commercial bond interest payment, the highly critical nature of the debt commission report, and Correa's November 20 assertion that Ecuador would not pay illegal debt, gave the strong impression that the GOE might default on part of its external debt. However, the Correa government has a track record of making polemical comments and then pursuing pragmatic actions. The fact that the report was published without recommendations suggests that the government did not want to be constrained by the commission's recommendations. The decision to initiate arbitration against Brazil's development bank, but continue servicing its debt in the interim, may be an indication of the approach the Correa government will take toward other debt, particularly the commercial bonds. ¶11. (C) This erratic approach might have gained President Correa some political maneuvering room, by responding to the debt report without actually curtailing debt payments and incurring the accompanying legal and financial fallout. However, this approach adds to the already high level of economic and business uncertainty which is impeding Ecuador's economic performance, although it is less damaging than an outright default. CHRITTON