ECUADOR ECON UPDATE: BOND REPURCHASE; FINANCIAL LIQUIDITY

UNCLAS QUITO 000351

SENSITIVE
SIPDIS

E.O. 12958: N/A
TAGS: ECON EINV ETRD EC
SUBJECT: ECUADOR ECON UPDATE: BOND REPURCHASE; FINANCIAL LIQUIDITY
MEASURES; NOBOA'S TAX DEBT

REFTEL A: QUITO 277
B: QUITO 220


1. (U) The following is a periodic economic update for Ecuador that
reports notable developments that are not reported by individual
cables.

Reactions to Government Repurchase Proposal
--------------


2. (U) On May 1, a group reportedly representing bondholders
holding 25% of outstanding Global 2012 bonds (of a total issuance of
$510 million) notified the Ecuadorian government that it intended to
accelerate principal repayment. Twenty-five percent is the
contractual threshold to call for accelerated payment following a
default, which would make the outstanding principal and interest
payments due immediately.


3. (U) Following the announcement of legal action, Finance Minister
Viteri held a conference call with bondholders on May 5. She stated
that Ecuador has financing available to repurchase the outstanding
2012 and 2030 bonds under the modified Dutch auction proposal that
it announced on April 20 (reftel a). She also stated that Ecuador
might pay a higher final clearing price than the 30% floor price set
by the GOE. The deadline for bondholders to accept the GOE's
modified Dutch action proposal is May 15, and final results of the
auction will be announced on May 26.

Government Measures to Improve Liquidity
--------------


4. (U) Since November 2008, deposits in the banking system have
declined markedly. Deposits are down 5.6% or USD 705 million as of
early May (in contrast to previous years when deposits were growing
at 20% per year). This is largely the result of decreased dollar
income because of low oil prices, falling remittances, and weakening
non-petroleum exports (reftel b). The Ecuadorian government
announced several measures to improve financial sector liquidity.
One measure, already announced in March 2009, is for the Ecuadorian
Social Security Institute (IESS) to buy up to $500 million in
mortgages issued by private banks. Additional measures to improve
liquidity include: i) public institutions would refrain from
withdrawing their deposits from private banks; ii) a possible
increase of IESS deposits in private banks, which now account for
$730 million or 5 percent of bank deposits; and iii) the GOE could
provide "indirect" support to help financial institutions obtain
external financing through regional international financial
institutions. In addition, public institutions would accept lower
interest rates on their deposits in private banks (up to 4 percent),
to help private banks maintain their profit margins.


5. (SBU) However, the GOE is considering other actions that could
reduce liquidity for some institutions. For example, although
public institutions are not to withdraw their deposits from private
banks, Coordinating Minister for Economic Policy Diego Borja
threatened to withdraw public sector resources if banks are
reluctant to grant credit. In addition, President Correa has
presented a bill to reform the Reserve Fund Law, which would drain
companies' liquidity by forcing them to pay on a monthly basis
employee benefits that were previously paid out every three years.

Banana Magnate Owes Millions in Back Taxes
--------------


6. (U) The Ecuadorian tax service (SRI) announced recently that
Exportadora Bananera Noboa, a banana export company owned by magnate
and four-time presidential candidate Alvaro Noboa, owed around $59
million in outstanding taxes from 2005. The head of the SRI also
said that the SRI will carry out additional audits on the company
for 2006, 2007 and 2008.

HODGES