Cablegate: External Debt Report Will Be Released in December

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RUEHLP/AMEMBASSY LA PAZ DEC LIMA 1209
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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

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