VZCZCXYZ0007
OO RUEHWEB

DE RUEHQT #2998 3461321
ZNR UUUUU ZZH
O 121321Z DEC 06
FM AMEMBASSY QUITO
TO RUEHC/SECSTATE WASHDC IMMEDIATE 5865
INFO RUEHBO/AMEMBASSY BOGOTA 6242
RUEHCV/AMEMBASSY CARACAS 2211
RUEHLP/AMEMBASSY LA PAZ DEC LIMA 1209
RUEHGL/AMCONSUL GUAYAQUIL 1553

UNCLAS QUITO 002998 
 
SIPDIS 
 
SENSITIVE 
SIPDIS 
 
DEPT FOR WHA/AND AND EB/TPP/ABT 
TREASURY FOR STEPHEN GOOCH 
 
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