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C O N F I D E N T I A L QUITO 003072 
 
SIPDIS 
 
SIPDIS 
 
TREASURY FOR STEVE GOOCH 
 
E.O. 12958: DECL: 12/20/2016 
TAGS: EFIN ECON PGOV KBIO PINR EC
SUBJECT: CORREA DEBT MANAGEMENT:  ECUADORIAN OBSERVERS 
EXPECT PRAGMATISM 
 
Classified By: A/DCM Alexi Panehal.  Reason:  1.4 B and D. 
 
¶1.  (C) Summary.  President-elect Correa and Economic 
Minister-designate Patino continue to talk about rescheduling 
Ecuador's external debt.  However, former and current 
Ministry of Economy officials agree that Correa will be 
pragmatic and conclude that it is not in Ecuador's interest 
to default.  Consensus of opinion is that the risk of default 
is low, although the likelihood of some debt restructuring is 
high.  See para 15-19 for biographic notes.  End summary. 
 
¶2.  (U) President-elect Rafael Correa and his Economic 
Minister nominee, Ricardo Patino, have continued to spook the 
international financial market by talking about restructuring 
Ecuador's debt, although they have been vague in their media 
statements as to what they might actually do.  On December 
14, while in Argentina Correa was quoted as looking for a 
restructuring Ecuador's commercial, multilateral and 
bilateral debt with discounts up to 75 percent.  On the same 
day, while in Chile, he was quoted as saying that an external 
debt restructuring would be "very friendly."  Patino, in an 
interview on December 1, when asked if external debt would be 
renegotiated replied "definitely," but when pressed as to 
what would be renegotiated, asked for time to study the 
situation. 
 
Cost-Benefit Calculation Argues Against Default 
--------------------------------------------- -- 
 
¶3.  (SBU) EconCouns asked a number of former and current 
Ministry of Economy officials, including one who may serve as 
an economic advisor to Correa, for their views on how a 
Correa administration will manage Ecuador's debt, given 
Correa's and Patino's statements about debt restructuring. 
 
¶4.  (C) Current Vice Minister for Finance Gene Alcivar, who 
has been coordinating with Correa's Ministry of Finance 
transition team, said that he does not expect that Correa 
would default.  Instead, he believes that Correa would see if 
spending needs can be met with available resources, and if 
not, enter into discussions with debt holders to see what 
flexibility there might be. 
 
¶5.  (C) Pablo Proano was Vice Minister of Finance until 
October and may serve as an advisor to Correa.  Proano said 
that the cost of servicing Ecuador's external debt in 2007 is 
marginal, and Correa realizes that the gains of defaulting 
are negligible.  Indeed, Proano argues that Correa should 
lower his anti-debt rhetoric and issue international debt in 
2007 to meet his financing needs.  Instead, Proano said, the 
real debt management challenge is domestic GOE debt, since 
over $1 billion in short-term debt has to be rolled over in 
¶2007.  He expects Correa will focus his debt restructuring on 
two domestic issues: a) persuading the Ecuadorian Social 
Security Institute (IESS -- by far the largest holder of GOE 
domestic debt) to replace short term debt with long-term 
bonds, and b) canceling over $1 billion in GOE debt to the 
Central Bank (the bonds were issued to Ecuador Deposit 
Guarantee Agency (AGD) during the 1999 banking crisis and 
were assumed by the Central Bank). 
 
¶6.  (C) Ramiro Galarza, who was Vice Minister of Finance 
under former President Lucio Gutierrez, also believes that 
Correa realizes that there is little benefit in defaulting, 
and will not choose to do so.  However, Galarza believes that 
the Correa administration will be heavily stocked with senior 
officials who have no government experience, and that 
inexperience will lead to financial mismanagement which could 
eventually force the Correa administration to miss payments 
to international lenders. 
 
¶7.  (C) Gilberto Pazmino, who also served as Vice Minister 
for Finance under Gutierrez, also asserted that Correa would 
not default, although he believes that Correa would attempt 
to renegotiate debt with foreign bond holders.  Pazmino did 
not speculate how Correa would bring about the negotiations, 
but he doubts Correa would pursue a simple market-based 
restructuring of issuing new debt at current low interest 
rates to retire Ecuador's expensive 2012 bonds, which pay 12 
percent. 
 
¶8.  (C) Fausto Ortiz is the Ministry of Economy transition 
coordinator for Correa and rumored to be the next Vice 
Minister for Finance.  According to a Latin Source article by 
former Economy Minister Magdalena Barriero, Ortiz said that 
liquidity constraints would not force a default in 2007, and 
 
that he favors market-based debt management, including 
possibly swapping current GOE debt for less expensive debt. 
A London-based financial analyst reports that Ortiz received 
assurances from Correa that Correa will not default unless 
absolutely necessary. 
 
Liquidity Crunch 
---------------- 
 
¶9.  (C) Although the Ecuadorian public sector will run a 
surplus of around 4.5% of GDP this year, the Ministry of 
Economy faces a cash shortfall, since windfall petroleum 
income is locked up in petroleum reserve funds and President 
Palacio has increased spending at the end of his term. 
Current Vice Minister Alcivar confirmed that the GOE is hard 
pressed to pay the extra monthly salary that is paid in 
December (13th month salary).  Separately, Ramiro Galarza, 
who is unofficially assisting the current Finance team, 
reported that the GOE could barely scrape up the cash to make 
a December payment to external bondholders, and will be late 
in making a payment to an unnamed multilateral development 
bank (invoking a contractual provision that allows it to 
delay payment up to 30 days). 
 
¶10.  (C) Pablo Proano was not concerned that the current 
liquidity squeeze would force Correa's hand on debt 
management.  He said that in its first few months the Correa 
administration will not be prepared to implement any spending 
projects, and therefore will only need to make basic salary 
and debt expenditures.  He said that Correa's ministerial 
nominees have no government experience and therefore will be 
very slow and ineffective in implementing government 
programs.  He added that this would relieve pressure on the 
Ministry of Economy to provide financing, although it would 
make it difficult for Correa to implement his agenda. 
 
¶11.  (C) Galarza echoed Proano's comment that an 
inexperienced Correa team will be very slow in implementing 
Correa's social spending agenda, and implied that would 
affect Correa's ability to maintain popular support.  Unlike 
Proano, he thought that the Correa economic team would not be 
able to effectively manage a complex cash management 
situation made worse by significant arrears, which could lead 
to an accidental default. 
 
Alternate Sources of Financing 
------------------------------ 
 
¶12.  (C) Multilaterals:  EconCouns asked several 
interlocutors about additional sources of financing (such as 
multilateral lenders) the Correa administration could draw 
upon to cover budget gaps.  Fausto Ortiz simply said that he 
would identify spending and financing options for the Correa 
administration, and whether it looked to support from 
institutions like the World Bank or IDB would be political 
decision.  Proano said that he hopes Correa would look to the 
multilateral lenders for support, although he noted Correa's 
sour experience with the World Bank, which refused to make a 
project disbursement during Correa's brief tenure as Minister 
of Finance in mid-2005.  Proano said that the World Bank and 
IDB would have to be flexible in their approach to Correa, 
and be willing to help address his agenda instead of 
attempting to impose their priorities on Correa. 
 
¶13.  (C) IESS:  As noted in para 5, Proano thought much of 
the Correa administration's financing needs could be met by 
loans from the IESS and international lenders.  Conversely, 
Galarza thought that an inexperienced Correa finance team 
would not work effectively with IESS, particularly if the GOE 
was in danger of defaulting on its external debt. 
 
¶14.  (C) Petroleum Reserves:  Proano said that in a crunch, 
the emergency provisions of the petroleum funds would allow 
the government to draw on those funds to make debt payments. 
On the other hand, Galarza opined that it would be difficult 
for Correa to draw on the petroleum reserve funds since 
working level Ministry of Economy officials would be 
reluctant to sign necessary paperwork for fear of being 
prosecuted. 
 
Personalities and Bio Notes 
--------------------------- 
 
¶15.  (C) Correa:  Both Galarza and Pazmino were certain that 
the Ministry of Economy would have little room to establish 
economic policy, and would instead respond to Correa's 
 
instructions.  Pazmino opined that Correa would not respond 
well if his subordinates challenged his views, asserting that 
if someone disagrees with Correa's perspective, Correa would 
quickly turn a policy disagreement into a personal challenge. 
 Former Economy Minister Magdalena Barreiro, who also served 
as Vice Minister under Correa at the Ministry of Economy, 
said that at times Correa welcomed input, but at other times 
she and fellow Vice Minister Patino would commiserate when 
Correa refused to follow their advice.  Barreiro also said 
that Correa is far more inclined to listen to guidance from 
those who are to the left of his position than those who are 
to the right. 
 
¶16.  (C) Patino:  Proano volunteered that he is concerned 
that Patino will be a weak Minister of Economy.  He said that 
Patino initially served as Correa's chief of staff when 
Correa was at the Ministry of Economy, and subsequently 
become Vice Minister of Economy, where he only served for a 
month.  As chief of staff, he did a good job of setting an 
agenda and helping to develop consensus.  However, Proano 
stressed, Patino spent relatively little time at the 
Ministry, and during that time had essentially no exposure to 
financial issues.  In addition, Proano doubts that Patino has 
the administrative capacity to effectively manage the 
Ministry of Economy.  Proano noted that the Minister of 
Finance sits on over a 100 different boards, and an 
ineffective Minister quickly lets his participation on those 
boards define his agenda, rather than advancing his own 
agenda.  Proano believes that Patino will fall into that 
pattern. 
 
¶17.  (C) Pazmino reported that when he was attempting to 
negotiate Ecuador's bilateral debt in the Paris Club, he was 
harshly criticized by Patino in letters and the media. At 
that time Patino was working for an NGO that questioned the 
legality of Ecuador's debt. 
 
¶18.  (C) Fausto Ortiz.  Ortiz is rumored to be Correa's 
nominee for Vice Minister of Finance.  One financial analyst 
reports that Ortiz privately confirmed that he will accept 
the position.  However, he has not been publicly named by 
either Correa or Patino.  Ortiz previously served in the 
Ministry of Economy for about a year, about half the time as 
Under Secretary for Budget, and the rest as Vice Minister for 
Finance.  Galarza opined that he would be a solid Vice 
Minister, but believed that Ortiz alone would not be 
sufficient to bring good management and policies to the 
Ministry. 
 
¶19.  (C) Proano.  Proano studied with Correa at the 
University of Illinois and worked at the Ministry of Economy 
under Correa and Patino.  He describes himself as a friend of 
Correa, although he asserts that he does not share Correa's 
ideological views.  He was Vice Minister of Finance until 
October, and after resigning, returned to teach at the 
Catholic University in Quito.  He told EconCouns that he was 
offered a position in the Correa administration, but 
declined, offering instead to serve as an informal advisor. 
Galarza described Proano as a solid official, but doubted 
that he has the presence to advance his own views in a Correa 
administration. 
 
Comment 
------- 
 
¶20.  (C) It is striking that a sizeable number of experienced 
former finance officials are unanimous that Correa 
understands the cost of a default is high and will not 
willingly default.  However, neither they nor we know how 
Correa will manage his debt policy once he assumes the 
Presidency.  We suspect Correa will adapt his views on debt 
management to the economic and political pressures that he 
will face in office.  He may very well be pragmatic, as our 
contacts have suggested.  However, he and his Minister of 
Economy also have a strong anti-debt bias, and in a difficult 
situation those instincts may prevail. 
JEWELL