VZCZCXYZ0000
OO RUEHWEB

DE RUEHQT #0169/01 0221233
ZNR UUUUU ZZH
O 221233Z JAN 07
FM AMEMBASSY QUITO
TO RUEHC/SECSTATE WASHDC IMMEDIATE 6143
INFO RUEHBO/AMEMBASSY BOGOTA 6361
RUEHCV/AMEMBASSY CARACAS 2308
RUEHLP/AMEMBASSY LA PAZ JAN LIMA 1324
RUEHGL/AMCONSUL GUAYAQUIL 1744

UNCLAS QUITO 000169 
 
SIPDIS 
 
SENSITIVE 
SIPDIS 
 
DEPT FOR WHA/AND AND EB/OMA 
TREASURY FOR STEPHEN GOOCH 
 
E.O. 12958: N/A 
TAGS: EFIN ECON EAID EC
SUBJECT:  Mixed Messages on Debt Renegotiation and GOE Approach to 
Multilateral Lenders 
 
 
¶1.  (SBU) Summary.  Minister of Economy Patino continues to send 
mixed messages on what the GOE wants to do on debt restructuring. 
On January 17, Patino, in an "aggressive" meeting with bondholders, 
said most of Ecuador's external debt is illegitimate and floated the 
idea of a 60 percent debt discount.  Patino said that he wanted to 
explore a "friendly" restructuring, but creditors left the meeting 
believing that a market-based restructuring is unlikely.  In an 
early January meeting with the IMF, Patino appeared to be interested 
in constructive alternatives for fulfilling campaign promises on 
social spending.  However, the multilateral development banks remain 
concerned the GOE could default, and do not anticipate making many 
new loans to the central government.  End summary. 
 
Messy Meeting with Bondholders 
-- -- -- -- -- -- -- -- -- --- 
 
¶2.  (U) Citigroup organized a team of bondholders who met with 
Minister of Economy Ricardo Patino on January 17.  According to the 
Citibank report on the meeting, Patino floated the idea of discount 
on debt, or "haircut," of 60% or more, although he stressed that was 
just one possibility and not necessarily supported by President 
Correa.  He said that the GOE had about USG 1 billion to buy back 
commercial bonds, and wanted to test the idea of a friendly 
restructuring.  The Citigroup report concluded that the meeting did 
not support a positive outlook for external debt and was pessimistic 
about the chances of a negotiated debt restructuring. 
 
¶3.  (SBU) EconCouns talked to several local and foreign analysts who 
had heard from the meeting participants that the meeting with Patino 
was much more antagonistic than implied by the Citigroup report, and 
that Patino took a very aggressive tone.  One analyst reported that 
Patino asked each representative to stand up and announce how much 
Ecuadorian debt his institution held.  When the representatives 
refused, for fiduciary reasons, Patino allegedly "lost it and turned 
red."  One participant reported that "it looked like Patino had been 
waiting for 20 years for this meeting."  The analysts concurred that 
Patino's performance indicated that he did not have a good idea of 
who he was dealing with (a group on a fact-finding mission) and is 
evidence of the GOE's inexperience in dealing with the international 
financial community. 
 
¶4.  (U) Prior to the meeting with Citigroup, Patino held a press 
conference, where he said the government's budget (which must be 
presented to congress by January 31) would include provisions to 
cover Ecuador's external debt obligations, but those provisions did 
not necessarily mean that Ecuador would pay.  He repeated his line 
that the government would not necessarily honor debt obligation in 
order to first meet social needs. 
 
Better Meeting with the IMF 
-- -- -- -- -- -- -- -- --- 
 
¶5. (SBU) IMF staff met with Patino in early January before he took 
office, and on January 10 reported the results of the meeting to 
representatives of multilateral development banks and USAID Quito. 
The IMF team's objective in their meeting with Patino was to 
minimize the likelihood or extent of default by providing Ecuador 
with cost-savings means for meeting Ecuador's commitments and with a 
strong analysis of the costs of default.  The IMF said that Patino 
was respectful, seeking advice on alternatives to meet promises for 
social spending made during the campaign, but reluctant to discuss 
whether the Government would declare a debt moratorium. 
 
¶6.  (SBU) IMF reported that Patino defines "illegitimate debt," 
which the GOE does not intend to pay, as that resulting from loan 
programs that did not achieve intended results.  To help make these 
determinations, the Ministry of Economy requested that IDB provide 
evaluation reports of loans.  Members of Jubilee 2000, an NGO that 
has called for the cancellation of unpayable debt, attended the 
IMF's meeting with Patino, "in the interest of transparency," and 
took a harder line than the minister-designate (Patino had been a 
member of Jubilee 2000). 
 
¶7.  (SBU) The IMF resident representative said that he expects the 
Correa administration will maintain a dialogue with the IMF, 
possibly including continued quarterly reviews.  He said that Patino 
was receptive to the IMF suggestion that they send a review team to 
Ecuador in March or April. 
 
Views of the Multilateral Development Banks 
-- -- -- -- -- -- -- -- -- -- -- -- -- -- - 
 
¶8. (SBU) At the January 10 IMF debriefing, the World Bank 
representative said that he believes that at least partial default 
 
is more likely than not, noting that comments from Correa and his 
economic team about the World Bank have been especially negative. 
The World Bank representative would like to develop a common 
approach among lenders and donors to minimize the likelihood of 
default and assure a coordinated response if it occurs.  The 
Interamerican Development Bank (IDB) reported that it would be 
prohibited from disbursing loans after a default, while the Andean 
Development Corporation (CAF) could disburse if it chose to. 
 
¶9. (SBU) The IDB does not expect to sign or disburse new loans in 
the next several months.  Significant disbursements for municipal 
infrastructure will continue, along with grants and modest technical 
assistance.  Disbursement of a signed $50 million loan for 
competitiveness is expected but not guaranteed.  The IDB will shift 
its focus to municipal loans and private partners, and may be 
interested in agricultural loans in the future. 
 
¶10. (SBU) CAF expects project-specific loans for social spending and 
domestic debt restructuring to continue, although reporting 
requirements have not yet been met.  CAF does not expect to provide 
new loans for budget support.  A $250 million CAF loan was 
supposedly close to approval in late 2006, and outgoing Ministry of 
Economy officials expected that the loan would be disbursed in early 
¶2007. 
 
¶11.  (U) At his January 17 press conference, Minister of Economy 
Patino announced that the GOE would not repay a $3.5 million loan 
from the InterAmerican Development Bank for trade capacity building 
to prepare Ecuador for the U.S.-Ecuador Free Trade Agreement. 
Patino said that $900,000 had been used and the GOE would request 
that no further funds be disbursed. 
 
Comment 
-- -- - 
 
¶12.  (SBU) It's going to be a bumpy ride as the GOE tries to find 
some strategy to reduce its external debt obligations.  About the 
only constant we can find so far in Correa's and Patino's statements 
is a belief that much of the GOE's external debt is somehow 
illegitimate and the this administration is determined to reduce the 
debt burden in some way.  At least Patino is talking about finding 
some sort of "friendly" restructuring, but that will be hard to do 
given the bondholders' belief that Ecuador has the capacity to pay 
combined with Correa's and Patino's hostility to foreign debt and 
their inexperience in dealing with the financial community.  Given 
Patino's evident willingness to reject debt to the multilateral 
development bank for programs that he considers inappropriate, it 
appears that the multilateral development banks will also be pulled 
along on this bumpy ride. 
 
Jewell