US embassy cable - 05QUITO900

C O N F I D E N T I A L SECTION 01 OF 02 QUITO 000900 
 
SIPDIS 
 
E.O. 12958: DECL: 04/25/2015 
TAGS: PGOV, PREL, PINR, EC 
SUBJECT: ECUADOR TO REVERSE ECONOMIC POLICY? 
 
 
Classified By: Amb. Kristie A. Kenney for reasons 1.4 (b) and (d). 
 
1.  (U) Summary:  Public pronouncements by and reports from 
private meetings with the new Ecuadorian Minister of Finance 
and Economy suggest that the GOE's economic policy will be 
making a U-turn.  Fiscal responsibility is to be replaced 
with increased social spending.  The intent to pay off debt 
early has been replaced with a political preference for 
default.  End Summary. 
 
2.  (U) Rafael Correa, the new (and young) Minister of 
Finance of the Palacio government has already made a big 
splash on the morning talk show circuit.  On as many as three 
programs a day since his appointment three days ago, he has 
preached the benefits of a new solidly left economic policy. 
He has stated that Ecuador cannot continue paying debt at 
current rates and that he would favor a "political" 
re-negotiation; that the earnings from petroleum should be 
used for social spending; that state pension funds should be 
invested in Petroecuador; and that Petroecuador's fields 
should not be operated by private companies.  Although he is 
one of dollarization's most forceful opponents, Correa stated 
publicly that he recognizes that dollarization cannot be 
reversed. 
 
3.  (U) Correa is 43.  He earned a Masters degree and a Ph.D. 
in Economics at the University of Illinois at 
Urbana-Champaigne.  Offered a USAID scholarship to study in 
the U.S., he instead accepted a scholarship from the Belgian 
government and earned a Masters degree (also in economics) at 
the Universite Catholique de Louvain.  Correa has taught 
economics at various Ecuadorian universities ever since 1983, 
only leaving Ecuador to earn his graduate degrees abroad. 
 
4.  (U) Correa debated the merits of the U.S.-Andean FTA 
against EconCouns three months ago at a local university. 
Correa argued that David Ricardo was wrong about comparative 
advantage, that free trade with the U.S. is a dangerous 
mistake (though free trade with Europe would be much more 
sensible, he said), that dollarization has been a disaster 
for Ecuador, and that the Washington consensus has been 
applied in Ecuador and Latin America for 20 years and has 
failed.  During the debate and in discussion before and 
afterward it was clear that Correa is highly intelligent, but 
also extremely stubborn and unwilling to reconsider 
entrenched ideas and positions. 
 
5.  (C) Central Bank President Mauricio Pareja asked to meet 
with Econcouns on April 22.  He expressed concern about the 
effects Correa's statements were already having on markets, 
stating that some capital flight has already taken place and 
he fears more is likely.  He asked for advice in approaching 
Correa.  Econcouns suggested that he enter the meeting in a 
listening mode, and then, rather than arguing policy, attempt 
to provide Correa with the information necessary for him to 
realize for himself how erroneous his initial policy 
inclinations were. 
 
6.  (C) Pareja called Econcouns April 23 to report on his 
meeting.  He said that Correa started the meeting by asking 
Pareja to develop alternative scenarios for a default on 
foreign debt.  Pareja responded that he could do so, of 
course, but that default was by no means necessary.  Correa 
asked whether there were any funds available to the GOE for 
expenditure, and Pareja affirmed that the GOE had 
approximately 200 million in its general account.  All state 
accounts had been frozen in the days before the overthrow of 
Gutierrez to ensure that government officials could not make 
last minute withdrawals.  Further, there is more than $300 
million in the oil stabilization fund (FEIREP), which could 
be accessed if the legal restrictions on the funds were 
eliminated.  (Note: These funds are mostly reserved for debt 
repayment, but were churned through the Social Security Fund 
and used for current expenditures under the Gutierrez 
government.  End Note.)  Pareja's sense was that, overall, 
the meeting had gone reasonably well.  He said, however, that 
Correa commented that he had no choice but to continue with 
his public statements.  They had agreed to meet again on 
Monday to review accounts in greater detail. 
 
7.  (C) Econcouns has been in constant contact with 
Citibank's local manager Francisco Aristigueta since the 
political crisis began.  According to Aristigueta, capital 
flows have been remarkably small.  A few clients had begun 
moving money out of the country on Thursday, and that trickle 
had continued on Friday.  There have been no signs of a run 
on banks.  However, Aristigueta and Pareja both believe that 
if Correa continues on the path he has set out for himself 
publicly, capital flight will pick up and a run on the banks 
is possible. 
 
8.  (U) IDB, IBRD, and IMF representatives all expressed 
concern about the situation at a meeting with Econcouns on 
April 22.  IDB and IBRD both have substantial loan outlays 
coming up, which hinge on the GOE's demonstrating commitment 
to the responsible policies of the past two years - the 
opposite of what Correa is announcing.  They are also quite 
concerned about the prospect of default.  They laughed a bit 
to themselves about CAF, though, which has $2 billion in 
exposure in Ecuador.  The three agreed on a joint request to 
meet the new minister and introduce themselves, and also 
agree with Econcouns that listening was the best mode for the 
first meeting.  The representatives intend to offer 
individual organizational follow-ups to brief Correa on their 
individual programs. 
 
9.  (U) Econcouns requested a meeting with Correa on April 21 
and 22.  So far, there has been no response.  We will renew 
the request again on April 25. 
KENNEY