US embassy cable - 05QUITO1978

C O N F I D E N T I A L SECTION 01 OF 02 QUITO 001978 
 
SIPDIS 
 
E.O. 12958: DECL: 08/22/2010 
TAGS: PREL, ECON, EFIN, VE, EC, Economy, Oil Sector, Regional 
SUBJECT: PALACIO:  I NEED YOUR HELP 
 
REF: QUITO 01181 
 
Classified By: CDA JEFFERSON BROWN, REASONS 1.4 (B,D) 
 
1.  (C) Summary:  In a meeting with Charge on August 22, 
President Palacio asked for U.S. assistance with the 
international financial institutions to ensure that Ecuador 
could meet its October financing requirements.  He expressed 
frustration with unrest in the oil patch and with the 
intelligence the military had been providing, suggesting that 
a great conspiracy, including his predecessor, was at work. 
He also expressed exasperation with Ministers of Foreign 
Affairs Parra, Economy (former) Correa, and Economy Barreiro, 
suggesting that they had formed a "friends of Venezuela 
society" which was limiting his options.  He said he was 
still awaiting technical details of Venezuela's newest 
proposal, to lend Ecuador the oil it lacks to meet its export 
commitments.  End Summary. 
 
Widespread Conspiracy 
--------------------- 
 
2.  (C) Palacio called Charge and ADCM in on the morning of 
August 22 to discuss the protests in the oil-producing 
regions of Sucumbios and Orellana and their economic 
implications.  He began by expressing his frustration with 
GOE military intelligence, which, he said, had initially 
concluded that "the highly organized protests had appeared 
out of nothing."  He said the quality of the intelligence he 
was getting since changing Ministers of Defense last week, 
"had changed instantly" for the better.  It was clear that 
the protests were the result of a "widespread conspiracy," 
including former President of Ecuador Gutierrez.  As a 
result, his initiative to increase social spending was now 
out of the question, "as the conspirators planned." 
 
Fiscal Crunch Time Coming 
------------------------- 
 
3.  (C) Ecuador would need the help of the U.S., Palacio 
said.  Ecuador had large debt payments due in October (more 
than $200 million, see reftel).  The losses in the protests 
were estimated at more than $400 million.  It was not clear 
how Ecuador could meet all its obligations.  What would be 
the attitude of the international financial institutions 
(IFIs)?  Could the USG help?  ADCM noted that the IFIs want 
to help.  Ecuador, however, would have to be willing to make 
commitments to them regarding the fiscal policies to be 
implemented.  An IMF team arrived in Ecuador today and will 
meet with Palacio on Thursday.  He is keen to leave them with 
a good impression and wanted to meet with them personally to 
be sure they hear the right message. 
 
Cuban Boondoggle 
---------------- 
 
4.  (C) Palacio explained a convoluted decision-making 
process which resulted in four GOE delegates to the Cuban 
medical school graduation over the weekend.  He said that he 
had initially decided on FM Parra and Minister of Health 
Wellington Sandoval.  However, in considering that decision, 
he realized the two were both from the left side of his 
cabinet.  He decided to add Secretary of Production Joaquin 
Zevallos to balance the delegation politically.  He then 
noted that the Vice President seemed to be sullen and feeling 
left out, so he invited him to go, as well. 
 
Venezuelan Solution 
------------------- 
 
5.  (C) Finally, Palacio described the genesis of the Chavez 
proposal to loan Ecuador the oil necessary to keep Ecuador's 
oil exports at their pre-protest level.  He expressed 
exasperation with ministers "who seem to have formed a 
Friends of Venezuela Club;" MFA Parra, former MinFin Correa, 
and "maybe" MinFin Barreiro.  He said Chavez had called on 
Saturday to make the offer.  "I could hardly reject it, as it 
seems so generous."  Shortly thereafter, Parra had called to 
crow about the "great deal he had negotiated with Chavez." 
He had said he had already called MinFin Barriero, who was 
excited by the news.  Palacio said he scolded Parra for 
taking the news elsewhere before informing the president. 
"Don't forget, I make the decisions," he told Parra.  He 
expressed confidence in the newly installed Petroecuador 
president, and will listen carefully to his technical advice. 
 He was clearly aware of the political implications of 
accepting the Chavez offer, and wanted us to know he was 
factoring that into his deliberations. In the end, he said, 
he would have to see the details of the Venezuela offer to 
decide whether to accept it, or not. 
Comment 
------- 
 
6.  (C) This meeting confirmed previous conclusions about 
Palacio:  He is doing his best, with limited capability; to 
deal with the very difficult hand he has been dealt.  His 
request for our help with the IFIs and its juxtaposition 
against the Venezuelan offer is transparently designed to 
convince us to raise Chavez's bet.  That said, if we can get 
a commitment by the GOE to pursue responsible fiscal policy, 
IFI financing might be forthcoming again.  Balanced against a 
Chavez offer which is almost certainly not the 
interest-free-loan-of-hundreds-of-millions-of -dollars it is 
being portrayed as, we might just drag the GOE back into a 
responsible economic policy.  Even responsible policy will 
not be enough if the GOE cannot find a way to dampen 
expectations which have been fueled by its own irresponsible 
talk and $60 oil. 
BROWN