Foreign Relations of the United States, 1955–1957, American Republics: Central and South America, Volume VII

483. Letter From the Acting Assistant Secretary of State for Inter-American Affairs (Rubottom) to the Ambassador in Ecuador (Ravndal)¹

Washington , December 10, 1956 .

Dear Mr. Ambassador: This is in answer to your letter of November 30 in which you report your conversation with the Minister and Subsecretary of the Treasury on the Ecuadoran financial situation and their desire for assistance from us. I agree with you on the necessity for some earnest thinking on the part of Washington on this matter. In fact, the Department had already been canvassing all the possibilities very carefully with the various interested agencies as indicated in its telegram No. 179.² The net result of these discussions is summarized in the paragraphs below. I should add, however, that there is some feeling here that the Ecuadorans have not bestirred themselves as actively as they might in finding a solution to their problem. This refers particularly to the possibility of borrowing from private sources which I shall touch on below.

First, let me give you the conclusions which have been developed with respect to external assistance.

1) United States Government agencies are not in a position to provide dollars, either by grant or by loan, to cover sucre expenditures.

2) As to the IMF, we understand that the Ecuadoran Central Bank people know that they have a good prospect of obtaining a drawing or stand-by agreement or both, provided they can satisfy the Fund that they are adequately dealing with their internal inflationary situation. However, we understand that the Central Bank expects to be very conservative in actually drawing on the IMF and prefers to keep any stand-by arrangement intact for psychological reasons. The Ecuadoran quota, as you know, is $10 million and this would be the maximum assistance which they can expect from the Fund.

3) Ecuador has shown some interest from time to time in the possibility of an exchange stabilization agreement with the U.S. Treasury. The Treasury has not committed itself on this subject. In any event, the Ecuadorans should understand that Treasury stabilization credits are generally part of a “package” arrangement wherein they may be drawn upon only after other credits, such as the IMF stand-by and possible private bank lines of credit have been exhausted. Ideally, the Treasury portion of any such package is not expected to be spent. Moreover, a Treasury exchange agreement would not be designed to deal with Ecuador’s budgetary deficits either immediately or in the future, but rather to provide confidence in the Ecuadoran currency.

4) Sucres can be provided under P.L. 480 for economic development purposes, but the FY 1955 loan use program approval did not include funds for activities which up to now have been regular budgetary items. Although the FY 1957 sucre loan funds could be authorized for use on legitimate economic development projects which formerly have been budgeted for, the United States is adhering to the principle that P.L. 480 funds should not be used for budget support. To conform to this principle it would be necessary for Ecuador to eliminate any projects to be financed by P.L. 480 from its budget or at least to isolate them so that it does not appear that the budget was balanced using P.L. 480 funds. In any case, it is obvious that P.L. 480 local currency from the agreement now pending will not become available in time to help balance the 1956 budget.

5) Loans from the Export-Import Bank or the IBRD to cover foreign exchange expenditures (whether appearing in the budget or not) can be provided only for specific projects which have been thoroughly studied and approved by the lending agencies. This requires some little time; consequently such assistance would not be available to help meet the 1956 budget problem. It might be available in 1957 and subsequently. This would depend upon presentation by Ecuador of applications covering sound projects and upon the lending institutions’ judgement of Ecuador’s credit worthiness.

6) Finally, as regards borrowing from foreign private banks, your letter quotes the Minister as saying that a short-term loan such as they might be able to obtain from commercial banks would not meet Ecuador’s needs, since the same problem would be bound to arise again in attempting to meet the necessarily large repayments. When Harland Corson was up here from Quito about six weeks ago he informed us that he had been told by Intriago that the best that Perez Chiriboga had been able to obtain in New York was the possibility of loans up to 180 days. I therefore presume that when the Minister spoke of “short term loans” he had in mind loans of approximately that maturity. The U.S. money market has, of course, tightened up very appreciably in recent months. However, I understand that where the borrowing country will undertake not to use the dollar funds such loans can be and have been arranged for medium terms and at relatively low rates of interest. If a loan were to be obtained on such a basis, the dollar proceeds could, of course, not be used for imports; they would have to remain on deposit in the U.S. However, it should be possible for the Central Bank to issue sucres to the government in exchange for the dollars and these local funds could then be used by the government for budgetary purposes. I think it would be worthwhile suggesting to the Ecuadorans that they have Ambassador Chiriboga explore the possibility of such private bank loans, particularly with American banks that have had dealings in Ecuador. (I should add, incidentally, that most of us feel rather dubious about the wisdom of using any portion of foreign financial assistance for the purpose of increasing imports.)

On the internal side it is appreciated up here that the government has been making determined efforts to cut expenditures and raise new revenue. From what is known here, however, it is not clear whether all possibilities for finding new sources of funds have been exhausted. For instance, has the government attempted to borrow from private banks or other financial institutions in Ecuador? Also, Messrs. Brand and Altman³ of the IMF mission think that the Central Bank should impose tighter credit restrictions on the private sector.

Over the longer run the government might wish to consider the possibility of encouraging the creation of a bond market as a source of noninflationary internal financing. The IBRD is understood to have provided technical assistance in at least one other case in this respect.

The Ecuadoran Government is understood to have asked the IBRD for assistance in obtaining a mission to advise it in the financial field. Such a mission should be helpful. It is presumed the Ecuadoran Embassy here will receive orders to press the IBRD directly for an early departure of such a mission but if you think it would be helpful for us to jog the Bank also, we’ll see what we can do.

All of the foregoing is written on the assumption that while the political situation is serious it is not critical. If it were to deteriorate to the point where the overthrow of the Ponce administration was a serious possibility, the only conceivable source of immediate economic assistance from U.S. Government sources would be the Presidents Fund (Section 401 of the Mutual Security Act). However, in view of the troubled world situation it is unlikely that Ecuador could claim sufficient priority to justify resort to this Fund. Other Mutual Security funds from the FY 1957 appropriation for Latin America are fully obligated or earmarked, and there is every indication that they will be fully utilized. The transfer to Ecuador of funds allocated to other areas would, of course, require a very high level decision.

I hope that the foregoing will prove useful to you in discussing this whole problem with our Ecuadoran friends. I should say that Ponce has made a fine impression up here in the way he has met the situation he inherited from Velasco. If he can see this thing through his stock should go up even higher. In any event you may rest assured that we are thoroughly aware of the political risks involved.

With all best wishes.

Sincerely,

R. R. Rubottom, Jr. ⁴

1. Source: Department of State, ARA Deputy Assistant Secretary’s Files: Lot 58 D 691, Ecuador. Confidential; Official–Informal.
2. Not printed.
3. Paul J. Brand, head of the International Monetary Fund mission to Ecuador in October 1956, and Oscar Altman, a member of that mission.
4. Printed from a copy which bears this typed signature.