Ecuador's Assange problem and its economic imbroglio are twined

Before he launched a major economic reform on April 2, Ecuadorean President Lenin Moreno cushioned it with a disclaimer: "Under no circumstances," he said, would the plan "affect the poorest, neediest sectors" of the country. At least one needy sector is already upset, however.

A few days earlier, WikiLeaks founder Julian Assange lost his internet connection at the Ecuadorean embassy in London, where he's been holed up since seeking refuge in 2012 against extradition to Sweden to face an investigation, subsequently dropped, for alleged sexual assault.

Ostensibly, muting Assange had nothing to do with the government effort to contain the country's ballooning debt and fiscal deficit.

Ecuadorean authorities claimed that the Australian hacktivist had violated his asylum agreement by using the embassy in Knightsbridge as a platform to hector foreign governments.

So they pulled the plug.

In fact, Ecuador's Assange problem and its economic imbroglio are twined.

After a decade of mercurial rule that fractured Ecuador's society and sandbagged its economy, the country is in the throes of a reset.

Upon taking office last May, Moreno began systematically undoing the so-called Citizen's Revolution he'd inherited from the choleric caudillo Rafael Correa, whom he had served as vice president.

Correa, an enthusiast of Venezuelan-style Bolivarian socialism, had engaged in a verbal and policy war with Washington, confronted foreign firms, bullied domestic critics and journalists, and tapped the country's oil bonanza to pump up public debt. Moreno broke with "Correaismo" by courting political adversaries, reaching out to the media, and settling quarrels with foreign businesses. He also took pains to smooth relations with traditional allies such as the U.S., which recently agreed to renew trade perks for Ecuadorean companies.

The latest economic overhaul furthers the course correction at a time when Ecuador needs to shift from consumer-driven growth financed by debt to greater international investment and fiscal parsimony. Such initiatives were clearly meant to signal a fresh start to Ecuador's Western allies; continuing to indulge Assange -- "an inherited problem," according to Moreno - was no help.

"The back story is that Ecuador wants to grow again by getting back into the good graces of international investors in oil and mining projects," Aristodimos Iliopoulos, of the Economist Intelligence Unit (EIU), told me. "So the wager might be that clamping down on Assange is seen as a sign of good will."

The Ecuadorean government tried to finesse its Assange problem by granting him citizenship in December and, eventually, offering him diplomatic status. As contradictory as that sounds, Ecuador's gambit was to disinter Assange from the embassy -- a small flat in Knightsbridge, where he had reportedly become a nuisance -- without reneging on its asylum commitment. (Assange refuses to leave the embassy without assurances that he won't face extradition to the U.S. on possible espionage charges.) The plan fell apart when Britain threatened to arrest him anyway.

Of course, unplugging Assange is hardly assurance that global investors will raise their Ecuador bets or that Moreno's 14-point economic reform will succeed. A recent independent audit found that public debt had grown to 68 percent of gross domestic product in 2016, and perhaps to an alarming 90 percent last year, according to the EIU.

Hence Moreno's vow to slash spending by $1 billion and close money-losing state companies, as Bloomberg News reported Tuesday. So far, investors are underwhelmed. Doubts remain over whether Moreno, whose approval ratings are slipping and whose allies control a minority of seats in congress, has the political muscle to carry through a deeper fiscal adjustment.

Never mind that Moreno, a man of the left, who served unwaveringly at Correa's side from 2007 to 2013, only belatedly embraced reform. Conspicuously absent from his plans is a potentially revenue-making value added tax, a lacuna that suggests "the plan will probably fail to signal meaningful fiscal consolidation," Eurasia Group said in a client note.

Yet it's too early to give up hopes for economic revival. In just 11 months, Moreno has turned heads and eased a decade of tensions. Creditors have taken note, continuing to lend the Moreno government more money at increasingly lower rates. (The coupon on January's $3 billion bond issue was 7.8 percent, down from 9.8 percent a year ago, the EIU reported.)

"Investors loved that Moreno broke with Correa the way he did, and that gave him a huge honeymoon at the start," said Iliopoulos. "The good will is there, but it's not a blank check." That's a message Assange has already received.

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Margolis writes about Latin America for Bloomberg View. He was a reporter for Newsweek and is the author of "The Last New World: The Conquest of the Amazon Frontier."