By Indira A.R. Lakshmanan and Nathan Gill

(Bloomberg) — The U.S. expelled Ecuador’s ambassador to Washington today in retaliation for the expulsion of the top U.S. diplomat in the South American country.

Within hours, Ecuador’s President Rafael Correa accused the U.S. of infiltrating his country’s police.

Ecuador on April 5 expelled the U.S. ambassador to Quito, Heather Hodges, in protest over allegations she made in a classified diplomatic cable to Washington that Correa had knowingly appointed a corrupt police chief. The cable was made public by the anti-secrecy group WikiLeaks.

“The unjustified WikiLeaks action of the Ecuadorean government in declaring Ambassador Hodges persona non grata left us no other option than this reciprocal action,” State Department spokesman Mark Toner said. The U.S. also is suspending talks with Ecuador scheduled for June, he said.

Hodges is the third U.S. ambassador displaced by the fallout from classified memos made public. The U.S. envoy to Mexico resigned and the U.S. ambassador to Libya was recalled to Washington after sensitive cables were released by WikiLeaks.

Assistant Secretary of State Arturo Valenzuela called in Ecuadorean Ambassador Luis Gallegos this morning to tell him he had been declared persona non grata and must leave the U.S. as soon as possible.

‘Regrettable and Unwarranted’

“The United States is interested in a positive relationship with Ecuador, but the regrettable and unwarranted decision to declare Ambassador Hodges persona non grata will have to be taken into account going forward,” Toner said.

Ecuador’s foreign minister, Ricardo Patino, said that it was still possible to maintain “cordial relations” between the two countries and that trade relations and consulates haven’t been affected by the expulsions, according to a statement on the Ecuadorean Foreign Ministry’s website.

“Both countries will maintain their trade envoys for now,” the statement said in Spanish. “In a few weeks, we hope we can restart dialogue with the U.S. and get past this moment.”

Correa, meanwhile, accused the U.S. of “infiltrating” the Andean nation’s police and security forces. The U.S. last year gave Ecuador $6.36 million in anti-narcotics assistance for the country’s police, armed forces and judiciary.

On April 5, the Ecuadorean embassy in Washington said in a statement that the expulsion of Hodges was “aimed solely at the individual involved” and “not toward the United States government or the Obama administration.”

‘Corrupt Activities’

In Hodges’ cable, which was published in the Spanish newspaper El Pais on April 4, she wrote that the police chief’s “corrupt activities were so widely known within the upper ranks of the ENP that some Embassy officials believe that President Correa must have been aware of them when he made the appointment,” referring to the upper ranks of the nation’s police force. “These observers believe that Correa may have wanted to have an ENP Chief whom he could easily manipulate.”

Correa said the cable revealed that the U.S. “has the police and armed forces infiltrated.”

“This woman received information and sent it to her government. This isn’t loyalty, it’s bad faith,” he said in a statement.

Correa, a political ally of Venezuela’s President Hugo Chavez, has repeatedly clashed with the U.S. since 2008, when he refused to renew a 10-year lease on a U.S. air base used to conduct anti-drug surveillance in the Andes, the world’s biggest cocaine-producing region. In February 2009, Correa expelled two U.S. embassy employees during a conflict over personnel selection in a U.S.-funded police program.

$13 Billion in Trade

Trade with the U.S., Ecuador’s biggest commercial partner, is unlikely to be affected by the dispute, Patrick Esteruelas, an analyst at Moody’s Investors Service in New York, said in a telephone interview today.

Total trade between the two nations last year was $13 billion, most of that in oil, according to U.S. Census data. Ecuador’s government earns 24 percent of its revenue from oil.

“It’s too early to say that this could result in a sustained freezing of diplomatic relations, let alone a commercial crisis that could have an impact on Ecuador’s economy,” Esteruelas said. “The U.S. hasn’t retaliated commercially against Ecuador in the past.”

The yield on Ecuador’s 9.375 percent bonds maturing in 2015 fell 10 basis points to 9.82 percent at 3:55 p.m. New York time, according to JPMorgan Chase & Co. The bond’s price rose 0.35 cents to 98.35 cents on the dollar.

The extra yield investors demand to hold Ecuadorean dollar bonds instead of U.S. Treasuries narrowed 6 basis points, or 0.06 percentage point, to 7.25 percent, according to JPMorgan’s EMBI+ index. Ecuadorean government debt is the second-riskiest after Venezuela’s among 15 emerging markets tracked by JPMorgan.

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