The people of Ecuador are rising up to refound their country as a pluri-national homeland for all. This inspiring movement, with Ecuador's indigenous peoples at its heart, is part of the revolution spreading across the Americas, laying the groundwork for a new, fairer, world. Ecuador Rising aims to bring news and analysis of events unfolding in Ecuador to english speakers.

Thursday, November 20, 2008

Ecuador to jump-start economy, threatens default

By Alonso Soto and Alexandra Valencia
GUAYAQUIL, Ecuador, Nov 18 (Reuters) - Ecuador's president said on Tuesday he will jump-start the economy and limit the OPEC nation's capital outflows and imports to counter the impact of a spreading global crisis that has dragged down oil prices.

However, Rafael Correa's government continued to send mixed signals over its willingness to repay foreign debt by threatening to default on its bonds, but also staying open to market transactions.

In an interview with Reuters, Finance Minister Elsa Viteri said her government does not rule out buying back the country's sovereign bonds found by a government commission to have been contracted "illegally."

Producers of Ecuadorean goods are already feeling the pinch of a global economic slowdown that could particularly hurt Latin American nations dependent on commodity exports.

Governments around the world are spending hundreds of billions of dollars to support their economies and financial systems after the crisis spread quickly.

Rich nations, including those that make up the euro zone and Japan, have topple into recession.

"We are afraid of deepening problems in the external sector. That could generate a crisis on the balance of payments and credit restrictions," said Correa, speaking to businessmen in the country's industrial hub of Guayaquil.

The socialist economist, who until recently had played down the effects of the crisis on the world's top banana exporter, said in rare comments that his government could delay social programs as its fiscal position looks tighter next year.

The economic woes and tighter public spending could be a political liability for Correa, who is expected to run for re-election in late April for another four-year term. Still, the central bank maintained its 2008 economic growth forecast unchanged at above 6 percent.

Since he took office in 2007, Correa has bolstered his control over the economy and sought for banks to offer more loans to the poor.

He said the government will raise the tax on capital outflows to 1 percent from 0.5 percent and offer a fiscal stimulus to banks that offer more business loans.


Correa also said his government is working to secure a $1 billion loan from the Inter-American Development Bank to finance key infrastructure projects.

His announcement comes only days after he raised the specter of default by threatening not to pay interest on one of his country's sovereign bonds. Government officials have said they are confident that ally countries such as Venezuela could help them if the market shuts down credit lines.

"This is peculiar because if you are thinking of not paying your debt that will be in detriment of negotiations to get such a large loan" said Enrique Alvarez, head of Latin America debt strategy with IDEAglobal in New York.

"With those measures Correa seems to be slowly trying to create the conditions to service its debt ... there are many mixed signals here."

Ecuador has not ruled out talks with bond-holders or a buyback to benefit from low market prices, Finance Minister Viteri told Reuters, but she kept the government's hard-line position on "illegal" debt by saying other options include an outright default.

"I doubt a bond-holder will show his face... but if it's done through the proper channels I have no problems in listening to what they have to say," said Viteri, adding no bond-holder has tried to approach her yet.

Economic Policy Minister Pedro Paez told Reuters earlier that bond-holders "now more than ever" should seek talks with the government to restructure "illegal" debt.

Viteri said Ecuador's decision will be based on advice from a group of legal experts and the findings of a government debt audit group that will deliver its results on Thursday.

In preliminary reports, the debt commission has found strong indications of "illegality" in the country's global bonds due on 2012 , 2030 and 2015 that amount to around $3.8 billion.

Top auditors have said the 2015 global bonds will be excluded from its recommendation to halt all commercial debt payments because its probe on them was limited.

The 2012 and 2030 bonds stem from a renegotiation of defaulted bonds that auditors say was riddled with irregularities, which included breaking national laws by overlooking required legal steps.

Ecuador has enough oil cash to make the debt payments, but analysts interpret the Andean country's debt threats as a bold bid to restructure the country's $10 billion foreign debt.

The prices of the global bonds have plummeted recently, and the country's debt is rated by Wall Street credit rating agencies as among the least creditworthy in Latin America.

In 1999, the country defaulted on about $5.8 billion in bonds amid the last major downturn in world oil prices.

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