Ecuador Defaults on Foreign Debt

Written by Daniel Denvir for UpsideDownWorld

Friday, 12 December 2008

President Rafael Correa declared on Friday that Ecuador would not make a $30.6 million interest payment on $510 million in bonds due in 2012, calling the debt illegal. The default on the Global Bonus 2012 bonds means that Ecuador is also defaulting on Global 2015 and 2030 bonds. The default totals $9.937 billion, 19 percent of the country’s GDP. Ecuador has assembled a legal team to fight expected lawsuits and hopes to use the default as leverage to renegotiate the debts. Civil society organizations have long criticized foreign debt as a means of exploiting impoverished countries in Latin America, Africa and Asia. The anti-debt organization Jubilee USA says “countries are paying debt service to wealthy nations and institutions at the expense of providing these basic services to their citizens.” In addition, lending institutions often use indebtedness to force cuts in social spending and impose business friendly economic policies. The Confederation of Ecuadorian Kichwas (ECUARUNARI), the powerful Andean branch of the country’s indigenous peoples movement, has long called the foreign debt illegal and illegitimate. “We have not acquired any debt. The so-called public debt really belongs to the oligarchy. We the peoples have not acquired anything or been benefited, and thus we owe nothing.” Mainstream analysts immediately predicted the move would hurt Ecuador economically, cutting off access to international credit from banks and multilateral institutions like the World Bank. Enrique Alvarez, head of research for Latin America Financial Markets at IDEAglobal in New York, told the Associated Press, "They were already sort of headed into isolation. Essentially now they've drawn shut the gate." Critics also say that financial institutions will see Ecuador as risky and may be reluctant to loan to the country’s private sector. But Mark Weisbrot of the Center for Economic and Policy Research argues that those claims are exaggerated. He says that the government does not currently require foreign funds and that any decision to not lend to Ecuador’s private sector would be purely ideological. "Ecuador doesn't need to borrow right now, especially if they're not paying the debt. They haven't been borrowing on international markets recently." Osvaldo León of the Latin American Information Agency (ALAI) in Quito says that international banks and businesspeople are defending a corrupt and unjust system. “Of course the establishment is going to come out and protest this. This is going to affect the interests of capital. There’s going to be an offensive from both inside and out.” He charges that business friendly economists and financiers unfairly frame their arguments as scientific and opponents’ views as ideologically driven. “Ecuador has decided on a political response to a political problem. They always want things like this to be seen as a technical issue, a problem that only economists can deal with.” Although Ecuador currently has the capacity to pay, dropping oil prices and squeezed credit markets are putting President Rafael Correa's plans to boost spending on education and health care in jeopardy. Correa has pledged to prioritize the "social debt" over debt to foreign creditors. Ecuador is undertaking a diplomatic offensive in an effort to win political support. Correa will be attending a summit in Brazil next week with presidents from throughout Latin American and Caribbean. Ecuador has called on Latin America to forge a united response to foreign debt. Venezuela, Bolivia and Paraguay have recently created debt audit commissions. Ecuador has also asked the United Nations to help develop international norms to regulate the foreign debt market. But relations between Brazil and Ecuador have been tense since the September expulsion of the Brazilian firm Odebrecht over accused accusations of shoddy work on a hydroelectric plant and contract violations. Most recently, Ecuador filed suit in the International Chamber of Commerce to stop payment on a $286 million debt to The Brazilian National Bank for Economic and Social Development (BNDES), credit that was allotted for Odebrecht’s hydroelectric project. Many activists in Ecuador see Brazil as a regional bully. Last month, a special debt audit commission released a report charging that much of Ecuador's foreign debt was illegitimate or illegal. The commission found that usurious interest rates were applied for many bonds and that past Ecuadorian governments illegally took other loans on. The report also accused Salomon Smith Barney, now part of Citigroup Inc., of handling the 2000 restructuring without Ecuador's authorization, leading to the application of 10 and 12 percent interest rates. Ecuador's military dictatorship (1974-1979) was the first government to lead the country into indebtedness. Commercial debt, or debt to private banks, made up 44% of Ecuador's interest payments in 2007, considerably more than the 27% paid to multilateral institutions such as the International Monetary Fund (IMF). Daniel Denvir is an independent journalist in Quito, Ecuador and a 2008 recipient of NACLA's Samuel Chavkin Investigative Journalism Grant. He is an editor at www.caterwaulquarterly.com.