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Monday, September 21, 2009

Ecuador's "innovative" default good for economy

By Hugh Bronstein

QUITO, Sept 11 (Reuters) - Ecuador's 2008 debt default was decried by Wall Street as the first example of a solvent country refusing to pay global bonds, but Nobel Prize-winning economist Joseph Stiglitz says the economy has benefited from the move.

Investors howled when socialist President Rafael Correa defaulted on $3.2 billion in debt, even though the economy was growing and state coffers brimmed with oil money at the time.

The OPEC-member country argued that the bonds were unfairly contracted years earlier by corrupt officials in league with greedy international bankers, rendering the debt "illegitimate."

A left-leaning audit committee convened by the government issued a 172-page report supporting the default.

In June Ecuador bought back 91 percent of the bonds in a deal that fetched higher-than-expected participation from cash-strapped investors hit by the world financial crisis.

"It was a very interesting and innovative idea to do the audit, trying to understand where the debt came from and the legitimacy of the indebtedness," Stiglitz told Reuters in a telephone interview from New York.

"It is something that other countries ought to consider," he said. "There are benefits and costs, but it is clear that Argentina is better off after its (2002) default than it was before. Russia is better off after its (1998) default."

Ecuador has improved its position as well, he said, as reduced debt fees allow the economy to rebound more quickly than it otherwise would from the global slowdown.

The government defaulted on its bonds due in 2012 and 2030, which were contracted as part of the restructuring of the country's Brady debt in 2000. The auditors said that restructuring imposed overly harsh terms on Ecuador and violated local law.

The government expects a 2 percent gross domestic product expansion this year and 3.4 percent growth in 2010 despite unstable oil demand due to the world slowdown. The economy grew 6.5 percent in 2008, when petroleum prices were stronger.

"Creditors want to persuade countries that they should never default," Stiglitz said. "But for Ecuador itself, it means it is less burdened by debt and will be able to grow faster."


What is needed, according to Stiglitz, is a better sovereign debt restructuring mechanism that would work in the same way bankruptcy courts do in sorting out the debts of individuals.

Such a system would allow governments to lodge their complaints about the way their debts were contracted, just as a private citizen might present his or her case against banks that, for example, issue credit cards with hidden costs or other irregularities.

"If a guy goes into bankruptcy court the judge might ask questions like 'What is his ability to service the debt?' The judge might also ask if the lender gave the money on fraudulent terms, charged usury and so forth," Stiglitz said.

"If the answer to those latter questions is 'Yes,' the bankruptcy judge might be more willing to write down the debt. That is the conceptual approach that Ecuador has used," he said.

Establishment of an international bankruptcy court would pressure creditors to do better due diligence before lending money to developing countries, according to Stiglitz.

Days before declaring default, Correa, a U.S.-educated economist, called for an international tribunal to settle disputes between debtor countries and creditors.

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