[News] Ecuador - President Threatens to Stiff Banks, Pay Social Debt First
Anti-Imperialist News
news at freedomarchives.org
Mon Dec 15 13:29:09 EST 2008
Ecuador Drops the Money Ball: President Correa
Threatens to Stiff Banks, Pay Social Debt First
By
<http://www.indypendent.org/?pagename=author_search&a=Daniel%20Denvir>Daniel
Denvir
From the
<http://www.indypendent.org/?pagename=issue&issue=12-12-08>December
12, 2008 issue
QUITO, EcuadorAmidst the spreading global
financial crisis, a special debt audit commission
released a report on Nov. 20 charging that much
of Ecuadors foreign debt was illegitimate or illegal.
We could not only sanction those who are to
blame, but also stop paying the illegitimate
debt, said Ecuadorian President Rafael Correa at
a ceremony where he presented the findings of the
commission, which he appointed.
The commission recommended that Ecuador default
on $3.9 billion in foreign commercial debts
Global Bonds 2012, 2015 and 2030 the result of
debts restructured in 2000 after the countrys 1999 default.
Although Ecuador currently has the capacity to
pay, dropping oil prices and squeezed credit
markets are putting President Rafael Correas
plans to boost spending on education and health
care in jeopardy. Correa has pledged to
prioritize the social debt over debt to foreign creditors.
As of August, Ecuadors total foreign debt was
$10.3 billion, or 21 percent of its gross
domestic product. Just one-fifth of those bonds
were issued to raise money for development, while
the rest correspond to refinancing costs,
according to Hugo Arias, the debt audit commissions coordinator.
Correa, a U.S.-trained economist, has threatened
to default on the debt since he campaigned for the presidency in 2006.
THE CITI GROUP CONNECTION
The commission accused Salomon Smith Barney, now
part of Citigroup, of handling the 2000
restructuring without Ecuadors authorization,
leading to the application of 10 and 12 percent
interest rates. The commission evaluated all
commercial, multilateral,
government-to-government and domestic debt from
1976 to 2006. Commercial debt, or debt to private
banks, made up 44 percent of Ecuadors interest
payments in 2007, considerably more than the 27
percent paid to multilateral institutions such as
the International Monetary Fund (IMF). But the
report also lambasted multilateral debt, saying
that many IMF and World Bank loans were used to
advance the interests of transnational
corporations. Ecuadors military dictatorship
(1974-1979) was the first government to lead the country into indebtedness.
The commission found that usurious interest rates
were applied for many bonds and that past
Ecuadorian governments illegally took on other
loans. Debt restructurings consistently forced
Ecuador to take on more foreign debt to pay
outstanding debt, and often at much higher
interest rates. The commission also charged that
the U.S. Federal Reserves late 1970s interest
rate hikes constituted a unilateral increase in
global rates, compounding Ecuadors indebtedness.
If President Correa follows the commissions
recommendations which is far from a certainty
Ecuador could default on some portion of its
foreign debt, becoming the first Latin American
country to do so since Argentina in 2001.
But despite all the hints at a default, it seems
likely that Ecuador will use the commissions
report as leverage for restructuring the
countrys debt. Commission president Ricardo
Patiño indicated as much to Bloomberg News, but
said that Ecuador would not settle for a 60
percent reduction, a number that had earlier been mentioned.
Ecuador announced that it would delay paying
$30.6 million in interest on the Global Bonus
2012, taking advantage of a month-long grace
period. The announcement sent the global
financial universe into a panic, with Standard
and Poors cutting Ecuadors risk rating to CCC-.
Social movements have long alleged that corrupt
former governments illegally negotiated loans for
their own personal financial gain.
Significantly, the commission singled out foreign
debt for being illegitimate rather than simply
illegal. Social movements have long declared most
foreign debt to be illegitimate, but Ecuadors
use of legitimacy as a legal argument for
defaulting would set a major precedent; indeed,
the mere formation of a debt auditing commission
does so. Osvaldo Leon, of the Latin American
Information Agency (ALAI), says that it remains
to be seen if other countries in Latin America will follow suit.
Ecuadors findings could set an important
precedent for the poorest of indebted countries,
whose debt burden has long been criticized as inhumane.
Pablo Davalos, an economist and fierce social
movement critic of Correa, has said that the
report will in the end only amount to political
posturing. Correa has criticized the foreign debt
since his brief 2005 stint as Finance Minister
but has faithfully made each and every payment
since his 2006 election. Correa has also made
peace with oil and mining companies after
acrimonious, high-profile negotiations. In
response, social movements have accused Correa of
being overly friendly to business. The foreign
press, and the business press in particular,
regularly exaggerates Correas radicalism.
It is also important to emphasize that
Argentinas 2001 default did not hamper the
countrys economic recovery in fact, it gave it a strong boost.
Former Constituent Assembly President Alberto
Acosta echoed Correa, saying that the proposal
could provide the legal basis for the prosecution
of Ecuadorian officials involved in the
negotiation of illegal or illegitimate debt. He
also said that it was perfectly reasonable to
take a debts legitimacy into account.
The United States itself has embraced the
concept of illegitimate foreign debt in
encouraging countries to forgive the debt accrued
in Iraq under Saddam Hussein, Acosta said.
In fact, the United States originated the concept
of illegitimate foreign debt after the
Spanish-American War. The United States refused
to pay Cubas outstanding debt to Spain, arguing
that it was created by agents of Spain in Spains
self-interest, a matter in which Cubans had no say.
This article was adapted from As Crisis Mounts,
Ecuador Declares Foreign Debt Illegitimate and
Illegal, published Nov. 26 on <http://alternet.org>alternet.org.
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