[News] Ecuador - President Threatens to Stiff Banks, Pay Social Debt First

[Anti-Imperialist News]

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 Ecuador’s 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 country’s 1999 default.

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.

As of August, Ecuador’s 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 commission’s 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 Ecuador’s 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 Ecuador’s 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. Ecuador’s 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 Reserve’s late 1970s interest 
rate hikes constituted a “unilateral” increase in 
global rates, compounding Ecuador’s indebtedness.

If President Correa follows the commission’s 
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 commission’s 
report as leverage for restructuring the 
country’s 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 Poor’s cutting Ecuador’s 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 Ecuador’s 
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.

Ecuador’s 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 Correa’s radicalism.

It is also important to emphasize that 
Argentina’s 2001 default did not hamper the 
country’s 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 debt’s 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 Cuba’s outstanding debt to Spain, arguing 
that it was created by agents of Spain in Spain’s 
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.




Freedom Archives
522 Valencia Street
San Francisco, CA 94110

415 863-9977

www.Freedomarchives.org  
-------------- next part --------------
An HTML attachment was scrubbed...
URL: <http://freedomarchives.org/pipermail/news_freedomarchives.org/attachments/20081215/c0b6d01a/attachment.htm>