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<h2><b>Ecuador Drops the Money Ball: President Correa Threatens to Stiff
Banks, Pay Social Debt First</b></h2><font size=3>By
<a href="http://www.indypendent.org/?pagename=author_search&a=Daniel%20Denvir">
Daniel Denvir</a> <br>
From the
<a href="http://www.indypendent.org/?pagename=issue&issue=12-12-08">
December 12, 2008</a> issue <br><br>
<b>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.<br><br>
</b>“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.<br><br>
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.<br><br>
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.<br><br>
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.<br><br>
Correa, a U.S.-trained economist, has threatened to default on the debt
since he campaigned for the presidency in 2006.<br><br>
<b>THE CITI GROUP CONNECTION<br><br>
</b>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.<br><br>
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.<br><br>
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.<br><br>
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
<i>Bloomberg News</i>, but said that Ecuador would not settle for a 60
percent reduction, a number that had earlier been mentioned.<br><br>
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-.<br><br>
Social movements have long alleged that corrupt former governments
illegally negotiated loans for their own personal financial
gain.<br><br>
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.<br><br>
Ecuador’s findings could set an important precedent for the poorest of
indebted countries, whose debt burden has long been criticized as
inhumane.<br><br>
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.<br><br>
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.<br><br>
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.<br><br>
“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.<br><br>
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.<br><br>
<i>This article was adapted from “As Crisis Mounts, Ecuador Declares
Foreign Debt Illegitimate and Illegal,” published Nov. 26 on
<a href="http://alternet.org">alternet.org</a>. <br><br>
<br><br>
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