Ecuador News & Newspapers

As Crisis Mounts, Ecuador Declares Foreign Debt Illegitimate and Illegal

By Daniel Denvir, AlterNet
Posted on November 26, 2008

Amidst the spreading global financial crisis, a special debt audit
commission released a report charging that much of Ecuador's foreign
debt was illegitimate or illegal. 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.

The commission 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. The commission evaluated all commercial, multilateral,
government-to-government and domestic debt from 1976-2006.

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). 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 other
loans on. 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 1970's interest rate hikes constituted a "unilateral"
increase in global rates, compounding Ecuador's indebtedness.

If President Rafael 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%
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 debt in
encouraging countries to forgive the debt accrued in Iraq under Saddam
Hussein." In fact, the U.S. originated the concept of foreign debt
after the Spanish-American war. The U.S. 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.

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