Sunday, November 30, 2008

Ecuador Declares Foreign Debt Illegitimate and Illegal

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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