WE ARE NO DEBTORS! WE ARE CREDITORS OF A HISTORICAL, SOCIAL AND ECOLOGICAL DEBT!
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ECUADOR - Ecuador's Conscientious Default |
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Thursday, 08 January 2009 |
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Counterpunch
December 23, 2008
Glitch in the System
Ecuador's Conscientious Default
By NEIL WATKINS and SARAH ANDERSON
When the government of Ecuador failed to make a scheduled interest
payment on private bonds this month, it was hardly the first time a
country had defaulted in the middle of a financial crisis. In fact, it
wasn't even the first time for Ecuador. The small South American country
did so just 10 years ago, at a time when the economy was reeling from
natural disasters and a drop in oil prices.
But this default is different. For the first time in history, the
government's defense isn't based on an inability to pay. Ecuadorian
President Rafael Correa explained rather that he was unwilling to
continue to pay debts that are "obviously immoral and illegitimate."
Like many of the victims of the U.S. subprime mortgage mess, the
Ecuadorian people were the targets of predatory lending. In the 1970s,
unscrupulous international lenders facilitated some $3 billion in
borrowing by Ecuadorian dictators who blew most of the money on the
military. After the transition to democracy, the Ecuadorian people got
stuck holding the bag.
Over the years, the country has made debt payments that exceed the value
of the principal it borrowed, plus significant interest and penalties.
But after multiple reschedulings, conversions, and some further
borrowing, Ecuador's debt has risen to more than $10 billion today.
Human Costs
The human costs are staggering. Every dollar sent to international
creditors means one dollar less is available for fighting poverty. And
in 2007, the Ecuadorian government paid $1.75 billion in debt service,
more than it spent on health care, social services, the environment, and
housing and urban development combined.
Correa campaigned on a commitment to prioritize the payment of the
"social debt" over financial debt. After taking office in 2007, he
responded to demands from Ecuadorian civil society and the international
Jubilee Network to form an independent commission to investigate the
origins, nature, and impacts of the nation's external debt. While
citizens' groups in other countries have carried out their own debt
audits, this was the first time a government had supported such an effort.
The debt audit commission documented hundreds of allegations of
irregularity, illegality, and illegitimacy in the contraction of
Ecuador's debt. In the case of the bonds Ecuador has now defaulted on,
the commission alleged that they were issued and restructured illegally,
violating Ecuador's domestic laws, U.S. Securities and Exchange
Commission regulations, and general principles of international law. The
agreement that gave rise to the Global bonds themselves may not be legal
under Ecuador's constitution, which prohibits an individual from
incurring debt on behalf of the country.
Commercial debt is the most expensive component of Ecuador's portfolio,
making up only 30% of its total obligations but comprising 44% of the
country's interest payments in 2007.
Correa says he hopes to cut a deal with creditors, much in the way that
many U.S. homeowners are seeking to restructure their subprime
mortgages. Ecuador's global bonds are currently valued at $3.8 billion.
If negotiations aren't fruitful, however, the economic repercussions
could be severe.
One avenue for the bondholders would be to sue under the U.S.-Ecuador
bilateral investment treaty, which went into force in 1997 (long before
Correa took office). Arbitration tribunals, such as the World
Bank-affiliated International Centre for the Settlement of Investment
Disputes (ICSID), handle such cases. Under this system, there is no
public accountability, no standard judicial ethics rules, and no appeals
process. A group of Italian investors has a pending ICSID claim over
about $5.5 billion in bonds that Argentina defaulted on in 2002.
Investors could also sue in New York courts, as the bonds were issued
under the laws of that state. Holders of Argentine bonds have also used
that tactic.
Financial analysts have also predicted that Ecuador's default will cut
off the country's access to capital markets and could dim its chances of
obtaining a long-term extension of U.S. trade preferences, which will
expire in 2008.
While the risks of default are high, Ecuador had only two options: keep
paying a dubious and possibly illegal debt at the risk of social unrest,
or default and face the wrath of the international markets.
Independent Mechanism
This exposes a gaping hole in the international financial system: the
lack of an international, independent mechanism for countries to resolve
disputes over potentially illegitimate and/or illegal debt or in the
case of bankruptcy. Ecuador may be the first developing country to
default during the current crisis, but it's unlikely to be the last.
As world leaders seek to build a new international financial
architecture to respond to the current meltdown and prevent future
crises, they should consider a new debt workout mechanism as one key pillar.
A bill pending in the U.S. Congress would be a step forward. The Jubilee
Act, which passed the House of Representatives in 2008, would require
the Comptroller General to undertake audits of the debt portfolios of
previous regimes where there is substantial evidence of odious, onerous,
or illegal loans. The legislation also instructs the Secretary of the
Treasury to "seek the international adoption of a binding legal
framework on new lending that…provides for decisions on irresponsible
lending to be made by an entity independent from the creditors; and
enables fair opportunities for the people of the affected country to be
heard."
To ensure more responsible and productive lending and borrowing in the
future, we need to learn from and redress the errors of the past. Only
then can we build the architecture for an international financial system
that works for people and the planet.
Neil Watkins, a Foreign Policy In Focus contributor, is the executive
director of Jubilee USA Network, and Sarah Anderson, a Foreign Policy In
Focus senior analyst, is the director of the Global Economy Project at
the Institute for Policy Studies.
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