Ecuador Defaults on Illegitimate Debt

By Hayley Hathaway, Jubilee USA Network

On Friday, Ecuador’s President Rafael Correa announced that his government would default on payments on some of its commercial debts. The decision comes in response to detailed recommendations from the Public Debt Audit Commission, an independent commission formed by the Ecuadorian government in 2007 in response to calls from civil society. The commission examined Ecuador’s debts over the period more than a year and its 172-page report (Click here for Spanish) evaluates 30 years of Ecuador’s debt and documents hundreds of examples of irregularities and claims of illegitimacy.

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The report found that out of Ecuador’s more than $10 billion of debt, the Global 2012 Bonds were especially problematic. The commission found that way the bonds were issued, rolled over, and reissued violated various Ecuadorian national laws including the Ecuadorian constitution, the civil code, the commercial code, and the law of finance and administration, as well as general principles of international law. President Correa recently told reporters: the bonds were "always structured for the benefit of the creditors, trampling on the national interests, dignity and sovereignty of our countries. . .It is now time to bring in justice and dignity."

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Given the findings of the commission, Ecuador faced two very difficult choices: keep paying on a dubious debt at a high social cost, or default and lose access to international credit.

The quagmire that Ecuador found itself in points to the reality that within the existing legal and regulatory framework governing sovereign borrowing, there’s no way for Ecuador to make its complaint about the possible illegitimacy of its debt to an independent, international body

Last year Ecuador paid $1.75 billion in debt service, more than the government spent on health care, social well-being, housing and urban development, and the environment combined. As part of its plan to fight poverty, the Ecuadorian government has made a public commitment to reverse this situation by 2010, seeking to significantly increase its spending on social services while cutting the amount it pays on debt service. Ecuador’s debt accumulation began 30 years ago under the dictatorship of the Supreme Government Council and has faced multiple debt restructurings since.

The global financial situation worsens every day. As we work to respond to the crisis, Ecuador’s example points clearly to the need for global financial reform and the need to create ways for sovereign nations to raise concerns about irregularities in lending. Ecuador may be the first country to default based on the claim of illegitimate debts in this crisis, but it may not be the last.

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Posted by: Credit Help | January 08, 2009 at 06:16 AM