Ecuador's default

Ecuador's default

Audit findings prompt refusal to pay 'illegitimate' debt.
December 12, 2008

by Odious Debts Online

After months of threats, the government of Ecuador has made good on its promise to forego payment of foreign loans deemed illegitimate by the country's debt audit commission.

Ecuadorian President Rafael Correa announced that his country would not be paying $30.6 million interest due Dec. 15 on its 2012 global bonds after the commission claimed the debt had been 'illegally' acquired by past administrations.

The commission which Correa created last year to investigate all debt issued to Ecuador from 1970 until June 2006, revealed in late November that traces of illegitimacy ran throughout much of the country's $10 billion foreign debt load.

The president's public statements regarding his administration's stance have been strongly worded. Describing debt the audit found tainted by corruption as "immoral and a betrayal of the country," Correa told reporters:

"If we have to confront international lawsuits, we will confront them and, I repeat, I assume all responsibility," he said. "I could not permit the continued payment of a debt that, in any light, is immoral and illegitimate."

Correa is expected to present a restructuring proposal to creditors in due course while simultaneously attempting to have the debt annulled in international courts. In a public statement on Dec. 13 Correa said he wanted to force "a big discount" on creditors whom he had described the day before as "true monsters" who wouldn't "hesitate to crush" his country.

According to the commission, the audit uncovered criminal violations by previous governments that sold debt to pension funds, hedge funds and other overseas investors, and found most of the country's multilateral loans violated local laws as well as international treaties, lacked transparency and forced Ecuador to apply harmful policies.

Of particular interest is Correa's alleged insistence that responsibility for debt held in dispute should be paid for by each party at fault with their own assets, whether they be creditor nations, multilateral organizations and/or national authorities.

Ecuadorian activist Helga Serrano said the country's audit process had become "an important tool that will assign responsibility to those who perhaps never thought that they would be judged for their actions that threaten the life and dignity of the people."

Ecuador's default, the second in 10 years, is still relatively small by comparison to Argentina's $100 million foreign debt default in 2002 notes the Washington Post, which credited the Ecuadorian move with a more unique distinction: It is rare, said the Post, for a developing nation to cease payments not because it can't afford to pay but because it has made a political decision not to.

The audit of the debt, initiated by the Ecuadorian government with the participation of economists, lawyers, and representatives of social organizations from Ecuador and other nations is unprecedented: no other nation has embarked on a similar exercise to determine responsibility for the debt. President Correa informed sources that he would also promote the creation of an International Tribunal for Arbitration of Sovereign Debt in the United Nations.