Ecuador Pushing to Break Free from the Cycle of Debt

December 5, 2008 12:00 am Published by Leave your thoughts

Ecuadorean President Rafael Correa had already given clear signals that his government would have taken decisive steps in addressing the foreign debt problem which has been and continues to be one of the greatest burdens on the Ecuadorean economy and society. In the last twenty-five years Ecuador has spent an approximate average of 40% of its annual budget on paying off its debt, a process which has contributed to the gradual dismantlement of State provision of basic services. Instead of dedicating its resources to improving strategic sectors for the development of the country, such as health, education and infrastructure, on which it has been negligent to say the least, Ecuador has been extremely punctual and observant in servicing the debt. This zeal has also been the cause of further indebtment on the internal front. The lack of funds to channel to foreign private banks has led to the accruing of internal debt, often under the pressure of creditors, at highly disadvantageous interest rates. In the 1990s. the emission of Treasury bonds has been the basic mechanism through which external public debt was decreased at the cost of increasing the internal one, with the net result of augmenting total debt, in a vicious circle where the role played by corrupt politicians and officials has had a major impact.

In an emotional event in front of an audience composed of a number of social and political activists who for years have struggled against the foreign debt in the country, the report of the Foreign Debt Auditing Commission, an initiative launched by the government at the beginning of its mandate, was handed over to the President of Ecuador. The report of the commission has sparked strong reactions. The commission has adopted a different view from the conventional norm that treats any stipulated contract as an obligation to honour at all costs, and has embraced the conception of illegitimate debt, put forward by the scholar Joseph Hanlon. This new notion makes reference to those parts of the debt that were contracted in outright violation of current law, or those that are simply unethical, unjust and detrimental to the public good. Hence, all those external and internal debts that were taken up through fraud, with free interest flotations, or through acts of corruption, designed clearly to favour the interests of the creditors at the expense of those of the debtor, have been considered illegitimate. The report has also attributed the individual responsibilities of fraudulent and dishonest debt contraction, putting under the spotlight the complicity of almost all the ex-Presidents since the return to democracy in 1979. Among these, Sixto Durán Ballen, also ex Ecuadorean Ambassador in London, stands out: under his 1992-1996 Presidency, Ecuador unilaterally renounced to the right not pay a part of the Ecuadorean debt, granted by the statue of limitations. It is not unlikely that some ex-officials and politicians may soon be prosecuted in Ecuador.

Correa (pictured) has not hesitated to launch an international campaign on foreign debt, and is currently trying to find legal instruments to quash Ecuador’s illegitimate debt. According to the report, international law provides Ecuador with a number of tools to advocate the cancellation of some parts of its monetary obligations. The concept of Rebus Sic Stantibus, present in the 1969 Convention of Vienna, states that if a radical change took place in the prevailing circumstances at the moment of the stipulation of a contract, and this change affected the pending obligations scheduled by the contract, then the affected party can ask for its suspension or cancellation. Correa’s most ambitious declaration, however, was his call for the creation of an international tribunal on sovereign debt arbitration in the search for a global solution to the foreign debt problem. He declared that “there will be no integral solution to the problem of foreign debt as long as the international finance architecture is not reformed.” It is also important to look at the supply side, and analyse how debt contraction has often been induced and brought about through pressure by international banks, which have seen developing world politicians as easy customers with little inclination to be accountable to their electors.

This move by the Ecuadorean government has led to a harsh reaction from Brazil. Brazil, through BNDES, its state-owned development bank, has over the last few years lent a substantial amount of money to Ecuador, the repayment of a part of which is now being put under question by Correa. In particular, Ecuador has advanced an arbitration demand at the International Chamber of Commerce in Paris, against a loan which served for the construction of a hydroelectric power plant. The works were assigned to Odebrecht, a Brazilian construction firm. The plant, which was handed over to the government in advance of the scheduled time, was immediately beset by a series of technical difficulties, which paralysed its works for several months. As a result of that, Odebrecht was expelled from the country, because of its unwillingness to take responsibility for the full cost of the necessary repair work. The Brazilian Ambassador in Quito has recently been called back to Brasilia, in a clear escalation of tensions between the two countries. Some unconfirmed news reports have suggested that Brazil may has also threatened Ecuador with trade restrictions by way of retaliation.

Ecuador’s proposals met with a very different reaction from the countries affiliated to the Bolivarian Alternative for Latin America and the Caribbean (ALBA in its Spanish acronym) during their last meeting in Caracas, which Correa attended as an Observer Member. Particular enthusiasm for the initiative has arisen among Central American countries, so much so that Correa has been invited by the President of Honduras, Manuel Zelaya, to explain the Ecuadorean case in a forthcoming international conference about foreign debt.

The initiative of Ecuador may play an important role in a new collective negotiation of the countries of the South against the interests of international private bankers. Since the outbreak of the debt crisis of 1982, there has been no serious attempt to form a cartel among debtor nations. Even though the hardest days of that crisis have now gone, the debt remains an extremely heavy burden for developing countries, impeding investment on social areas, obliging States to default on local people’s salaries and pensions, and reducing opportunities for positive state intervention in the economy. By contrast, the position of Brazil is not helpful by any standards, and undermines the Ecuadorean move from enjoying the regional support and legitimacy it fully deserves.

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This post was written by Samuele Mazzolini

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