KAIROS Debt E-Bulletin January 2009
Ecuador Has Every Right to Refuse to Pay Illegitimate Debts
President Rafael's Correa's decision to default on payments on a portion of Ecuador's external debts has received enthusiastic approval from social justice advocates amidst warnings of retribution from private financiers. London's /Financial Times/ accuses Correa of halting payments "on ideological grounds".
In fact, Ecuador made this decision for solid moral, legal and financial reasons that have been ignored by media reports. The default followed an exhaustive audit of Ecuador's debts that uncovered extensive irregularities and illegalities in the way the debts in question were contracted. Moreover, the decision is based on a strong moral case for repudiating illegitimate debts as affirmed by many church and civil society organizations
The Integral Auditing Commission for Public Credit of Ecuador published an exhaustive 30,000 page audit of the country's debts that uncovered numerous irregularities in past borrowing practices, dating back to the years when the country was under military dictatorships.
In the particular case of the Global Bonds on which Correa is refusing to make payments the official audit found several irregularities in the way in which the debts were contracted. Among other things:
* The issue offer was not authorized by the Ecuadorian laws.
* Salomon Smith Barney Inc. and J.P. Morgan acted in the negotiation without the formal authorization of Ecuador.
* The authority for the Ecuador Consul in New York to proceed with the restructuring of the debt was delegated after the negotiation took place.
Moreover, the negotiations were conducted in secret without the provision of detailed information to the responsible government bodies - the Finance Ministry and the Central Bank of Ecuador.
In addition, the terms of the Global Bonds that restructured an existing debt were too costly resulting in serious economic damage. The market value of the debt being restructured was just over US$1 billion. Instead of restructuring the debt for this amount the new bonds were issued for US$3.95 billion, that is, almost four times the market value of the original debt. From the time of issue until August 2008 Ecuador paid interest at an onerous rate of 12% resulting in payments worth US$2.45 billion.
The audit commission concludes that had the restructuring been handled properly according to the market value of the original debt it would be clear that the debt has already been paid.
Ecuador now faces a prolonged legal battle. Bondholders seeking full repayment will likely take their case to a Manhattan district court where the bonds are registered rather than take up President Correa's offer to negotiate a restructuring deal.
Ecuador also faces a battle in the court of world opinion. Ecuador's detractors are calling the decision to default on just a portion of Ecuador's debt irresponsible political posturing that is likely to lead to economic ruin because Quito will be denied further credit. In fact Ecuador has no need to resort to new foreign borrowing since its foreign exchange reserves worth some US$6 billion are more than adequate.
Defenders of the existing order that operates to enrich wealthy lenders at the expense of the impoverished peoples of the global South oppose Ecuador's actions, not because the amount of debt in question is large (it is not) but because of the precedent it sets. They are alarmed because Bolivia, Paraguay and Venezuela have already followed Ecuador's example by setting up their own debt audit commissions. Creditors know that many other skeletons are hidden in dusty closets left behind of other dictators.
Social justice advocates are applauding Ecuador's decision to refuse to pay debts that have been proven to be illegitimate. The international debt cancellation movement has long advocated the annulment of debts that have already been paid many times over and recognition of the much larger historical, social and ecological debts that the North owes the peoples of the South.
The government of Norway has become an advocate within international financial institutions for the cancellation of illegitimate debts. Norway set a precedent by recognizing as illegitimate and then cancelling debts owed by Ecuador and other countries contracted through an ill-conceived Norwegian Ship Export Campaign dating back to the years 1977 to 1981.
Many church bodies, including KAIROS, have long advocated the cancellation of illegitimate debts. A recent International Symposium on Illegitimate External Debt sponsored by the Lutheran World Federation, the Church of Sweden and Norwegian Church Aid concluded that external debts "must be examined from moral/ethical and political points of view, as well as from economic and legal points of view." The symposium's Outcome Document explicitly welcomed the Ecuadorian audit and noted that "civil society has an indispensable role in mobilizing political will and in ... supporting legal interventions with regard to illegitimate debt and creditor co-responsibility."
John Dillon, Program Coordinator, Global Economic Justice, KAIROS - Canadian Ecumenical Justice Initiatives