Ecuadorian President Rafael Correa recently announced that his country will not repay back its remaining external debt. Citing the economic crisis, Correa calls the debt, “immoral and illegitimate” and he echoes the sentiments of ordinary Ecuadorians who say that they cannot pay anymore. Ecuador has already paid $2.45 billion in interest as mandated by the global bonds. Every little bit will help in an uncertain economy where oil prices have decreased from 140 dollars a barrel to just 45 at the end of this week, the remittances sent by immigrants have also fallen, and a fiscal deficit for the 2009 of 3,200 millions dollars are all factors in this decision [es]. The refusal to pay the debt will allow the government to spend more on social programs.
The decision of defaulting on the global bonds (2012, 2015 and 2030) was taken by Correa after the official presentation of the final report from the Public Credit Audit Commission (Comision para la Auditoria Integral del Crédito Público, CAIC [es]) audit regarding Ecuador's foreign debt. Ecuador's decision to stop payments on the interest on its national debt is it's second in two decades, the other coming in 1999, when it defaulted on $10 billion. In 2008, the figure stands at $3.9 billion.
Ecuador's President at the moment he was making official the default on interests of 2012 bonds. Photo used under Creative Commons license from Presidencia de la República del Ecuador.
This commission integrated by economists, lawyers, and representatives of social organizations from Ecuador and other nations worked on the report which shows illegality and therefore illegitimacy of the borrowing process. Correa, an American-educated economist, is working on both fronts, his government has hired two New York lawyers staff (Foley Hoag and Paul Reichler) to advise the Latin American country on international legislation. Correa also will promote the creation of an International Tribunal for Arbitration of Sovereign Debt in the United Nations, which will help reform the international financial framework.
Bloggers are expressing their concerns on this matter. They show appreciation for the work performed by the CAIC but some, such as Ecuador Sin Censura [es] say that it would be better for the country if the the Commission had worked outside the government, especially when one of its members is the versatile Ricardo Patiño, former Finance Minister under Correa.
La Alharaca [es]shows compassion for the poor people who don't understand the consequences of their President's decision. He states that many will not understand why banks will have to charge higher interest rates because they have no lines of international funding and that the small manufacturing in Ecuador will disappear because no supplier will be lending to a company in a country where the President has said that raising rate by the creditors is illegal.
People and even recognized journalists doubt of the truths in the report. Economics professor Pablo Lucio Paredes, who is writing a daily column for the newspaper El Universo has been a great guide on this matter for his students, and still has questions himself. His column asks“Are there any truths?”, and he answers himself, “probably”. One of his students and current blogger recalls a university finance class and writes about the case of study Paredes presented under the very same circumstances, but assuming the students were the managers of a private company.
The article's author of Cambiemos Ecuador [es] concedes that Ecuador, as a company has been managed badly because of abuses of previous administrations, the bad negotiations with local financials, unnecessary expenditures, and so on. But he stresses, “As a company, getting loans is not bad, the bad thing is not to use the funds for activities that bring returns to the government's revenue,” and he advises, “The loans for dams, ports, and roads, pay themselves and generate wealth, those being used for public spending, sink us more.“
Yet, some others wonder about the path that Ecuador is following right now. La Hueca [es] writes:
cada vez nos vamos poquito a poquito a la mierda. Dios quiera e ilumine a nuestro Presidente para que tenga toda la razón -lo dudo- pero quién sabe.
In the end, ordinary Ecuadorians, who may not understand the terminology of this discussion, may correlate the issue of debts to the banks to their own lives. If they follow the same logic, shouldn't they stop paying their own debts with banks?