Ecuadorean President Rafael "The Mentalist" Correa announced Saturday that his country will be defaulting on an upcoming payment for "illegitimate" loans made by previous administrations. Ecuador was supposed to be making a $30 million dollar interest payment (and you thought your API was bad!), mostly to international banks and foreign governments. The power to default on foreign loans was given to El Presidente by the massive, Chavez-style referendum which was approved (64%) by the voters back in September. Correa made it clear that despite the global economic ice storm, Ecuador retained enough capital to make these payments -- but that it chose not to, based on a recent internal audit which found that these loans were illegitimate under Ecuadorean law.
This was a minor story carried by most MSM under the auspices of the global economic ice storm. However a story from everyone's favorite journalistic go-getter, McClatchy Newspapers, points out that this is the first time a country has defaulted on foreign debt simply out of choice. This is certainly a significant step towards a more level playing field in international debt financing. I believe Correa's action here fits under the general theme of the Great Financial Finger-Pointing of 2009. In this economic crisis, villains are easy to cast, and Correa has cast his finger, rightly so, at the Global South loan-peddlers and their financial enablers. Other countries and foreign affairs blog editors may also take this time to default on loans. It's like karaoke Thursday at the local bar -- everyone's already drunk and singing Marvin Gaye songs off-key, so what the hell, give me the microphone and shot of cheap whiskey.
Correa is already pretty popular, and this D-bomb can only add to his appeal. He will encounter problems if the price of oil keeps dropping, as this industry represents a good chunk (around 40%) of his economy. For now foreign investors will probably resort to some pushy lawsuits and threats to cut off foreign financing. These tactics are nearly moot. Correa has already contracted the massive Boston law firm of Foley & Hoag (Fox News "expert" talking point #1: Foley & Hoag also represents some detainees at Guantanamo Bay) to sue some of the original investors in the "illegitimate" loans. Threats to cut off foreign financing are basically toothless at a time when insolvency is the new black for practically every international financial institution -- the money's not coming, whether it's "cut off" or not.
Interesting soap-opera side note: The same day Correa made his announcement, his foreign minister resigned. Maria Isabel Salvador had only been in office for a year. Are these events related, or is her family just that cool?
Are you a big fan of Rafael Correa? Do you support Global South debt relief? Will you buy a T-shirt, regardless of content, just because it is new and nobody else has it? If you answered "yes" to one or more of these questions, then pass 'GO', collect $14.99 from your parents' wallet, and go directly HERE.
Addendum (12/16/08)
The collective mouth of the Western financial world opens in shock and horror. A Third World country defaulting on foreign loans -- and this time it's not because their coffers have been licked dry by a corrupt banana dictator! A puny wanna-be socialist telling Wall Street bankers he's got better things to do with his money then pay them exorbitant interest rates! What nerve! We must teach him a lesson!
The Fitch Rating Agency slaps Ecuador with an across-the-board investment downgrade. Portfolio.com declares Correa "idiotic". Seeking Alpha ties the decision to an anti-imperialist 'Bolivarian' ideology. So this default decision was short-sighted and lacked pragmatism...right?
Wrong. Rafael Correa is no short-sighted populist. He has a PhD in Economics from the University of Illinois. His new foreign minister, Fander Falconi, has a doctorate in economics from la Universidad Autonoma de Barcelona. These are not men who lack awareness of the consequences of their actions. Correa's administration has been threatening to default on this "illegitimate" debt for over a year, and specifically included the power to do so in their September referendum. Everyone agrees the country retained, and retains, the ability to make these payments, as they have been doing for decades under both leftists and military juntas.
The debt default is part of a well-planned and forward-thinking economic policy. One goal of this policy seems to be the end of dollarization in Ecuador. Ecuador has used the dollar since 2000, when its local currency, the sucre, spiralled out of control. The dollar is no longer the monetary heavyweight it once was, and Ecuador is not alone in trying to escape the Dollar Zone. Another part of this policy is the assertion of a precedent in international North-South lending: Don't make deals with illegitimate governments, because those deals can be thrown out later.
I think Correa is also betting on a lot of the investors to bite on debt renegotiation. This debt has already been renegotiated twice before. However many of these investors are short on capital given the current climate, and Ecuador's ability to pay make renegotiation, even on very pro-Ecuador terms, much more attractive than any attempt to seize assets through the courts. So in this way Correa can take advantage of the economic glo-pocalypse to rid himself of burdensome debt servicing, set a strong precedent for poor debtor nations weaning themselves off the Washington Consensus, and all the while increase his local and regional popularity.
1 comment:
I say we take the equator away from them -- what'll they call their country then, huh?
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