A historic step: sovereign debt default on the basis of illegitimacy On November 14th Ecuadorian Finance Minister, Maria Elsa Viteri announced that Ecuador will not pay the $ 30.6 million interest on its 2012 bond issue and will take a 30 day moratorium. This moratorium will be used by the Ecuadorian government to analyse the final results of the official audit commission that was launched in July 2007 to scrutinise Ecuadorians debt. 2012 bonds amount up to $ 1.250 million, with a 12% interest to be paid each year. This year Ecuador was due to pay $ 30.6 million in May and in November.
Rafael Correa, Ecuador's president, declared that the Andean nation will not repay some of its $10bn foreign debt, on the basis of the conclusions of the preliminary official debt audit report published last week. "If there are sufficient grounds for illegitimacy, we won't pay this debt," Mr Correa said. The preliminary report of Ecuador's debt-audit commission highlighted "terrible" irregularities with the management and renegotiation of the country's debt by previous administrations that amounted to "a real robbery of the country", Mr Correa said. Mr Correa has raised concerns over the legitimacy of the debt, because he says it has harmed the country's economy and its people. Mr Correa has suggested that previous governments mishandled debt negotiations and abused privileged information for financial gain.
Hugo Arias, coordinator of the Audit commission, explained that "more than 80% of Ecuadorian’s debt is the result of refinancing old debt with new debt" and added that only 20% of the debt relates to development projects. Arias informed that Ecuador received around $80billion in loans but has already repaid more than $127 billion so far and still has a $17 billion outstanding debt. He added that the most prejudicial debt to the country is commercial debt (Global Bonds 2012, 2015 and 2030) because it is the most onerous and the most corrupt and reaches $4 billion, around 90% of Ecuador’s public debt.
What are the main findings of the final audit report?
The final Audit commission report was released on 20 November. The conclusions show that the commission identified damaging features such as:
What will this decision mean for Ecuador and for the creditors?
Already in October Ecuador expelled Brazilian construction company Odebrecht of the country, and cancel $800 million worth of contracts due to irregularities and some long standing problems regarding San Francisco Hydro electrical plant. This has already created some tensions between the two countries. Today, with the new decision of defaulting global bonds Ecuador may again face tensions with another important neighbour country, Venezuela, which owns most of these bonds.
The Ecuadorian government is examining its options regarding other creditors. During the 30 day bond payment moratorium the Ecuadorian government will work with international lawyers to determine whether the country should pay and to what extend the debt is legitimate. But the present context of lowering oil prices, on which both Venezuela and Ecuador depend for significant amounts of revenue, will certainly play a key role in rising tensions if Ecuador is to finally default on its payments.
The need for an international debt workout mechanism The Ecuadorian debt repayment moratorium and debt audit commission report launch come at an interesting time. A few days ago leaders were in Washington for the Bretton Woods II summit and in ten days they will be in Doha for the UN conference on Financing for Development. The commission report provides plenty of evidence of the inequalities and inefficiencies in the international financial architecture and may help concentrate the minds of government negotiators that significant changes are needed.