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One, Two, Three … Many Ecuadors? December 22, 2008

Posted by rogerhollander in A: Roger's Original Essays, About Ecuador, Economic Crisis, Ecuador, Latin America.
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© Roger Hollander, 2008


Four the past fourteen months a Commission appointed by Ecuadorian President Rafael Correa to “audit” the nation’s public debt in the period from 1976-2006 has been labouring away on a report that landed like a bombshell when it was issued on November 20.


 La Comisión de Auditoria Integral del Crédito Público (Commission for the Integral Audit of the Public Debt) was made up of senior government officials, representatives of Ecuadorian social movements and international organizations.  Its mandate was to investigate the legitimacy and legality of external and internal debt incurred by governments in the designated period through the examination of conventions, contracts, and other documents related to acquired public debt and entered into between governments, multilateral financial institutions (IMF, World Bank, etc.), commercial banks, and the private sector both national and foreign.


 If the Commission’s conclusions can be verified, a virtual revolution with respect to public debt could very well occur within the entire Third World, for there is little doubt that the kind of financial shenanigans uncovered by the Commission in Ecuador are not unique to that country.


 The Commission’s 172 page report outlined various categories of illicit and illegal debt, including “odious debts” incurred by the military dictatorship (1970-1979), usurious debts, and corrupt debts (contracted under conditions that do not conform to the legal norms of the lender or debtor or international norms).  It went on to cite instances of illicit and hidden clauses, uncontrolled and disproportionate expenses and commissions, excessive arms sales, capitalization of interest, and fraudulent collusion between lending institutions and government officials that served individual interests at the expense of the Ecuadorian nation.


According to Patrick Esteruelas, analyst at Eurasia Group, the report found “multiple irregularities in debt contracted between 1976 and 2006, such as double payments, abusive clauses, false justifications and negligence on the part of high-level government officials and multilateral institutions.”


 Esteruelas, who has seen a copy of the audit report, said that it recommends that Ecuador suspend payments on all three of its global bonds, at least 45 multilateral loans and its debt to the Paris Club of international lenders.  “The government will likely use these findings to enter into talks with bond holders over restructuring terms, driving a very hard bargain that will hamstring any negotiations and could likely lead the government to default,” Esteruelas said.


 Perhaps the most controversial and explosive finding of the report is that not only private financial institutions but also multilateral lending institutions such as the IMF and World Bank are accused of being guilty of colluding with local government officials to impose impossible conditions and to “socialize” private debt.  It alleges that false and misleading information was used to promote indebtedness and makes the general assertion that the lending institutions were guilty of policies that violated national sovereignty in favor of implementing the neoliberal policies of the “Washington Consensus.”


 The Report advocates the notion of “co-responsibility” for illicit debt, a concept that the industrialized lending countries and multilateral funding institutions have roundly rejected.  The situation may be analogous with the sub-prime rate mortgage lending “scandal” in the United States where lenders knowingly created debt that could not likely be repaid.  Many believe that the lender as well as the borrower should share in the responsibility for the disastrous consequences of such practices.


Beyond narrow legal and financial considerations, the Report speaks of the social costs to the people of Ecuador.  Its external debt rose from $241 million in 1970 to $16.6 billion in July 2006 (a 690% increase).  From 1980 to 2006, the Ecuadorian government’s expenditure on education decreased from 30% to 12% and on health from 10% to 7%, while the percentage of the government budget to service the debt rose from 15% to 47%.  A 2006 Report (“Comparte”) indicates that poverty affects 65% of Ecuadorians, and the 70% of Ecuador’s children live in extreme poverty. 30% of Ecuadorian children do not complete primary education.


When President Correa called into question the $30 million coupon on Ecuador’s Global 2012 bonds that was due on November 15 (with a 30-day grace period) ,Ecuador’s credit rate has plummeted.  S&P has lowered Ecuador’s long-term sovereign credit rating to CCC- from B-, citing the severe uncertainty regarding the government’s willingness and likelihood to pay during the grace period.  Meanwhile, Moody’s downgraded Ecuador’s B3 foreign currency government bond rating to Caa1 and placed them on review for another downgrade. They claim that Ecuador has “ample liquidity” and that the government’s action has demonstrated its “poor willingness” to pay.


 True to form, a Moody’s senior analyst, Alessandra Alecci, was quick to “blame the victim.”  “It seems that the [Ecuadorian] government’s stance towards bond holders is motivated by political and ideological factors, given the very small fiscal relief that a default would bring compared to the damage to the government’s ability to access international markets,” she said.


Now that Correa has announced that he will not meet the final December 15 deadline, the rating is expected to plummet.  According to a report in the Globe and Mail, “Ratings agency Standard & Poor is likely to downgrade Ecuador’s credit rating to “Selective Default” from triple-C-negative, one of the agency’s analysts said after Mr. Correa’s announcement.”


Ecuador’s Alberto Acosta, a highly respected economist who served as President of the country’s recently concluded Constituent Assembly, challenges the position of the lender community.  “Debt and corruption,” he says, “are two sides of the same coin.”  He points out that “the developed countries have denied any co-responsibility whatsoever in their capacity as lenders, and, in fact, have blocked any investigation of the processes of indebtedness, their legality and, especially their legitimacy.”  He cites as an example of the suffering of the underdeveloped nations as a consequence of the vicissitudes of the policies of the wealthy nations the fact that the soaring interest rates of the 1980s resulted in a net loss of financial resources in Latin America of 210 Billion dollars.


 The Ecuadorian government has retained U.S. Attorney Paul Reichler of the law firm Foley and Hoag to advise on international law applicable to their case.  It is considering an appeal to the World Court at The Hague. 


Should Ecuador succeed in its ground breaking attempt to call to account the wealthy nations of the world and their multilateral lending institutions for at least co-responsibility for the enormous social and economic damage to the world’s poorest nations that has resulted from external indebtedness, we very well might see a domino effect.  On December 5, the 22 countries that make up the Parlamento Latinoamericano (Latin American Parliament) threw their support behind Ecuador and urged its member to begin similar actions.  In Spain, a coalition of more than 50 NGOs has sent a letter to the President of Spain asking the government to forgive its part of the Ecuadorian debt and to review its debts with other countries to verify their legitimacy.


Unwanted fuel to the fire given the state of the world’s financial institutions, on the one hand.  On the other, some of the world’s poorest and most exploited nations may be finally taking a stand against the capricious and destructive lending that has deepened their levels of poverty.





 Home website of the Comisión de Auditoria Integral del Crédito Público:

http://www.auditoriadeuda.org.ec/ (contains complete Report)


 Polya Lesova, “Fears Rise Over Possible Ecuador Default,” MarketWatch, November 19, 2008; http://www.marketwatch.com/news/story/Fears-rise-Ecuador-may-default/story.aspx?guid=%7B46EE5CFA-6F60-4688-906C-4889080A83FF%7D


 “Ecuador: A New Perspective on External Debt,” Third World Resurgence #198/199 (Feb/Mar 2007)


 CENSAT, “Informe de la Comisión de Auditoría Integral del Crédito Público de Ecuador,”  En Deuda con los Derechos – Sep 25, 2008,



Paulina Escobar & Julia Chávez, “La sucretización es una ilegalidad por sancionar,” El Telegrafo, Guayaquil, Ecuador, November 26, 2008,http://www.eltelegrafo.com.ec/macroeconomia/noticia/archive/macroeconomia/2008/11/26/La-sucretizaci_F300_n-es-una-ilegalidad-por-sancionar.aspx


“Comisión hace público informe de auditoría,”  Diario El Mercurio, Manta, Ecuador, Novermber 27, 2008



 Alberto Acosta, “Un paso histórico para una solución definitiva,”  unpublished; from [Yapapolitica]  Deuda external illegal de ecuador – Alberto Acosta; private e-mail to the author, kyapa@yahoo.com, November 25, 2008


 “Comparte,” http://www.comparte.org/accion/ecuador.htm


 “Ecuador contrata abogados estadounidenses para disputa de la deuda,” El Universio, Guayaquil, Ecuador, December 2, 2008, http://www.eluniverso.com/2008/12/02/0001/9/2CF4A5CF4CEB48ECB3380718D219763C.html


“Acreedores nerviosos por posible efecto contagio en pagos de deuda,” El Universio, Guayaquil, Ecuador, December 8,2008.  C:UsersrhollanderDesktopEL UNIVERSO – Acreedores nerviosos por posible efecto contagio en pagos de deuda – Dec_ 08, 2008 – Economía.mht


“ONG solicita a España anular deuda ilegal,” El Universio, Guayaquil, Ecuador, December 12, 2008 (paper edition).


Maria Eugenia Tello, (Reuters, December 12, 2008) “Ecuador defaults on foreign debt,” The Globe and Mail,” December 13, 2008.  http://business.theglobeandmail.com/servlet/story/RTGAM.20081212.wecuador1212/BNStory/Business/home



Membership of the La Comisión de Auditoria Integral del Crédito Público (Commission for the Integral Audit of the Public Debt)

Government Representatives

Minister of Finance and Economy

Procurer General

Controller General

President of the Civic Council for the Control of Corruption


National Representatives

International Representatives










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