Untwisting Reality

What is Behind Ecuador’s “Default” on its Foreign Debt

• By Poetry X
• 2 May, 2014
• 4 Comments

On December 2008,  President Rafael Correa declared that Ecuador would default on $30.6M payment on state bonds.  The decision was taken after an appointed international commission determined that most of the foreign debt was illegitimate. This was called a debt default, but rather should be called a debt adjustment.  Let’s see why.

• The transferences of net resources to the international private banking, since 1976 until 2006, summed $7.13M. Nevertheless, the external debt with the banks has grown. Since 1976, the Ecuadorian external debt with the international private banking grew from $115.7M to $4.163B in 2006. These figures do not include other relevant costs like commissions and fees that have been paid by Ecuador.
• Due to conditions imposed by the IMF, the World Bank and the USAID, the Ecuadorian public sector was privatized, or decision making was transferred from the general or common welfare to for-profit corporations. Health, education, potable water, agriculture, mining, foreign trade regulation and programs to benefit the oppressed classes, all were immediate targets for privatization. As a result, most Ecuadorians became poor and could not afford medical consultations, medicines, books for their children, fuel, energy, telecommunications, or access to water for irrigation.
• Vast amounts of the loans were given away on consultations fees, including NGOs and industry experts imposed by the creditors. Since then, poverty has grown deeper, migration has increased, and environmental conditions have deteriorated in areas where concessions were given to corporations for oil or mineral exploitation. Natives from the Amazon basin sued Texaco-Shell corporation for destroying a big portion of the jungle back on the 1970’s.
• A significant piece of the loan process was the requirement that Ecuador pays off the foreign debt; and even here, funds for the country’s projects would benefit the multinationals. For example, the Ecuadorian death squads, created on May 23rd 1985, were financed with funds from the Ecuadorian Central Bank [ECUADORTV Escuadrones Volantes]

• The Ecuadorian foreign debt benefited international private banks such as Shearson Loeb Rhoades, its concessionary E. F. Hutton and Morgan. Between 1976 and 1982, there were six financial institutions taking advantage of these deals: Loeb Rhoades, Citibank, Lloyds Bank, Chase Manhattan Bank, JP Morgan and EF Hutton, and later on, Salomon Smith Barney on the Global Bonds swap.
• Banks bypassed the scrutiny of regulators through the use of an agent bank quartered in fiscal paradises such as Bahamas, Nassau, Panama and Luxemburg.

IRREGULARITIES ON THE ECUADORIAN DEBT

• The foreign debt has been a tool of submission to the politics imposed by financial organisms such as the IMF, the agencies of the World Bank, the multilateral financial organisms, the international private banking, and the Paris Club. [Aljazeera May 24th 2011] These debts were incurred under the justification of “investment in projects”, especially at the end of the 70’s for oil exploitation.  These contracts would condition the state to hold a permanent dependence to those international financial institutions under onerous conditions.
• Ecuador gave away even its sovereignty under the so called “reciprocal protection of investment agreements” allowing corporations to ignore Ecuadorian law in case of any liability against them. One specific case is the private sue from the Amazon natives against Chevron (formerly Texaco) for polluting the rain forest. Chevron left Ecuador in 1992 and a reciprocal protection treaty was signed with the US in 1997. Chevron moved the trial from New York to Ecuador and lost the judgment. However, the reciprocal protection was conveniently made retroactive in favor of multinationals and now the Ecuadorian State is expected to pay the $18.2B compensation for Chevron. [amazonwatch.org Jul 8th 2013] To put this in perspective, Chile signed the human right treaty in 1990, but to protect Pinochet was no made retroactive.
• On multiple refinancing processes, the creditors demanded Ecuador to surrender all of its rights to please the international financial markets with the excuse of “improving the possibilities of attracting foreign investment”.
• The high cost of contracting debt has been covered in the State budget. This has diminished the financing of social investments.  Not serving the public sector with these basic services constitutes a violation of Article 25 of the Universal Declaration of Human Rights.
• Among many procedural irregularities, many of the signatories were not authorized to discuss, design, agree or sign these agreements and contracts. Many of the instruments themselves were in violation of the Ecuadorian and international law. One example is the Brady Plan, which is clearly illegal according Article 1602 and Article 2140 of the Ecuadorian Civil Code. In addition, collateral liquidation guarantees were illegally authorized.
• Many public entities did not have the appropriate documentation to determine the origin of the debt.  There was no tracking of the payments and no valid documents to back these obligations. The contracts were not identified accurately and in many instances, the application of the funds is unknown.
• There were deficiencies in the calculation of interest rates (Libor and Prime).  In addition, many times the total amount of the loan was omitted, like in the case of the Tolling Agreement.
• Between 1977 and 1983, there was an abnormal rise of the Libor and Prime rates. This constitutes a violation of the Latin-American Parliament in the article 62 of the Vienna Convention of 1969.

• At the same time, the increment of the international interest rates was:

• The “Prime” is stipulated by the Federal Reserve Bank of the US, and the “Libor” is fixed by the association of banks of London. It was later found that London banks would be manipulating the Libor rate to benefit their financial interests (Libor Scandal).
• Since the onset of the cold war, the US has used foreign aid as a device to impose its agenda on Ecuador.  Three of the more recent examples were; the closing of Manta military base which president Correa was willing to renew only if the US “allows Ecuador to have an Ecuadorian military base in Miami”. Another one was the black mailing against Ecuador for not signing the Copenhagen accord on 2010 by cutting off funding for $2.5M.  Ecuador responded by saying that Ecuador would give twice that amount ($5M) if the US signs and fulfill its obligations in the Kyoto Protocol. In another instance Ecuador has been criticized for not allowing observes from the EU and the US for the presidential elections, to which Ecuador responded to be receiving European and US observers with pleasure as soon as Latino American states are called to observe elections in Europe and the US.

BRIEF HISTORY OF THE ECUADORIAN DEBT

• Throughout the years, international financial institutions have applied various mechanisms that have trapped Ecuador in a never ending indebtedness.  These mechanisms for external commercial debt were; the Complementary Mechanism; the Sucretization (Sucre was the Ecuadorian currency at that time); the 80’s Renegotiations; the Tolling Agreement; the emission of Brady Bonds; and the emission of Global Bonds.
• In the late 1960’s, the World Bank intervened Ecuador, and in 30 years; under-employment and unemployment went from 15% to 70%, distribution of resources to the poor went from 20% to 6%, poverty went from 50% to 70%, and the public debt from $240M to $16B. [film Zeitgeist Addendum]
• During the 1970’s, during the time of the military dictatorship, Ecuador finally finished paying its debt to England, a debt that had incurred for its independence in the 1830’s.
• In the 1980’s, with the sucretization process, the private debt was transferred to the Ecuadorian Central Bank. The private debtors had to pay in sucres (the Ecuadorian currency) at a fixed interest rate (original interest rate), while the state assumed their obligations with a floating interest rate.
• The current debt from investing in Global Bonds originated in the Brady Bonds in the 1980’s, that’s when the debt begun. As indicated before, the Federal Reserve of the US raised illegally these interests at the end of the 1970’s.
• Although payments were made to the international financial institutions, these payments were not registered in the books of the Ecuadorian Central Bank as paid. The debt was registered as a passive. This would provoke a disequilibrium in the accounting balance which gave opportunity to another financial artifice, the “Complementary Mechanism”
• The domestic debt has been pushed strongly, especially through the issuance of bonds and Treasury Certificates. Due to loose regulation or lack of it, banks held these bonds during periods where interest rates were high but when rates fell they walked away.
• During the period from 1992 to 1996, there was an accelerated growth in domestic public debt, which leapt from $256M to $2.224B. Government Bonds generated huge returns and interest income for private banks. In 1994, Ecuador passed a law to allow banks to regulate themselves which led to massive inflow of speculative capital.
• Although all the banks had accumulated massive profits, by 1998 and 1999, national banks went bankrupt. The Ecuadorian government was forced to issue bonds as part of the economic strategy imposed by the IMF, and bailed out the bankrupt private banks.
• On March 8, 1999 Ecuador froze the public bank accounts to guarantee the liquidity of the banking system to save the economy from rampant inflation.  At the same time the government determined to move from sucre to US dollar as the Ecuadorian currency.
• Between March 5 and 11, the media failed to tell what was going on with the banking crisis. [Robinson Robles – La Historia Completa y Real Sobre el Feriado Bancario]
• Savings and checking accounts were frozen at 10,000 sucres per dollar and when the public was allowed to get their money back on the year 2000, the funds were returned at 25,000 sucres per dollar.  Therefore, 1M sucres became $100 at the time of the freeze in 1999, but the public got only $40 in 2000.
• Months before the freeze, the sucre rate was around US $2,500, and when the freeze was lifted, many people were not able to get a single cent of their savings. The hardships caused by these events led to multiple deaths and the emigration of about 3M Ecuadorians in just two years.
• The president at the time was Jamil Mahuad, who had to run away due to massive protests against his administration.  Mahuad was called to face trial due for charges of corruption along with many bankers.  However, he and some bankers escaped to the US and despite extradition requests, the US rejects them, since Interpol defined their cases as a political prosecution.
• In 2003, lucio gutierrez took position as elected president and soon after he decided to implement the “Chicago school” neoliberal model, failing on his promise of advancing a nationalist agenda for the country.
• In 2005, many retired people went on hunger strike to protest the cut on social security benefits. At least 12 hunger strikers died as a result. Soon after, the president revoked the newly appointed Supreme Court of Justice.  This led to the climax of discontent against his regime and president gutierrez had to escape.
• In 2008, Ecuador defaulted on its debt and the country has turned to an amazing success story of progress implementing social programs in defiance to the neoliberal model that had impoverished the nation. [The Guardian Jan 19th 2012]

[INTERNAL AUDITING COMMISSON FOR PUBLIC CREDIT OF ECUADOR Created on July 9th 2007 / Ecuador from Banana Republic a la No República by Rafael Correa / Debtocracy by Katerina Kitidi and Aris Hatzistefanou]