Ecuador president refuses to pay down 'illegal' foreign debt

CARACAS, Venezuela — Latin America got a bad dose of economic news Friday when Ecuador announced that it would default on an upcoming foreign debt payment.

Analysts were quick to emphasize, however, that Ecuador's move doesn't herald a coming wave of defaults in Latin America even as they noted that economic prospects for the region in 2009 are growing increasingly bleak.

President Rafael Correa announced that Ecuador wouldn't make a $30.6 million payment due on Monday that is the interest on a $510 million bond the nation is supposed to fully repay in 2012. Correa said that that debt had been contracted years ago in an "illegal" and "illegitimate" way.

His decision came after a Correa-created commission recommended last month that Ecuador should default on 40 percent of its overall $10 billion foreign debt. The commission accused government officials and foreign bankers from illegally arranging the loans to earn big profits.

Correa said he wanted Ecuador's debtors to accept smaller payments so he can maintain high spending to reduce poverty.

Correa's action "is fairly unique," said Arturo Porzecanski, a professor of international finance at American University in Washington. "It's the first time that someone says, 'Hell no, I won't pay' because it's illegitimate."

Correa, who has a doctorate from the University of Illinois, said falling oil prices forced him to make good on previous threats not to make foreign debt payments. Oil accounts for 40 percent of the government's budget.

Vicente Albornoz, director of Cordes, a Quito-based think tank, said Correa's announcement will be popular among ordinary Ecuadoreans and is the latest in a series of populist moves by Correa.

"The decision is political, not economic," Albornoz said. "The government has the money."

Ecuador's foreign debt as a percentage of its economy has declined to a manageable 21 percent of its economy, Albornoz said. The economy uses U.S. dollars, theoretically making it even easier for Ecuador to meet its payments, he added.

Albornoz said Correa's decision would make it difficult for exporters and importers to borrow money to finance their trade deals.

"Ecuador will be isolating itself further from the community of nations," he added.

Claudio Loser, an Argentine economist at the Inter-American Dialogue in Washington, does not expect Ecuador's move to portend a region-wide trend because most Latin American countries have steadily paid down foreign debt over the past five years.

"You don't have the same conditions as in the early 1980s (in Latin America) or in 2001 with Argentina," Loser said, referring to earlier defaults.

He added that President Cristina Fernandez de Kirchner recently nationalized Argentina's $33 billion pension system in a controversial move that will give the government more money to minimize the chances of a default.

Joydeep Mukherji, who rates Latin America for Standard & Poor's, said Argentina and Bolivia are the lowest rated Latin American countries after Ecuador.

"But they are quite a long way from defaulting," Mukherji said.

Still, both countries — and indeed virtually all Latin American countries — are expecting tough times in 2009 after several good years that created millionaires and lifted millions of people out of poverty.

"Two problems are affecting Latin America: commodity prices are falling and credit is drying up," said Santiago Mosquera, a senior economist for Latin America at IHS Global Insight, a Boston-based consultant group. "We should see reduced consumer demand in the coming year, but Latin America is not headed for a disaster."

Venezuela, hit hard by the oil price drop, will barely grow in 2009 after several boom years, but also stands far from the default precipice, said Asdrubal Oliveros, a Caracas-based economist.

"Debt payments will be only $3 billion in 2009," Oliveros said. "That's a small amount even in the case of low oil prices."

Besides, he added, "The political and economic cost would be too high."


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