Correa cries wolf once too often

Ecuador’s voluntary default sees the wily gambler lose

If public opinion is anything to go by, Rafael Correa is either incredibly brave or incredibly stupid. Ecuador’s president recently announced his country would default on interest payments on its foreign debt. Not because Ecuador couldn’t afford the 30,6 million dollars due to holders of the Global 2012 bonds.


The reason Correa isn’t coughing up is because at least some of that debt is illegitimate, according to a government committee tasked with investigating Ecuador’s 10 billion dollar foreign debt.

“The contracts (outlining part of the debt) do not comply with legal norms of our country, nor do they live up to the norms and rules of international law. As a result that debt that is now denominated in Global bonds basically amounts to an illegal debt,” claimed Ricardo Patiño, who heads up the auditing committee that spent the last year sifting through three decades of public debt. He insists 3,6 billion dollars worth of that debt is questionable and so for now Ecuador refuses to pay.

Defaulting on foreign debt has far reaching consequences – Argentina is still a long way from recovering credibility after its spectacular default 7 years ago, as a particularly active New York judge will tell you. Ecuador is no stranger to harsh reprisals, either. In fact it’s still recovering from a default of its own in 1999.

So why force another default in less than a decade? Especially when you don’t have to. Ecuador has 5,700 million dollars in foreign reserves and the total foreign debt amounts to only 20 percent of GDP compared to 80 percent in 1999.

Correa claims – and has been for the past two years - that his country is up against “monsters” both foreign and domestic who have plundered Ecuador’s coffers in the past. Previous governments had begotten debt illegally, the investigating committee writes. Now there are even calls for ex-presidents to be prosecuted.

Critics say the default is politically motivated, but there may be some truth to the claims of illegal dealings. In his 2004 best-seller Confessions of an Economic Hitman, John Perkins writes that as a consultant for a US firm he was involved in misleading the Ecuadorian government into contracting huge debts from the World Bank to finance white elephant infrastructure projects meant for US contractors. In this case though, it’s bondholders and not the multilateral lenders who are getting targeted.

According to president Correa a similar pattern lays at the heart the current stand-off with neighbouring Brazil. Last month Ecuador disputed the legitimacy of 286 million dollar loan from a Brazilian development bank (BNDES). That money was used to pay for a hydroelectric plant constructed by the Brazilian firm Odebrecht, which was also sent packing last month. The plant was inaugurated in mid 2007 but stopped working in June of this year due to structural errors. Brazil recalled its ambassador to Quito over the dispute.

So after Brazil, Correa now seeks to defy all international holders of Ecuador’s debt over the legitimacy of those loans, never mind the consequences.

At a time when oil prices are below 35 dollars, scaring off foreign investors and making Ecuador even more dependent on oil revenues hardly seems like a good idea. Meanwhile remittances, Ecuador’s other source of foreign currency, are dwindling as the world crisis worsens.

The first to be hit by this default will be the credit-needy exporters of the country’s three other main currency earners; bananas, shrimps and flowers.

The fact that Ecuador has no currency of its own, but instead uses the US dollar makes the situation even more difficult. Interest rates will soar even further, as the dollar becomes increasingly scarce.

All in all, a scary scenario that threatens to plunge Ecuador deeper into economic turmoil.

Would all that be worth it on the off chance that at some point an international court will find a part of Ecuador’s foreign debt to be illegitimate?

There are suggestions that Correa may have an ace up his sleeve. His promise to default may be an attempt to push down the market value of the Global 2012 bonds in the hope of snapping them up at bargain prices.

As a major holder of it’s own debt the Ecuadorian government would be in a better to position to force the kind of easy-going debt restructuring that it seeks. So instead of brave or stupid, perhaps Correa is really a sly gambler.

But even if that where the case and wily reasoning is behind the threats to default, why go all the way and actually announce a default. The economic fall-out from a default looks certain surpass any money saved on a benign debt restructuring.

My guess is Correa has overplayed his hand. After threatening to default on several occasions, he finally found himself with no alternative.

If he hadn’t refused to pay, two things would have happened. First of all his claim and Patiño’s that Ecuador’s foreign debt was largely illegitimate would have lost all credibility, damaging his bid for the upcoming presidential elections in April.

Secondly, had he not defaulted, the international legal system may well have turned against his government, punishing it for putting out rumours that seriously damaged bondholders and investigating claims that it was buying back those bonds.

In the fable, the boy who cried wolf was finally ignored and left to fend for himself. In the hands of Rafael Correa, Ecuador awaits a similar fate.

The man who would free us all

After a decade, Chávez is anything but a liberator

Published December 9, Buenos Aires Herald.

Venezuelan president Hugo Chávez would like us to think that over the past decade he has been playing a pivotal role in uniting Latin America. Who knows, perhaps late at night, as he watches reruns of his speeches on any of a range of state-run TV-channels, Chávez may well be wondering if he isn't already a latter day Simón Bolívar, liberating his fellow Latin Americans from the yoke of Yankee Imperialism.


Although the former coup plotter can certainly be credited with putting the plight of the poor firmly on the political agenda, that hardly makes him a symbol for regional harmony. In fact, a number of experts in the region, consulted for this column agreed that since first winning elections on December 8 1998, Chávez has done more to foment discord and division among states in the region than he ever did to unite those freed by Bolívar´s sword.

Over the years, the Bolivarian Revolution has become a byword for confrontation. We've grown used to the way Chávez blasts his enemies with fiery rhetoric, while supplying allies with suitcases full of oil dollars. The toxic combination more often than not results in diplomatic conflicts and frayed relations between Venezuela and her neighbours.

"I´m very critical of the Chavez legacy so far," says Carlos Malamud, leading Latin America investigator for the Elcano Institute in Madrid. He believes that Chávez has done more to divide than to unite people in Latin America and cites as an example conflicts between Venezuela and Chile.

Chávez once called the Chilean senate "fascist" and this year insults were hurled at Chilean ministers while Venezuela expelled the Chilean director of Human Rights Watch.

Peru and Mexico can vouch for Chavez' meddling. In both countries Venezuela's head of state actively supported a presidential candidate during elections. Unfortunately for the candidates Chavez' blessing became a kiss of death, as both Ollanta Humala in Peru and Andrés Manuel López Obrador in México dived in the polls following the Bolivarian endorsement.

The Venezuelan Moises Naím agrees. "Chávez is responsible fragmenting the continent and creating two blocks of nations," says the former minister for Trade and Industry and now editor of Foreign Policy magazine.

On the one hand he sees a group of countries led by Venezuela and including Bolivia, Nicaragua and Cuba and, to a lesser extent, Ecuador, Paraguay, Argentina and several Caribbean states. On the other hand a block consisting of and Chile and Peru and Colombia who want nothing to do with Chávez and Mexico and Brazil who dispute Venezuela´s regional leadership.

In pushing his brand of socialism in other countries Chávez has also done much to undermine the working of democracy, claims Naím. "Chávez method of undermining democracy has been copied by other governments," the former minister explains. "He wins elections with the purpose of undermining the checks and balances of the system, essentially using democracy to subvert democracy. That strategy has been copied almost to the letter by Bolivia and Ecuador."

To aid his allies in power or to help groups that Chávez feels should be in control he has spent billions of Venezuela's oil money. Just how much is still unclear because of the many different forms the financing takes - how many Antonini Wilsons are there that we don't know about? - but estimates range upwards of 10 billion dollars.

To be fair, that massive spending has had some positive results. "In using his largesse to spread regional influence, Chávez has ended up helping some cash-strapped governments and has contributed to the overall drop in poverty levels," Michael Shifter of the Inter American Dialogue, wrote me in an email.

But those generous gifts may also have made poorer nations dependant on Venezuela. According to Carlos Malamud, Chávez has created a clientist system in the region. "Especially Bolivia and Nicaragua have put all their eggs in one basket as far as Chavez is concerned," Malamud says.

Others, such as Cuba, are quickly starting to diversify as they initiate dealings with for instance Russia and China. The aid has done little to adress long term tasks of fundamental reform, according to Michael Shifter

Aside from the opaque motifs for such generosity, there is serious concern the abrupt fall in oil prices – now at less than 40 dollars - will at some point force a severe cut in Venezuela's aid spending, causing a deepening of the economic crisis already being felt in many of the receiving nations.

Such a cut would also reveal the true acceptance of Bolivarian socialism, Naím thinks. "The test for Chavez will be if he can maintain his alliance while the price of oil is so low. We should see whether the popularity his ideas receive abroad depends on the fact that they are accompanied with large subsidies. Will they still remain popular without the oil sponsored subsidy?"

It's too early to tell now, but after ten years of Hugo Chávez the divisive and harmful nature of chavismo has become clear enough. The results of November's regional elections in Venezuela suggest that even at home, many are becoming weary of the former colonel at the helm.
Chávez himself though shows no sign of tiring from his own rule and has announced his plans to rule until 2021. The constitutional rewrite to make that possible will be submitted to referendum in February.

To many across the region that may sound like a recipe for dictatorship, but Chavez too, has his supporters. Many of them, such as Evel Petrini of the Argentine rights group Mothers of the Plaza de Mayo, will be rooting for the man they consider a modern Liberator. "Chávez has shown us that a revolution without weapons is possible," says Petrini. "He´s a beacon of light that proves that a government for the people can exist."