Ecuador at the cross-roads, for an integral audit of public indebtedness

Chapter 1: Ecuador’s Illegitimate Debt

15 August 2007 by Cécile Lamarque


Chapter 1: Ecuador’s Illegitimate Debt

A. Financial and economic crime against human development
B. Rafael correa’s government: towards a sovereign debt Sovereign debt Government debts or debts guaranteed by the government. policy
C. The doctrine of illegitimate debt

  • 1. Odious debt
  • 2. Illegitimate debt

D. The origins of Ecuador’s debts

  • 1. The process of indebtedness in Ecuador
  • 2. The illegitimacy of debts and payments in Ecuador

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Indebtedness in developing countries presents a specific feature which has to be set at the heart of public debate: it results from an ongoing policy of deprivation and subordination of these countries by more industrialised countries, transnational corporations (TNCs) and international financial institutions, with the elites of the South aiding and abetting.
Like other indebted countries in the third world, Ecuador is the victim of criminal over-indebtedness: while it is one of the countries in Latin America with the most natural wealth, its resources, mainly oil and bananas, have been systematically plundered by TNCs, creditors and landowners. A massive and criminal indebtedness has worked as the main mechanism through which resources are stolen.
As a consequence, Ecuador is the Latin American country devoting the highest part of its budget to paying back its debt, which has an impact on public expenditure, notably health and education. In 1980, 40% of the budget went to health and education expenses and 15% to servicing the debt. In 2005 the situation was reversed: the government spent 40% of the budget on servicing the debt while health and education expenses amounted to no more than 15%! [1] These figures clearly indicate the priorities of successive former governments when they distributed resources: those who had to be satisfied first were the creditors, no matter if it was detrimental to the most fundamental needs of the people. In the face of such an outrageous situation it is essential to take action.

A. FINANCIAL AND ECONOMIC CRIME AGAINST HUMAN DEVELOPMENT

The financial haemorrhage started under the military dictatorship of Guillermo Lara (1972-1976) and Alfredo Poveda (1976-1979), with the oil boom in the 1970s that marked the beginning of the process through which the country slipped into indebtedness. It further deteriorated with the rise in interest rates Interest rates When A lends money to B, B repays the amount lent by A (the capital) as well as a supplementary sum known as interest, so that A has an interest in agreeing to this financial operation. The interest is determined by the interest rate, which may be high or low. To take a very simple example: if A borrows 100 million dollars for 10 years at a fixed interest rate of 5%, the first year he will repay a tenth of the capital initially borrowed (10 million dollars) plus 5% of the capital owed, i.e. 5 million dollars, that is a total of 15 million dollars. In the second year, he will again repay 10% of the capital borrowed, but the 5% now only applies to the remaining 90 million dollars still due, i.e. 4.5 million dollars, or a total of 14.5 million dollars. And so on, until the tenth year when he will repay the last 10 million dollars, plus 5% of that remaining 10 million dollars, i.e. 0.5 million dollars, giving a total of 10.5 million dollars. Over 10 years, the total amount repaid will come to 127.5 million dollars. The repayment of the capital is not usually made in equal instalments. In the initial years, the repayment concerns mainly the interest, and the proportion of capital repaid increases over the years. In this case, if repayments are stopped, the capital still due is higher…

The nominal interest rate is the rate at which the loan is contracted. The real interest rate is the nominal rate reduced by the rate of inflation.
, unilaterally decided by the United States in 1979, and by the process of “sucretisation” (chapter 2). For nearly twenty years, successive governments all followed the same path. They all implemented the austerity measures that the IMF IMF
International Monetary Fund
Along with the World Bank, the IMF was founded on the day the Bretton Woods Agreements were signed. Its first mission was to support the new system of standard exchange rates.

When the Bretton Wood fixed rates system came to an end in 1971, the main function of the IMF became that of being both policeman and fireman for global capital: it acts as policeman when it enforces its Structural Adjustment Policies and as fireman when it steps in to help out governments in risk of defaulting on debt repayments.

As for the World Bank, a weighted voting system operates: depending on the amount paid as contribution by each member state. 85% of the votes is required to modify the IMF Charter (which means that the USA with 17,68% % of the votes has a de facto veto on any change).

The institution is dominated by five countries: the United States (16,74%), Japan (6,23%), Germany (5,81%), France (4,29%) and the UK (4,29%).
The other 183 member countries are divided into groups led by one country. The most important one (6,57% of the votes) is led by Belgium. The least important group of countries (1,55% of the votes) is led by Gabon and brings together African countries.

http://imf.org
and the WB World Bank
WB
The World Bank was founded as part of the new international monetary system set up at Bretton Woods in 1944. Its capital is provided by member states’ contributions and loans on the international money markets. It financed public and private projects in Third World and East European countries.

It consists of several closely associated institutions, among which :

1. The International Bank for Reconstruction and Development (IBRD, 189 members in 2017), which provides loans in productive sectors such as farming or energy ;

2. The International Development Association (IDA, 159 members in 1997), which provides less advanced countries with long-term loans (35-40 years) at very low interest (1%) ;

3. The International Finance Corporation (IFC), which provides both loan and equity finance for business ventures in developing countries.

As Third World Debt gets worse, the World Bank (along with the IMF) tends to adopt a macro-economic perspective. For instance, it enforces adjustment policies that are intended to balance heavily indebted countries’ payments. The World Bank advises those countries that have to undergo the IMF’s therapy on such matters as how to reduce budget deficits, round up savings, enduce foreign investors to settle within their borders, or free prices and exchange rates.

imposed in order to grant new loans and pay back old ones, thus feeding the vicious circle of the debt. Implementing those neo-liberal policies – drastically reducing social expenses, privatizing key industries such as oil, gas, electricity and telecommunications, suppressing subsidies for essential commodities Commodities The goods exchanged on the commodities market, traditionally raw materials such as metals and fuels, and cereals. – had disastrous social and economic consequences: 80 % of the population lived on less than 2 dollars a day, workers were more vulnerable because of an increasingly “flexible” labour market, the unilateral opening of markets and the dollarization [2] of Ecuador’s national currency in 2000 led to thousands of small and medium-sized companies, both in farming and in manufacture, becoming bankrupt because they could not compete with commodities that were imported at a lower price thanks to heavy subsidies. This resulted in such massive unemployment that millions of people left Ecuador to migrate to Europe or the United States.
We can thus understand the sense of frustration and the determination to bring about a radical change that can be found in an increasingly large proportion of the population, particularly since the beginning of the 1990s: general strikes and governmental and revolutionary crises followed fast one upon the other, leading to the downfall of three heads of state within a few years and mirroring the growing awareness of the ills of capitalism, which can be perceived in recurring protest against the interference of IFIs, against US imperialism and against the free trade agreement.
These neo-liberal policies condemned Ecuador to under-development and the loss of its sovereignty. Development, making poverty history, and fighting illiteracy were some of the official motives invoked for contracting loans over the past thirty years, but they were used to conceal the reality of the debt and its effects: social, cultural, economic and political deterioration of the country, as constraints resulting from the external debt increased.

The present paper intends to shed light on Ecuador’s illegitimate debt and to highlight some moments in its political and economic history when decisions were taken that led to the present situation, namely heavy indebtedness, economic and financial dependence, and increasing inequalities. Yet a new element occurred in November 2006, which accounts for a most particular context: people elected Rafael Correa as president of the Republic.
As soon as he took office in mid-January 2007, the new president subscribed to fundamental commitments, such as refusing that the country become part of the FTAA (Free Trade Area of the Americas) and refusing to renew the lease for the US military base in Manta. [3] He showed a deep commitment to Latin-American integration, notably by actively participating in the creation of the Bank of the South, [4] giving priority to social and productive investments, protecting the environment, [5] and organising the election through universal suffrage of a Constituent Assembly in charge of the democratization of the country. [6] A leading commitment of the new government is restructuring the external and internal public debt and carrying on the debt auditing process initiated by former President Alfredo Palacio. To this end, on July 5th 2007President Correa signed the presidential order setting up a Commission for the Integral Audit on Public Credit (Comisión para la Auditoria Integral del Crédito Público - CAIC). The Commission, that held its first meeting on 23rd and 24th July, has a mandate for one year, renewable if necessary. The CAIC is authorised to “conduct the audit and to elucidate all cases of indebtedness of State institutions (“está autorizada para auditar y transparentar todos los procesos de endeudamiento de las instituciones del Estado”). It is composed of four representatives of State and government at the highest level, six representatives of social and citizens’ organisations in the country, and three international representatives of non-governmental organisations specializing in debt [7].

Ecuador is thus a perfect illustration of a government that takes the sovereign decision to audit the debt process in order to achieve the cancellation of those debts that the auditing process will show to be illegitimate.
Since the election of Rafael Correa as president the balance Balance End of year statement of a company’s assets (what the company possesses) and liabilities (what it owes). In other words, the assets provide information about how the funds collected by the company have been used; and the liabilities, about the origins of those funds. of power has changed. Consequently, governments of rich countries, multilateral institutions, financial markets, allied Latin-American governments and anti-globalization movements have developed a keen interest Interest An amount paid in remuneration of an investment or received by a lender. Interest is calculated on the amount of the capital invested or borrowed, the duration of the operation and the rate that has been set. in what is going on in Ecuador. Creditors are on the lookout: what kind of measures will the Correa government take concerning its debts?

B. RAFAEL CORREA’S GOVERNMENT: TOWARDS A SOVEREIGN DEBT POLICY

Rafael Correa has committed himself to putting a stop to the absurd vicious circle of debt payment and the various kinds of refinancing agreements. To this end he wants to carry on the auditing process set up by the former president Palacio with the Special External Debt Auditing Commission" (CEIDEX). [8]
Having been given a very short time (6 months), the CEIDEX analysis only examined a few cases, though among the most representative, its conclusions are unequivocal: it found many irregularities in the way debts were renegotiated, new loans granted, and funds used, so that a large part of the debt turns out to be illegitimate.
The Correa government intends to push investigations further and identify illegitimate debts, whether to multilateral creditors such as the WB, the IMF, or the IDB, or to bilateral creditors. [9] On the basis of what the audit will show, Ecuador will renegotiate the payment of its external debt, refusing to pay any debts that did not benefit its population or were contracted in a criminal way and are consequently illegitimate, and bringing legal action against those who were responsible for the current situation of indebtedness. Correa’s position is clear: the country’s external debt will be paid only in so far as it does not jeopardize the priorities required by national development, which may include a moratorium if the economic situation makes it necessary. The government thus takes up the position of a creditor country in the face of a debt that has largely been paid back and a significant part of which is illegitimate, a fact which justifies not paying it back at all.

In February 2007, according to figures provided by Ecuador’s Central Bank Central Bank The establishment which in a given State is in charge of issuing bank notes and controlling the volume of currency and credit. In France, it is the Banque de France which assumes this role under the auspices of the European Central Bank (see ECB) while in the UK it is the Bank of England.

ECB : http://www.bankofengland.co.uk/Pages/home.aspx
, the country’s external debt amounted to USD 16 800 million, of which USD 10 483 million had the backing of the public authorities. This meant that if the government agreed to bleed itself dry to pay back it would have had to make an unsustainable effort in 2007: the predicted debt service Debt service The sum of the interests and the amortization of the capital borrowed. was some USD 2 800 million (i.e. 38% of the national budget).
But the Correa government chose another alternative: in order to use the country’s resources for social and productive expenses, it decided on a significant reduction of the portion of the budget dedicated to paying and servicing the external debt, namely from 38% in 2006 to 11.8 % in 2010. During the same period human investment will rise from 22 to 38.4% and productive investment from 6.4% to 11%. [10] Implementing these fundamental budget objectives will partly depend on the audit’s results and the repudiation of illegitimate debts. It is thus essential to determine which debts can be challenged in order to subsequently cancel their payment. [11] Otherwise, the Ecuador government will have to pay huge amounts to its creditors, as already happened back in February when it had to pay close to USD 1000 million to creditors. Ecuador paid back its USD 11.4 million external debt to the IMF and Correa does not consider calling upon this institution to obtain a loan. With the same determination to assert its independence, Correa expelled the WB representative in Ecuador in April 2007, which drew the attention of the international media. He had not forgotten that in 2005, when he was minister for the economy in the Palacio government, the WB blocked a promised USD 100 million loan by way of reprisal for the reforms initiated by the FEIREP (Stabilisation, Social and Productive Investment and Public Debt Reduction Fund), which recommended that oil revenues should be used to develop social policies rather than to pay back the debt.
More recently, IMF representatives were also invited to leave the offices they occupied in the country’s Central Bank and indeed leave the country altogether, with 15 July as a deadline set by the minister Patiño. [12] “We never want anything to do with international bureaucracy again,” Correa said, bringing to an end two decades of submission to the perverse recipes of the IMF and the WB.
Correa has thus stopped the interference by international financial institutions which he rightly considers to be responsible for the country’s disastrous social and economic situation, to support national and regional sovereignty.
If the economic and social reforms that Correa and his government [13] announced are actually implemented, if he can reduce the US influence on his country, if the audit makes it possible to cancel significant debt amounts, as it should, then it is possible for us to hope that a fairer distribution of riches will improve living conditions for all in this country of glaring inequalities. Indeed Correa’s commitment to the cancellation of illegitimate debts via the auditing process, a necessary step on the road to another model of socially fair development, is part of a more general project of radical change and assertion of a sovereign national policy.
Ecuador has entered a transition period and nobody can tell how it is going to end: in order to achieve his purpose, Correa will need wide popular support because destabilization campaigns by right-wing parties and the local oligarchy, determined not to give away any of their privileges and strongly supported by international finance and by the U.S. government, will have to be vanquished. Nothing is guaranteed in advance, Rafael Correa and his government may vacillate, like so many other governments, and lack boldness. What will be decisive is the population’s ability to become a direct agent of change. Support from the social and citizens’ movements of the world will also be a factor of success.

C. THE DOCTRINE OF ILLEGITIMATE DEBT

In our definition of key notions on debt, we will first discuss those that legal doctrine and jurisprudence call “odious debt,” before considering the larger category of “illegitimate debts”, i.e., debts that do not meet the population’s needs and expectations, that generate human, social, environmental and political disasters, etc.

1. ODIOUS DEBT

The doctrine of odious debt was first formulated by Alexander Nahum Sack, a Russian jurist and former minister of Nicholas II in 1927. He wrote:

If a despotic power incurs a debt not for the needs or in the interest of the State, but to strengthen its despotic regime, to repress the population that fights against it, etc., this debt is odious for the population of all the State.
This debt is not an obligation for the nation; it is a regime’s debt, a personal debt of the power that has incurred it, consequently it falls with the fall of this power
. [14]

This doctrine introduces an exception to the principle of “continuity of the State” as stated by the Convention of Succession of State in respect of State Property, Archives and Debts. According to this rule in international relations, a State has to honour international obligations independently of changes in its regime. Sack claimed that in the case of odious debt, the later government can forfeit the former’s obligations: “[Such] debts do not fulfil one of the conditions that define the regularity of a State debt, namely that State debts must be contracted and funds thus acquired must be used to the end of meeting the needs and interests of the State.” Any debt can thus be considered odious if it was contracted by an illegitimate government and/or if it was not used to meet the needs and interests of the people. Moreover, Sack argues that lenders are responsible: if they know the borrower’s intentions, they are guilty of “a hostile act against the people” and run the risk of not being paid if the regime falls. They cannot then claim their money back.
Sack used a number of historical precedents to elaborate the notion of odious debt: thus the law has merely ratified an existing situation.

Some historical precedents [15]
Mexico was the first country to repudiate odious debt. In 1861 Benito Juarez announced a two-year freeze on repayment of Mexico’s external debt (notably contracted by dictator Antonio Lopez de Santa Anna. Some fifteen years later Mexico voted the 18 June 1883 law called “settlement of the national debt”, which repudiates as void and odious debts that were contracted between 1857 and 1860 and from 1863 to1867.

The odious debt doctrine was again called upon three decades later with regard to Cuba. In 1898 Cuba was freed of Spanish domination as a result of the Spanish-American war, and the United States took control of the island. Defeated Spain claimed from the US the payment of the debt owed by Cuba. The US refused to pay, claiming that this debt was odious since it had been imposed by Spain without the Cuban people’s consent. In 1898 the Paris Treaty ratified this interpretation, and the debt was cancelled. The notion of “odious debt” was thus at least implicitly acknowledged.

In 1919 the Versailles Treaty cancelled the debt Germany claimed from Poland since it had been used to colonise the country. Article 255 says: “In the case of Poland that portion of the debt which, in the opinion of the Reparation Commission, is attributable to the measures taken by the German and Prussian Governments for the German colonisation of Poland shall be excluded from the apportionment [to be paid to Germany].” Similarly, after the Second World War the 1947 peace treaty between France and Italy states that it is “unthinkable that Ethiopia should bear the burden of debts contracted by Italy in order to ensure its domination on Ethiopian territory”.

The legal case that opposed Costa Rica and Great Britain in 1923 is one of the few instances when a court had to make a decision. Considering the way dictator Federico Tinoco had embezzled funds lent by the Royal Bank of Canada (a British bank), the Costa Rican government passed the Law of Nullities in 1922, a law that cancelled all contracts undertaken by Tinoco’s government from 1917 to 1919. Britain challenged this law and the dispute was taken to the International Court of Arbitration, chaired by Justice Taft, Chief Justice of the Supreme Court of the United States, who sanctioned the Law of Nullities and declared: “The case of the Royal Bank depends not on the mere form of the transaction but upon the good faith of the bank in the payment of money for the real use of the Costa Rican Government under the Tinoco regime. It must make out its case of actual furnishing of money to the government for its legitimate use. It has not done so.” [16]

More recently, the doctrine of odious debt was invoked to support demands for debt cancellation in Rwanda, Iraq, and Nigeria.

En 1998 the British House of Commons’ International Development Committee pointed out the odious nature of Rwanda’s debt in favour of its cancellation: “the bulk of Rwanda’s external debt was incurred by [a] genocidal regime . . . Some argue that loans were used by the genocidal regime to purchase weapons, and that the current administration, and ultimately the people of Rwanda, should not have to repay these “odious” debts . . . We urge the Government to insist that multilateral debt relief for Rwanda be implemented as rapidly as possible. We further recommend that the Government urge all bilateral creditors, in particular France, to cancel debt incurred by the previous regime. [17]

In 2003, after the military invasion of Iraq by the United States and their allies, and the collapse of Saddam Hussein’s regime, the United States called for the cancellation of Iraq’s debt – defined as odious – so as to spare the new regime they had just set up the burden of paying it back. But they soon realized the danger of creating a precedent and dropped the odious debt argument. On the other hand, they had the Paris Club Paris Club This group of lender States was founded in 1956 and specializes in dealing with non-payment by developing countries.

agree to an 80% cancellation of Iraq’s debts without any reference to its odious nature. [18]

In early 2005, when the high price of oil gave Nigeria a hold on its creditors, the Nigerian Parliament asked the government to repudiate a debt that had been largely inherited from various military dictatorships, notably under Sani Abacha (1993-1998). Here too, President Olusegun Obasanjo preferred negotiating with the Paris Club, and was granted a 60% reduction of the Nigerian debt in exchange for an advance payment of the remaining 40%, that is, USD 12 billion.

Since Sack’s legal developments, and apart from work on this issue produced within the CADTM, [19] several authors have written on odious debt, notably Patricia Adams [20], Joseph Hanlon[Joseph Hanlon, Dictators and debt, 1998 ; Defining Illegitimate Debt and Linking its Cancellation to Economic Justice, Open University for Norwegian Church Aid, June 2002.]], or the Canadian authors Jeff King, Ashfaq Khalfan and Bryan Thomas [21] of the Centre for International Sustainable Development Law (CISDL). According to the latter, a debt is odious if it simultaneously meets the three following criteria: there must be absence of consent of the population, absence of benefit to the population, and lastly the lenders must be aware of absence of consent and benefit. [22] If a debt meets those criteria then it can be called odious. If a debt is odious, it is null and void and cannot be claimed from a given country once the contracting regime has fallen.

2. ILLEGITIMATE DEBT

An “illegitimate debt” has, strictly speaking, no legal definition, yet a definition emerges from various cases that can be encountered in the history of indebtedness. It is reasonable to classify as illegitimate a debt which goes counter to law or public policy; a debt which is unjust, inappropriate or abusive; a debt which an indebted country should not be forced to repay because the loan, or the conditions attached to the loan, violate a country’s sovereignty and infringe human rights. The debts of the countries of the South frequently meet this definition. The loans granted by the IMF and the World Bank, conditioned by the enforcement of structural adjustment Structural Adjustment Economic policies imposed by the IMF in exchange of new loans or the rescheduling of old loans.

Structural Adjustments policies were enforced in the early 1980 to qualify countries for new loans or for debt rescheduling by the IMF and the World Bank. The requested kind of adjustment aims at ensuring that the country can again service its external debt. Structural adjustment usually combines the following elements : devaluation of the national currency (in order to bring down the prices of exported goods and attract strong currencies), rise in interest rates (in order to attract international capital), reduction of public expenditure (’streamlining’ of public services staff, reduction of budgets devoted to education and the health sector, etc.), massive privatisations, reduction of public subsidies to some companies or products, freezing of salaries (to avoid inflation as a consequence of deflation). These SAPs have not only substantially contributed to higher and higher levels of indebtedness in the affected countries ; they have simultaneously led to higher prices (because of a high VAT rate and of the free market prices) and to a dramatic fall in the income of local populations (as a consequence of rising unemployment and of the dismantling of public services, among other factors).

IMF : http://www.worldbank.org/
policies, can thus be considered illegitimate.
It is clear that the notion of illegitimate debt is based first and foremost on a moral judgment. The concept of “illegitimate debt” was first mentioned in an official verdict in 2000 : the Olmos verdict (so named after the journalist who lodged a complaint against the dictatorship of Jorge Videla) pronounced on 13 July 2000 by the Argentine Supreme Court, served to reveal the illegitimate nature of the external debt contracted during the dictatorship (1976-1983) and the liability of the creditors and debtors.
At the end of 2006, Norway invoked this concept to allow a number of its debtor countries (including Ecuador as it happens) to forgo repayment of certain debts. This innovative approach will be discussed in Chapter 5.
The notion of illegitimate debt is evolving and becoming more precisely defined thanks to the contributions of a number of authors and social movements.
Joseph Hanlon proposes four conditions that render a loan illegitimate: a loan granted for the purpose of reinforcing a dictatorial regime (unacceptable loan); a loan with excessive interest rates (unacceptable conditions); a loan granted to a country while being aware of its incapacity to repay (inappropriate loan); a loan dependent on IMF-imposed conditions, creating an economic situation that makes repayment more difficult still (inappropriate conditions).

In 2000, the Canadian Ecumenical Jubilee Initiative [23] took up the moral argument: “Repayment of the debt leads to serious deprivation which threatens the cohesion of the community. In such a situation, the debt is illegitimate. The justice of a contract may not be guaranteed if the relationship between the parties is too unequal. Similarly, a contract may not be legally binding if it endangers the health or the life of one of the parties. Ending a contract, or in this case cancelling or repudiating a debt, can be a moral response to what would be an immoral or illegitimate situation, should it continue.” The Canadian Initiative continues its definition of illegitimate debt, no longer placing it in the moral sphere, but in the context of politics, economics and structural problems caused by the present financial architecture, declaring that the debt “is not an aberration, but one key mechanism of exploitation. Where the system itself is illegitimate, the fruit of that system – debt - is also illegitimate, and the term ‘illegitimate debt’ becomes a means of questioning the system itself. In this context, debt cancellation is a necessary but insufficient step; systemic change is required.”

The Latin-American Parliament has, in its turn, developed four grounds for illegitimate debt:

  • The origin of the debts, given that in many cases they have been fraudulently and criminally contracted. For example, the conversion of private debts into public debts.
  • The unilateral increase in interest rates, initiated in 1979.
  • The Brady Plan agreements, which forced the governments of indebted countries to renegotiate debts and in the process obliged them to recognize illegitimate debts.
  • The co-opting of negotiators within the government, who sign the agreements and soon after, leave their post to take up another one in the financial institution that benefits from these agreements.

More recently, the studies carried out by the Debt Observatory in Globalization and the book by Laura Ramos [24], published by the Observatory, bring new arguments and justifications to support the concept of “illegitimate debt” and its repudiation. They explain the distinctions between, for example, debts of oppression, war, elitism, corruption, or debts for “rescue” purposes.
Finally, various collectives on debt in a number of countries organize seminars on the concept of illegitimate debt.

D. THE ORIGINS OF ECUADOR’S DEBTS

1. THE PROCESS OF INDEBTEDNESS IN ECUADOR

The work being carried out by the Special Investigation Committee on Ecuador’s External Debt retraces the pernicious process that has led to the country’s present indebtedness, a general outline of which follows [25].

The origin and expansion of the debt

Starting in the 1970s, and with oil revenues soaring, Ecuador saw its external debt increase significantly. This situation was to become intolerable just a few years later. In 1978, a change in Ecuador’s Constitution marked a real turning-point. From then on, Parliament had absolutely no say in the country’s policy on debt, leaving the door wide open to corruption and clientelism.
In the early 1980s, following successive devaluations of Ecuador’s currency (the sucre), a serious financial crisis broke out in the private sector. To remedy this, the State launched an operation to rescue the banking sector, which held the debts of national companies. This rescue operation went by the name of “sucretization”, a process that in fact consisted of converting the private debt into a public one, and which multiplied the debt by 6, increasing it from USD 1 650 million to USD 7 500 million.
A significant number of the legal reforms were pushed through under the influence of the international financial institutions to ensure repayment of the debt. Examples include the decree recognizing unrepayable debts and the issuing of State currency bonds designed to buy back some of the private debt.

Refinancing the public external debt …

With the relaxing of the legal and constitutional framework, Ecuador’s indebtedness continued to rise in the 1990s with the issuing of new State bonds, including the Brady bonds [26]. In 1993, the State issued bonds amounting to the total remaining external public debt – some USD 909 million. This was clearly an operation designed to finance the external debt which, in its turn, had served to finance the debt from 1983 to 1985. In 1994, a new decree authorized the issue of new bonds and agreements with foreign banks.

... and rescheduling it

After the financial crisis of 1999, a new rescue operation was launched. It consisted of exchanging “Brady” bonds for “global” bonds at interest rates from 10 to 12%. Two years later, a new law on accountability and fiscal transparency was brought in, ensuring the repayment of the public debt with oil revenues. Thus the debts contracted during the 1980s, many of them contracted for speculative purposes, were extended for a further term.

The proliferation of development project management departments

In this context of deregulation and relaxing of the legal framework, promoted by the multilateral organizations, countless departments sprang up in Ecuador for the purpose of managing projects financed by external credits, but acting with little coordination amongst themselves and barely better coordinated with government. On the one hand, the poor management and malfunctioning of the system (which in the absence of an efficient planning and monitoring body, subordinated national standards to those of the IFI), and on the other hand the onerous conditions imposed on the country (not considered poor enough to benefit from more favourable terms) further increased Ecuador’s debt burden.

2. THE ILLEGITIMACY OF DEBTS AND PAYMENTS IN ECUADOR

Throughout this work, we will be analysing the illegitimacy of Ecuador’s debt, both from a political and economic viewpoint.
Numerous legal arguments sustain the claim that Ecuador’s debts are illegitimate or odious. The flagrant violation of human, economic, social and ecological rights caused by the debt makes it illegitimate, unjust, immoral and unrepayable. Since refusal to repay is the only means of ensuring the population’s basic needs, the “state of necessity” must be invoked. Another argument justifying repudiation of the debt is the violation of national sovereignty, since all external debt should comply with the country’s laws and the national interest.
The debt is odious because of the “aggressive indebtedness” organized under military dictatorships which started this pernicious process. The debts contracted to pay for old odious debts must also be declared null and void.
Contracts carrying excessively heavy interest rates also fall into the illegitimate category. Here one can invoke “force majeure”, since the dramatic increase in interest rates decided unilaterally by the United States has modified the circumstances of the agreements made between Ecuador and its creditors. The UN International Law Commission defines it thus: "The legal impossibility (...) is the situation in which an event, either unforeseen or beyond the control of the person who invokes it, makes this person absolutely unable to respect his obligation by virtue of the principle that no-one is bound by what is impossible” [27].
The plethora of conditions for rescheduling and renegotiating debts, and the conditions attached to the granting of loans (the process of renegotiating Brady bonds as global bonds, the structural adjustment programmes imposed by the IMF and the WB, etc.) whose purpose is not to reduce the level of indebtedness but rather to perpetuate domination of the country via the debt – all these are grounds for cancelling Ecuador’s debts.
Further instances of illegitimacy are the repayments demanded for projects in Ecuador that have never seen the light of day or which have been only partially completed, with complete disregard for specifications. From an overall viewpoint, Ecuador’s debt has already been largely repaid, making Ecuador a “creditor country” vis-à-vis the countries of the North. The countries of the South have in fact financed the social and ecological debt by which the North holds the South to ransom.

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This collective work was carried out in July 2007 at the request of AFRODAD (www.afrodad.org) by a team at the CADTM composed of Benoît Bouchat, Virginie de Romanet, Stéphanie Jacquemont, Cécile Lamarque and Eric Toussaint.

It was revised by Myriam Bourgy, Damien Millet and Renaud Vivien.

The English translation was done by Elizabeth Anne, Vicki Briault, Judith Harris and Christine Pagnoulle.

Footnotes

[1« Auditoría ciudadana de la deuda ecuatoriana », a lecture by Hugo Arias during the First International Symposium on Public Debt, Caracas, Venezuela, 22-23-24 September 2006.

[2In 2000, Ecuador abandoned its own currency for the US dollar

[3The agreement according to which the US can use a military base on Ecuadorian soil runs out in 2009 and will not be renewed.

[4Correa’s government has whole-heartedly adhered to the “Bank of the South” project launched by Venezuela and Argentina in February 2007, and contributed to defining its orientations. This Bank of the South should be created by the end of 2007. It will support peoples of the South in the re-appropriation of their natural resources and help finance projects in the fields of health care, education, infrastructures, manufacture, etc. For Correa this initiative does not only mean the chance to end their country’s dependence on international loan bodies such as the IMF and the WB but also an opportunity to adopt a common currency. The Bank of the South project will contribute to solving social, commercial and economic difficulties while remaining outside international financial and economic constraints and will thus participate in the retrieval of national and regional sovereignty.

[5The Ecuadorian government also launched an initiative to prevent oil extraction in the Yanusi National Park. It tried to raise funds at an international level to compensate for half of the revenues that oil drilling would have generated. If it is actually implemented this innovative policy would represent a historic precedent in the quest for alternatives to a productivist model that destroys the environment.

[6In the referendum that took place in April 2007, 82% of the population voted in favour of the election of a Constituent Assembly, to be held in October 2007.

[7Including Eurodad, Jubileo Sur, CADTM, Latindadd.

[8The commission’s mandate was to check whether the external debt was legitimate, to analyse the social and economic consequences of renegotiations, to examine whether projects had been carried out and objectives met, to define recommendations about debt policies that turn out to be responsible for the country’s indebtedness. However, it had no power to launch any legal action against national or international people or bodies identified as bearing such responsibility.

[9The country has over 15 bilateral creditors for an amount of USD 2 billion, i.e. 20% of Ecuador’s public external debt. Its main creditors are Spain, Japan, Brazil and Italy.

[10The government finances about 35% of its budget with oil revenues, oil being its main export commodity. Under the Palacio administration, the hydrocarbons reform law made it possible for the government to tax multinational oil companies more heavily. Correa and his minister for energy, Alberto Acosta (who resigned from this post on 15 June to run as a candidate in Correa’s party “Movimiento País” for the Constituent Assembly), plan stronger government control of the oil industry and renegotiation of agreements with foreign companies so as to increase revenues and to ensure that the country’s oil resources, which so far have been used to pay the debt, also be used for development purposes.

[11The new auditing commission was officially launched at Guayaquil on 23 July 2007.

[12El FMI deja sus oficinas del Banco central, (The IMF leaves its offices in the Central Bank) Argenpress, 15 July 2007, http://www.argenpress.info/nota.asp?num=044989&Parte=0

[13For more information, see the 2007-2010 plan proposed by Rafael Correa’s government, which can be accessed on the portal of the minister for the economy, www.mef.gov.ec

[14Quoted by Patricia Adams in Chapter 17 of her book Odious Debts: Loose Lending, Corruption, and the Third World’s Environmental Legacy, found on www.odiousdebts.org

[15CADTM, Le droit international, un instrument de lutte ? Pour une justice au service des peuples, CADTM/Syllepse, Liège/Paris, 2004.

[17Report of the British International Development Committee, May 1998, see also www.odiousdebts.org

[18See D. Millet, « La dette de l’Irak n’a jamais existé » (The Iraqi Debt Never Existed), Le Monde, 23 November 2004

[19See www.cadtm.org

[20Patricia Adams, Odious Debt, Earthscan, 1991. Patricia Adams has also developed a website on the issue, see www.odiousdebt.org

[21Khalfan, King & Thomas, Advancing the Odious Debt Doctrine, Centre for International Sustainable Development Law, Montréal, 2003.

[22See http://www.cisdl.org, executive summary.

[24“Los Crímenes de la Deuda. La Deuda Ilegítima”, (Debt Crimes. Illegitimate Debt) Laura Ramos, published by the Debt Observatory in
Globalisation (ODG), Icaria, March 2006. The French version will be co-published by CADTM and Syllepse in 2007.

[25Excerpt from the article by Eric Toussaint: « L’analyse de trente ans de debt extérieure de l’Ecuador » (An Analysis of Thirty Years of Ecuador’s External Debt), www.cadtm.org

[26In 1989, the Brady Plan (named after the United States Secretary of the Treasury) offered an exchange of commercial bank claims for bonds guaranteed by the US Treasury, on condition that the creditor banks reduce the amount of claims and put the money back in circulation. The beneficiary countries, on their part, undertook to consolidate part of their debt and sign structural adjustment programmes with the IMF. In this way the problem was solved as far as the banks were concerned, and merely prolonged for the debtors. Brady bonds represent a little less than half of Ecuador’s public debt.

[27http://untreaty.un.org Document A/CN.4/315 « Force majeure » and « foruitous event » as circumstances precluding wrongfulness: survey of State pratice, international judicial decisions and doctrine ; p.61.

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